Photo by Robson Hatsukami Morgan on Unsplash
Why it’s paramount that shippers avoid the seduction of a turnkey logistics provider (and why many mature supply chain leaders already know this).
As they approached a higher level of demand for their offerings, an importer of food products from Mexico signed up with a one-stop logistics provider in Laredo, Texas. This new supplier promised to take care of it all: carriers, warehousing, and import documentation; it sounded like a logical and efficient step for the growth of their company.
After all, wouldn’t having a single contract be easier than having multiple agreements for management of shipping, warehousing, and distribution? Isn’t it akin to having one bank handle all your financial needs? Or one Wal-Mart where you can buy fresh produce and school supplies under one roof?
For the company in question, working with the one-stop logistics provider and bundling logistics services quickly became a mess.
What it gained in coordination, it lost in other areas. The logistics provider simply didn’t have the expertise or relationships the company needed in other markets they were penetrating. Soon, retailers and customers began inquiring, as their supply of products wasn’t there.
It’s a common misconception in the exchange of logistics services. While inventory control, warehousing, and transportation may seem related because they all fall into the logistics bucket, they are very different executions and simply offering all three does not suggest that one company will do all three well.
Rather than signing up with a turnkey supplier and bundling logistics services, a best practice is to segregate the various links in your supply chain.
One vendor is responsible for procuring carriers, negotiating rates, and determining transport modes. Another partner may handle any freight forwarding and custom documentation. Yet another is strictly managing warehousing and perhaps distribution-center lease purchasing.
Leveraging disparate services is what established, world-class shippers do, and it’s the way you should strategize your supply chain, too.
6 Reasons Against Bundling Logistics and Warehousing
Here are six reasons to best explain the benefits of procuring disparate supply chain contracts and not bundling logistics services.
Single point of contact
The promise of a single point of contact is commonly made by turnkey providers but is often left unmet. Rarely is the person managing inventory and orders the same person handing transportation or imports. You will still need to work with multiple contacts within a one-stop shop, making the promise for simpler coordination elusive.
Core competencies
Sounds simple, but companies develop core competencies in their services. It’s hard to build longstanding expertise in carrier rates, negotiations, contacts, and networking and be equally competent in another discipline such as warehousing, inventory management or fulfillment.
The core competency of a supply chain vendor takes time to build and refine. Adding a new core competency is tantamount to entering a new genre of logistics and is more of a high-risk pursuit than one of convenience. And if a company’s success in an ancillary service is dependent on the goodwill created by their core service, then it is unlikely they are the best option. Avoid the lure of trusting someone who says they can do it all.
Service risk
When a company has a singular focus, they’re able to provide better solutions in pricing and service. A top freight broker will know vendors wide and deep and can move product as swiftly to and from a distribution center in Washington state as they can to and from Linden, New Jersey. Plus, they’re able to attain better pricing through volume discounts, achieving more favorable rates. They’ll also help you determine who to trust (best carrier for the job) so products get where they need to be with the least amount of risk.
Working with one provider for everything comes with risk. They’ll likely excel in one area more than another, and you’ll bear the brunt of service failures.
Having disparate suppliers is like having a portfolio of advisors. If one goes bad or is weak, it is easier to replace or terminate the relationship than if all your eggs are in one basket. Having several suppliers or contracts that each deliver on a core competency is just plain lower risk for the same investment and the same culmination of services.
Price transparency
Pricing is often bundled when working with a turn-key provider. Think of your cable company. You might save if you bundle internet with cable and a home phone line, but you often end up paying for more services than you need/use. Plus, you lose visibility into what exactly each service costs. With bundled pricing, you have no clear understanding of what is driving specific cost increases or decreases. And with bundled pricing you are often locked into a contract or agreement. If your volumes increase or needs change, you’ll be forced to renegotiate all your pricing.
Growth
As a company grows, they need more space. Such growth may take place in locations where supply and demand dictate who gets what space. For one, a company may have gotten their foot in the door in a regional market that is growing hot. But a larger, more established vendor may have more capital and volume in that market. Before you know it, the other company’s demand may be enough to terminate your lease between the warehouse and you, if it wasn’t negotiated properly up front by a supplier that knows the risks and cautions when signing a lease.
Zipline has helped an estimated 50 percent of clients with moving product to new warehouses. Space is severely limited and smaller brands are often “kicked out” by warehouse providers to make room for larger customers. Even with 90-day notice it can be difficult to find a new partner. If already working with multiple providers, this hurdle is less of a burden.
While the one-stop, turnkey approach seems appealing, bundling logistics services could end up stifling your growth. For example, if you need to alter your warehousing contract in order to service a new region across the country, your transportation pricing could be impacted. As mentioned above, bundled pricing can seem attractive, but when you adjust, other services could become inflated to compensate.
Bias
When you choose to work with a single provider for both warehousing and transportation, they may offer biased recommendations when it comes to network design. They’ll naturally recommend their facilities over others.
Ideally, you want a transportation partner that can work with ANY warehouse, not just the ones they own. Fast growing companies need the flexibility to expand where the demand is, not where they are locked into a warehouse agreement. Don’t limit your potential by partnering with a service provider that is inclined to put their interest above yours.
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A few years back, consultant PwC and the MIT Forum for Supply Chain Innovation provided five key principles that companies should learn to better manage present-day supply chain risk and prepare for future opportunity. In the joint study, they state that “mature companies that [invest in] supply chain flexibility are more resilient to disruptions than mature companies that don’t and mature companies investing in risk segmentation are more resilient to disruptions than mature companies that do not invest in risk segmentation.”
So, keep your supply chain flexible and disparate to capitalize on future opportunities to thrive in tomorrow’s economy. Remember, separating your logistics functions is a strategic advantage.
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