The idea of “Managed Supply Chain” is based on the more traditional idea of “Managed Transportation” or “Managed Transportation Services (MTS)." In this more traditional sense, shippers would generally pay a management fee to a third-party logistics (3PL) provider to not only tender loads, but also for: sourcing and procurement (RFP management), carrier and mode optimization (via rate and lane optimization), planning and execution (bread and butter of a typical 3PL relationship), auditing and payment (confirmation and optimization of certain lanes, modes, and classes).
So, what is a “Managed Supply Chain,” and as a 3PL, how can you create additional revenue streams by offering these services?
Managed Supply Chain
Managed Supply Chain (MSC) takes some of the ideas and components of MTS and broadens the scope to include: freight forwarding, customs clearance, freight management, fulfillment, parcel auditing, retailer/buyer relationship management, inventory management, and many others.
All of these services culminate into what are necessities for modern brands to manage. However, oftentimes many brands don’t have the bandwidth, expertise, or willingness to take on the complex challenges that our modern supply chains face. This is where 3PLs can fill a big void—and profitably.
Why Offer Managed Supply Chain Services?
Recently, we published an article that highlighted the growing and stiffening competition within the 3PL fulfillment space. Now more than ever, brands are looking for additional areas that their 3PL can service, above the traditional B2B/B2C order fulfillment.
Think about it like a relationship with a bank. Do you want to have your checking account in one bank, savings account in another, investments in another, credit cards in another, and mortgage in another? Probably not. For one, it becomes a headache to manage all of those relationships, payment terms, yield, etc. Additionally, fostering a relationship with one or just a few institutions generally lends itself to better rates on additional financial products (insurance, mortgages, etc). Same goes for 3PLs. If brands know that they can consolidate their operations, communications, and billing into fewer parties, that relationship becomes exponentially easier to manage. This means there are fewer weekly/monthly phone calls to be made, fewer RFPs/RFQs they have to manage, and fewer invoices for their accounting teams to process.
Additionally, it affords them (and you) the ability to increase the number of cost levers at each party's disposal, thereby allowing for more wiggle room when it comes to the ever-important price. If you only offer fulfillment services, price adjustments are far tougher to stomach than if you are offering several different services at once. Perhaps a brand needs to cut their fulfillment costs in order to satisfy certain unit economics, but they are happy to give up some ground on LTL charges. By offering services on both sides of that coin, a 3PL is in a much better spot to give up margin in one area and maintain margin in another.
One potential ‘bonus’ reason to include MSC in your service offerings is the idea of management fees—a concept that both MTS and Wall Street know well. Basically, a brand will pay a fee to have these services managed by a third party, either as a percentage of overall spend or a flat fee, thereby guaranteeing a stream of revenue up front, regardless of how much volume a brand pushes (or doesn’t push). This idea became popular in the traditional MTS model and post-2008 on Wall Street when traders moved away from ‘shady’ transactional commissions in pursuit of ‘management fees’ for the overall value of an account, thereby aligning objectives between money managers and clients.
Where to Start with Managed Supply Chain
Managed Supply Chain as a service sounds great, but the main caveat here is execution of said services. Would I recommend a brand new 3PL start out with adding this service? Unless they have prior experience in any of these areas, I’d say to stick with what you know best and what you can best service. That being said, everyone has to start somewhere.
Begin by dipping your toes into one of these areas to start. That could be freight forwarding, LTL/TL domestic freight, packaging sourcing, etc.—I’d also start with one client that is willing to be the ‘test case.’ From there, I’d suggest partnering with an existing provider that does have experience in one of these areas. A great place as a 3PL to start would be on the freight forwarding or domestic freight side, as most brokers in these areas would welcome the business, especially if you’re servicing multiple clients that would eventually want to move their spend to that broker. Come to an agreement on a proper revenue share and align responsibilities of each party. Most importantly, ensure that lines of communication, pricing, and billing are aligned and airtight—these are generally the areas where these relationships falter.
With all of the above in mind, it’s always best to ask your customers first for what services they’d like to see added to your catalog. More often than not, if you’ve got a great relationship with your clients, they’ll be more than happy to share some of the services that they’d like to see serviced by a third party. With enough traction, adding these additional services becomes more intuitive as customers share more of the specific areas they need assistance with.
In today’s increasingly competitive landscape for 3PLs and fulfillment centers, diversification will be key to gaining and maintaining accounts—especially the good ones. So while the idea of managed transportation services may seem intimidating, it can actually be an amazing opportunity to diversify the catalog of services you offer, which then leads to less risk per client and increased retention as services are added onto a client’s contract.
If you'd like more information on how to roll these services out to your customers or if you're interested in learning more about the consulting services offered at Extensiv, please send an email to firstname.lastname@example.org.