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Logistics Quarterly Magazine - Volume 16, Issue 3, 2011

LQ’s Top North American 3PL Executive Interview Series

A Conversation With Joe Gallick, Senior Vice President, Sales, Penske
Logistics, and Colleagues from Penske Logistics

Questions for LQ’s Executive Interview Series on 3PL have been prepared by members of LQ’s Board: Graham Allen, Senior Program Manager, Supply Chain Secretariat, Treasury Board Office, Ontario Ministry of Finance; David Closs, PhD, Michigan State University and LQ Executive Editor; David Faoro, Director of Supply Chain, The International Group; C. John Langley Jr., PhD, Penn State Smeal College of Business; Clifford F. Lynch, President, C. F. Lynch & Associates; Nicholas Seiersen, LQ Executive Editor

LQ: The total landed cost is not really a new metric but is another name for total cost of ownership (TCO). Supply chain professionals should be doing this as part of their due diligence. Why is this considered “new”? (Graham Allen)

Joe Gallick: The concepts of total landed cost and total cost of ownership bear many similarities in that they both represent an effort to holistically measure the true costs of asset ownership. But that may be where the comparisons end, and explain why total landed cost still has a way to go before becoming a standard term and perhaps earning its own acronym.

TCO gained prominence in the 1980s as a widely accepted economic term which essentially coupled the acquisition of an asset with the life-cycle cost of its maintenance and use. Hence, the measure is still very visible in new vehicle advertisements and the like. Conceptually, total landed cost attempts to similarly expand the acquisition cost, but within a different context and via different factors.

While the global expansion of supply chains endeavored to exploit low-cost country sourcing and labor opportunities, supply chain professionals were, perhaps in parallel, expanding their line of sight beyond functional business silos and across the entire supply chain. What they quickly learned were the additional costs and effects associated with long distance supply chains, the primary being the increase in buffer inventory to deal with demand fluctuations and potential disruptions in supply. The financing, storage and handling of this increased inventory, along with volatile fuel prices, capacity constraints, and bottlenecked ports are but a few of the factors contributing to total landed cost. This type of metric, though perhaps not completely new, is rapidly becoming a standard reference in the supply chain lexicon.

LQ: How can a 3PL ensure that as customer needs change, their offerings change and adapt to meet their needs? I can think of examples where shippers have asked for enhancements and were rebuffed due to cost or a lack of resources on the 3PL’s part. (David Faoro)

Sue Maier, Manager: The key is not waiting until a customer needs change. The key is to be proactive in assessing the need for change, and the direction of that change. We need to regularly analyze the customer’s supply chain data and analyze industry trends in both the customer’s industry and the supply chain industry. For example, a high-level engineering analysis may alert both the 3PL and the customer to possible supply chain changes. Then, as part of ongoing communication with the customer, we will analyze the data and we’ll jointly plan a strategy for moving forward. This way, instead of responding reactively to a solution which may not be optimal, we’re both moving together toward a collaborative solution.

LQ: What are some of the “keys” to successful relationships between 3PLs and their customers in relation to IT needs? What are some of the reasons that may be responsible for the lack of success in some instances? (John Langley, PhD)

Tom McKenna, Senior Vice President, Engineering and Technology: Collaboration is the single most important factor for successful relationships between 3PLs and their customers in relation to IT needs. Open and honest communication between both IT organizations is vital. This allows for regular and appropriate feedback to respective business leadership in regards to contractual boundaries, smooth startups and transitions, and for handling the constant changes that are simply part of today’s business dynamics.
Within the umbrella of collaboration, the following keys should be kept in mind:

  • Integrating: Understand the degree of integration required between each party’s systems, which can range from very loose (e.g., web-based) connections to extremely tight EDI interfaces between a customer’s ERP and the 3PL’s logistics systems. Business leaders should understand that the complexity of integrating systems is not in transferring data between the two systems, but in synchronizing the business processes between the two organizations. In one case, a 3PL and a customer nearly doubled the number of interfaces required as the work proceeded. In the end, the cost of that additional work enabled much greater operational efficiency for both.
  • Planning: Allow both IT organizations to jointly build project plans and timelines. Ask the IT leaders for alternatives and contingency plans that can help get the business up and running while the full IT work is completed successfully.
  • Testing: Insist on thorough and cooperative testing of the interfaces and other IT work. Linking information systems are increasingly complex, so best practices for testing should be shared openly by all parties. One customer and a 3PL jointly devised an innovative smoke test approach to testing several inter-related interfaces that allowed each party to identify where problems may leak out in unanticipated places.
  • Adapting: Both during business transitions, and over a period of time, there will be ongoing changes and new discoveries. A highly collaborative and open working relationship between the IT functions of a 3PL and its customer can enable the rapid identification and execution of necessary changes to help mitigate risks and pursue new opportunities.

IT and system failures can cause serious damage to businesses and dilute, or even eliminate the expected benefits and value for both the 3PL and the customer. Unanticipated problems can still result from these complex IT solutions, but success is much more likely to be achieved if an open and collaborative relationship between the parties is established and maintained.

LQ: How do you think an increased focus on environmental sustainability and carbon footprint will impact distribution operations over the next five years? (David Closs, PhD)

Joe Gallick: In a recently published 3PL industry survey conducted by Dr. Robert Lieb of Northeastern University, an overwhelming percentage of CEOs indicated a continued dedication to greener practices despite the challenging economic environment. As 3PL investments in general tend to be reactive to industry requirements, they are often harbingers of emerging trends in manufacturing and distribution. Sustainability activity has grown steadily over the past five years, including the use of LEED certified DCs, solar panels and energy efficient lighting in warehouses; energy and packaging material recycling in plants; and a number of initiatives around transportation including new engine technology, idle reduction systems, APUs, alternative fuels, and the adoption of SmartWay practices with respect to vehicles and outsourced carriers. We believe this trend will continue to grow and its pace will be largely influenced by increased consumer preference in green products, as well as government regulation and emerging technologies.