A New Model for Evaluating Third Party Logistics Providers: Enter Service Oriented Architecture
Written By: Michael Bittner
Published On: October 3 2005
The highly competitive third-party logistics (3PL) market is a broad and diverse group of companies that move product over ground, air, and sea, from point-to-point for just about every industry imaginable. Companies like UPS Logistics, Ryder, C.H. Robinson, Airborne Logistics, Cardinal Transport, and Penske Logistics are some of the names from a pool of over 200 logistics service providers in the US alone. 3PLs are notoriously under tremendous pressure to manage costs, while providing a wider range of services to an expanded and diverse customer base. At the same time, 3PL providers need to view themselves as business process managers that can capitalize on today's evolving supply chain management (SCM) technology.
Most 3PLs have a significant inventory of applications to host business process outsourcing for order services, warehousing, pick-pack-ship operations, inventory control, kitting, light assembly, transportation, consolidation, international trade logistics, reverse logistics, and many other functions for requesting clients and prospects. Software applications from Descartes, i2, Manugistics, GT Nexus, Vertex Interactive, Nextlinx, as well as a plethora of warehouse management systems (WMS) packages are found within their applications mix.
Enterprises will stick with what they do best and outsource non-core competencies to 3PL companies.
Progressive enterprises have recognized that they cannot be all things to all people and, consequently, will outsource all but their main lines of business to service providers, which can do a more effective job for less money. This can create a huge opportunity for those services that are providing what the market demands, when the demands are made. As customers demand quicker goods and services and at lower costs, service providers need to be able to integrate technology into existing and future business functions and reinvent processes as demand dictates. Service providers also have to be able to match changing customer expectations and respond rapidly as customers require changes in business processes. Logistics service providers have matured to become logistics business process outsourcing (BPO) services for companies willing to focus on core competencies and outsource indirect tasks.
Lower satisfaction has renewed scrutiny of 3PL service providers.
Customers are demanding more and want to make sure they receive the perceived benefits from their logistics service providers. Enterprise' SCM staffs are reassessing the value of 3PL providers and their ability to lower costs and maintain service levels. Logistics management within enterprises are also questioning 3PL providers' ability to be flexible, innovative, and to make use of newer, more efficient technology. But companies are being shortsighted if they are only looking to the outsourcing option for specific logistics functions aimed at simply reducing costs while maintaining existing service levels. Alternatively, bringing outsourced functions back in-house may be a daunting task. Research on logistics services indicates the long-term trend toward outsourcing the management of entire business processes, such as dynamic business processes including order assembly and order delivery, which are subject to considerable change over time.
New criteria for evaluating logistics service providers
With these changes in customer needs come alterations in how users evaluate their potential 3PL providers. The old method of evaluation consisted of the following factors:
- Reduced labor costs and inventory carrying costs
- Lower transportation costs
- Reduced cycle time
- Improved customer system integration
- Business process efficiency
- Access to information systems
- Financial stability
Such criteria served a purpose at one time, but customers expect their 3PL providers to be more than just delivery mechanisms now. Customers want 3PL providers to be more like supply chain partners, so customers must evaluate which service they choose using higher standards than in the past. The new criteria include the following:
- Expanded supply chain capabilities
- Global access and deployment
- Leading-edge technology
- Supply chain service integration, visibility, flexibility, and scalability
- Business process management and innovation
- Support for collaboration initiatives
- Financial strength
Enter SOA: 3PL Technologies Need To Be Evaluated Against an SOA Blueprint
Service oriented architecture (SOA), in its simplest form, is an approach to managing business tasks and business processes made available from different software packages for reuse. SOA uses flexible connectivity with well defined standards-based interfaces. Components of SOA include Web services, portals, application servers, security and analytics frameworks, business process management (BPM), and master data management, just to name a few.
SOA is a guide companies can use for the strategic management of their business. At the heart of SOA is the concept that business applications must be active and based on internal and external business processes, including outsourced ones. Serving as a blueprint for the next generation of collaborative systems and business practices, SOA ties together a company's systems of record, process, and venture, so that the technologies within each system work toward supporting collaborative services. The SOA model must be applied to internal and external systems, particularly those in support of whole business process outsourcing.
Major technology vendors like IBM with WebSphere Live for SOA, Oracle's Service Oriented Enterprise (SOE) and Fusion, and SAP's NetWeaver with Enterprise Services Architecture (ESA) are pioneering the development of SOA frameworks. Other major SCM vendors are touting plans for a service oriented architecture like Manhattan Associates and i2. SOA's most anticipated benefits include faster and more flexible reconfiguration of business processes. This should be just the trick for 3PLs.
For manufacturing enterprises over 1,000 employees, just over 20 percent report active investments in SOA infrastructure. Therefore, this is an evolving technology investment that will grow over the next five years. Don't expect your logistics service providers to be leading edge for SOA, but press them on their plans because it could be a differentiator in the near future. If you are considering outsourcing particular logistics functions or whole business processes to a logistics service provider, there are key actions you must take.
Perform an assessment of your business strategy. Is your market leadership a result of innovation? Profitability through cost reduction? Growth through merger and acquisition?
Identify critical processes. What are the critical processes of the company within the five major areas of enterprise management, SCM, customer relationship management (CRM), procurement, and product lifecycle management (PLM)? How automated are the processes?
Map out your IT infrastructure concurrent with anticipated 3PL technology. What are the applications or technologies that are implemented internally and will need to be integrated with the prospective 3PL provider?
Evaluate the combined technology road map relative to SOA compatibility. Does the road map work within the context of SOA pillars of technology compliance, such as application independent integration, business process management, and integrated systems management?
Today's 3PL customer has different needs than in the past and must evaluate 3PL providers on new criteria, for the following reasons:
- Current criteria has been shortsighted, with too much emphasis on cost savings alone
- Logistics outsourcing decisions and evaluation of service providers need to be based on long-term, strategic factors
- Over time your relationship with 3PLs should become more of a collaborative relationship, requiring technology to support such a relationship
3PL technologies need to be evaluated against an emerging SOA blueprint. If the logistics provider cannot articulate a plan toward SOA, then future services could be in jeopardy as technology leap frogs their existing static application offerings.