Will 3PL's Handle Your Entire Back Office?

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Last week I had a chance to catch up with a colleague whom I met a couple of years ago through my former employer (Deloitte Consulting). Back then, Joris Van der Smissen worked for Cat Logistics and today he works for arguably the largest 3PL (Third Party Logistics) provider, DHL/Exel. Historically, 3PL providers and the purchasing organization worked at an arms length from one another. But after a latte with Joris, I came away with the conclusion that 3PL providers will play a much bigger role in procurement than ever before and I believe that role will only continue to grow when you see what large OEM’s are asking Joris’ company to do for them.

First, let’s start with the business issues. Joris mentioned three of them that he sees within his target clients and prospects. The first, and no surprise to MetalMiner readers, involves the lack of credit and capital available to the business. The second issue involves what Joris calls the “velocity of the market in other words, whereas we always talk about the volatility of metal supply markets, he believes volatile demand wreaks the same kind of havoc to manufacturing organizations. In addition, OEM’s face a challenge in ensuring their assembly lines (and via extension, their supply chains) can react to market demand quickly. Finally, companies want and need to cut the part of the business that handles low sales to free up cash.

Now turning to specifics, what have these OEM’s specifically asked of their 3PL providers? The first request involves outsourcing inventory ownership. Instead of the manufacturing organization also playing the role of wholesaler, the 3PL provider serves that function by handling inventory, fulfillment and financing. In other words, the front office function stays with the OEM whereas the back office functions move to the 3PL. This trend has already begun to take hold particularly around spare parts and finished goods. If the parts are on a 40% margin, the 3PL will take over the fulfillment piece and take 10% of the margin while the client retains 30%.

A second request from the marketplace involves financing inventory in transit and taking over the movement and title of goods. Think of a US automotive OEM who is sourcing parts from China. He knows he has the lowest total landed cost by managing the logistics himself (or outsourced to a 3PL) as opposed to having the seller ship the goods CIF (cost insurance freight) to him. But the second the goods hit the water in China, the inventory goes onto the books of the OEM and the OEM ties up precious working capital in financing. So the OEM’s would like to see the 3PL’s take title to the goods while they are in transit and only hit the books of the OEM as the materials are consumed on the line.

Essentially, the OEM’s have asked the 3PL providers to provide additional services and we would argue integration of both financial and logistics services. These companies, US Postal Service notwithstanding, could fill the void. The publicly traded 3PL’s appear financially healthy. Few players including the BPO’s (Business Process Outsourcers) have both the cash and logistics wherewithal to compete with the 3PL’s. And though some of these trends appear nascent within the industrial manufacturing world, retailers in the UK have begun experimenting with the model in which 3PL’s with private equity financing have begun to take over the inventory for retailers and handle all fulfillment. DHL/Exel acknowledges that complex industrial engineered parts and assemblies will create additional challenges.

How will this all look in five years? It’s hard to say but we know for certain that the financial distress of many of the automotive OEM’s have created the impetus to look at where and how 3PL providers can reduce risk, improve working capital and create new efficiencies. MRO and service parts management is another area that Joris believes will be completely outsourced to 3PL providers. How the 3PL’s will manage things like warranty, obsolete inventory, minimum stock policies etc remain to be seen.

Here is what Joris had to say about what automotive OEM’s have asked for:

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Of course the 3PL providers will have to carefully tread these risky waters but watch for these companies to integrate more tightly with procurement organizations!

–Lisa Reisman

Comment (1)

  1. Brian says:

    Great posting. I concur that 3PL will continue to take on more responsibilities and develop more core competencies outside traditional roles.

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