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(originally published by Booz & Company)


Third-Party Logistics: The Industry That Needs to Relax

The company has seen dramatic productivity gains in the warehouse tests, and improvements in the time it takes to implement new contracts. The challenge now will be to reap those benefits throughout the company, and that will require the entire organization — from the designers of customer “products” to IT and operations, to business development and the sales force — to relax efforts to respond to every customer request, replacing that tactic with the strategic goal of cost-effective modularity.

Can such a strategy save the entire global third-party logistics industry? That depends on how the industry copes with two endemic problems that arise directly out of the self-defeating urge to customize every customer contract. First, leading players are consolidating across national borders to gain global reach. Yet the efforts to integrate acquisitions into their global networks have not generally been successful, leaving many industry players to stumble along as loosely connected networks of national or regional businesses. That, in turn, has kept them from effectively sharing contacts, knowledge, and good practices throughout the company, and has supported the practice of creating individual solutions to every customer request.

The second problem is an outgrowth of the first. Despite the critical role of information technology in their business, third-party logistics firms are inefficient users of IT. Thanks in part to their poor integration of acquisitions and in part to their undisciplined use of outsourcing, some operators continue to support as many as 80 separate warehouse-management systems. Their unwillingness to consolidate systems has led to unsustainably high cost structures, and the resulting complexity just erodes margins further.

On a company-by-company basis, smart customization can help solve the first problem by requiring company-wide strategic responses to customers’ real needs, and the second problem by forcing companies to develop modular, high-value, IT-intensive products that sit on top of a common, and much less costly, company-wide IT infrastructure.

If smart customization were to spread throughout the industry, the competitive landscape would change dramatically. Companies might find that more extensive partnering, based on the need to fill gaps in their modular offerings or industry-specific expertise, would be to their mutual advantage. And ultimately, perhaps, the industry would evolve a single, interoperable platform for the most highly commoditized parts of its business, enjoying profits thanks to the higher margins generated from the parts that have been customized, smartly.

Author Profiles:

Damian Coffey ([email protected]) is a senior associate with Booz Allen Hamilton based in London. He focuses on assignments in the postal, logistics, and transportation industries, and has extensive supply chain and operations experience with a wide variety of clients across industry sectors.

Marco Kesteloo ([email protected]) is a vice president with Booz Allen Hamilton based in Amsterdam. He focuses on assignments in the areas of strategy, operations, and organizational management, and has extensive supply chain experience with a wide variety of clients across the logistics industry, as well as their customers.

Robert Spieker ([email protected]) is a principal with Booz Allen Hamilton based in Amsterdam. He focuses on assignments that leverage sourcing, supply chain, and logistics to drive performance improvement, and has extensive experience with logistics, consumer products, and retail industry clients. 
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  1. David L. Cahill, Customer Loyability in Third-Party Logistics Relationships: Findings from Studies in Germany and the USA (Physica-Verlag, 2006): How third-party logistics providers can find success by focusing on customer loyalty. Click here.
  2. Evan Hirsh, Matt Egol, and Karla Martin, “The Five Principles of Smart Customization,” Booz Allen Hamilton white paper, April 2005. White paper outlining a process for achieving dramatic improvements by trading off the value of variety against the costs associated with introducing more complexity. PDF download. Click here.
  3. Keith Oliver, Leslie H. Moeller, and Bill Lakenan, “Smart Customization: Profitable Growth Through Tailored Business Streams,” s+b, Spring 2004: As markets atomize, a striking new approach emerges to profitably serve fragmenting demand. Click here.
  4. “Third-Party Logistics,” Wikipedia entry: Brief but useful explanation of the "3PL" industry, including types of providers and a rundown of the players. Click here.
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