Gagan Goraya

The TPLs or third party logistics has shown the industry that they cater to customers special needs better than asset based transportation companies. This is probably the reason why they continue to thrive even as the rest of the industry is going through a tough recession, granted that recession has impact on the entire industry and no one is totally immune to it. Some may argue that this has to do with their structure, or their lower cost of operation, or their lower investment in fixed assets. Others may argue that their agility comes from their ability to strike better bargains with transportation companies using their portfolio size as leverage. Aside from the obvious, I believe the differences are far more subtle and lie within the fundamentals of the organization. Furthermore, “lower cost” argument is very sound considering TPLs invest heavily in technology and their margins are generally lower.

One of the key differences is the systems development approach most TPLs follow, which I like to call customer focused design (CFD). Before I discuss the CFD, I would like to discuss three components that make a successful TPL; A good phone system, an effective computer system, and dedicated staff. The key difference between a TPL and another transportation company is that a good computer system is paramount for all TPLs to be successful which may or may not be the case for small to mid-sized transportation companies. Furthermore, CFD oriented computer system allows TPLs to separate themselves from their competition.

So what is CFD? It is a methodology that systems must be designed with one objective: System must be able to meet all functional and non-functional requirements of the customer. As part of the CFD, TPLs focus on systems that allow them to establish long terms relationships with its customers. The system include, in no particular order:

1) Online reporting to help customers analyze end-to-end freight movement.
2) Purchase order system that allows customers to feed directly from their ERP systems.
3) Back-end integration with their suppliers to transfer information seamlessly using EDI, Web Services, Online portals.

Most customers like to maintain control over their supply chain. TPLs cater to that need by allowing them to access their online portals to do number of key functions. In order to ensure the web portal is updated in timely fashion, TPLs constantly monitor their suppliers to maintain good information using some sort of reinforcement method. In many cases, we have seen penalties associated to failures. The bottom line is TPLs use information as a commodity to be sold to their customers as an add-on to customers transportation needs.

Another example of the CFD is the Purchase Order System. This has been around for a very long time and many companies have built sophisticated PO management systems to simplify PO integration with their customers. PO integration is essential requirement for management supply chain for both TPLs, and customers. In addition to having access to information for planning movement, TPLs use PO systems to bridge information gap that is typically seen in the supply chain as freight moves from production facility to a consumer. A good purchase order system allows organizations to establish a special bond with its customers that can add significant value to the relationship. Using the information and having end-to-end visibility, allows companies to manage various aspects of the freight movement. This approach has been widely used, although not limited to the TPLs. There are a lot of transportation companies and freight forwarders who are using these systems to attract new business.

Third component in the CFD model is back-end integration. As I highlighted earlier, the TPLs rely heavily on these systems. In order for these systems to work well, they have to be maintained and updated frequently. The fact that it is very expensive to maintain these systems manually, good back-end integration is essential. By back-end integration I am referring to capabilities required to interface with their customers and suppliers easily. Most of the TPLs are now using third party applications and connect directly to suppliers TMS systems. These systems rely on EDI and Web services, a cheaper alternative to EDI, to maintain constant information flow. This is why large TPLs are highly invested in these systems. Unlike transportation companies who invest a lot of resources in their fleets and facilities, TPLs are investing in these systems.

Information awareness is making customers look for suppliers that can offer both: good service, and good information. It is my opinion that the balance of freight industry will tip towards organizations who will invest in the CFD oriented systems. Third Party Logistics have taken a head start and have shown that this approach does pay off. Similar approaches have been taken by some of the leading transportation companies, and it is paying off for them as well. By the end of this decade, these systems will be required to stay in this industry. Let’s get started!