Logistics Performance Measurement and the 3PL Value Proposition.

Excerpts copied from Logistics Quarterly the official magazine of the Logistics Institute. For the whole article, click here

The case for logistics performance measurement
The five most recent studies published by the Council of Logistics Management on the subject of performance measurement in logistics had three significant findings in common (Kearney 1984; Bowersox et al 1989; Byrne and Markham 1991; Global Logistics Research Team at Michigan State University 1995; Keebler et. al. 1999):

(1) Most firms do not comprehensively measure logistics performance,

(2) Even the best performing firms fail to realize their productivity and service potential available from logistics performance measurement, and

(3) Logistics competency will increasingly be viewed as a
competitive differentiator and a key strategic resource
for the firm.

There are three major reasons why firms measure their logistics performance. They are to (1) reduce their operating costs, (2) drive their revenue growth, and (3) enhance their shareholder value. Measuring operating costs helps to identify whether and where to make operational changes to control expenses and to discover areas for improved asset management. To attract and retain valuable customers, the price/value of products offered can be enhanced through cost reductions and service improvements in logistics activities. The returns on stockholder investments and the market value of the firm are impacted by the performance of firm logistics. These seem to be obvious reasons why companies should want to be competent in performance measurement.

The 3PL value proposition
Third party logistics providers enable firms to achieve reduced operating costs and increased revenues in new and existing markets. 3Pls provide firms an opportunity to enhance their market value by reducing ownership of assets, which translates to a higher return on remaining assets and greater return on stockholder investment. 3PLs also bring to the relationship their specialized expertise in managing logistics with contemporary technology and systems. The COO’s decision to outsource company logistics operations to the 3PL is often justified solely on the favorable difference between the more efficient 3PL’s price for the services and the firm’s higher costs of existing operations. The chief marketing officer views the enhanced services and distribution reach of 3PLs in existing and new markets as translating into increased sales and better long-term relationships with customers. CFOs are delighted to see assets — property, plant, equipment, and even inventory — disappear from the firm’s balance sheet, freeing up cash for more productive uses, instantaneously and “permanently” improving the company’s returns on assets. CIOs are often very pleased to have access to the 3PLs systems and technology resources, avoiding the cost and trauma of upgrading their own. Reliance on the 3PL alliance frees up company employees to focus on their core competencies, doing more of what they are good at and less of what can be done better by the 3PL. Chief logistics officers begin to realize that ownership of resources is not necessary to achieve control over the results.

Conclusions
In today’s competitive market place what distinguishes winners from losers is the ability to differentiate themselves through their service and product offerings. For many firms, the service differentiation is accomplished by how well the logistics process is managed. To achieve excellence in logistics, successful firms ensure that the key logistics processes are aligned with the firm’s business strategy and measured against predetermined performance objectives. Additionally, the top firms are jointly defining the specifics of each measure with their trading partners (customers / suppliers / 3PLs) to create a common understating of expectations. While some firms are developing their measurement capability internally, a number are turning to 3PLs to support their needs. As focused service providers, 3PLs are ideally positioned to bring the systems, process design, and managerial expertise to aid in establishing and implementing a comprehensive logistics measurement effort. The 3PL is also often in the position to act as a catalyst for meaningful dialogue between trading partners to establish a level of service performance that truly adds value.

Regardless of the approach a firm takes in establishing logistics measurements, the real value comes when the information is acted
upon to align the effectiveness and efficiency of the logistics process performance to a level that is valued by customers. How well is your organization meeting your customers’ logistics expectations? What
role can the 3PL have in your success? Now may be the time to start measuring your logistics performance.

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