When most companies think of activities that generate revenue, shipping operations are probably the last things that come to mind. In fact, many companies mistakenly believe that logistics is just another word for "cost center." If you're one of those companies, you could be missing out on a substantial money-making opportunity.
While logistics activities such as shipping can be costly, especially at the individual package level, that doesn't mean they can't carry their own financial weight. When both planned and implemented correctly, they might even become a profit center.
That's the good news. The even better news is you already have some excellent points of reference to get you started because running profitable shipping activities is what 3PLs do every day. With that in mind, here are a few ways acting like a 3PL (a 3PL is the commonly used acronym for third-party logistics provider) can yield positive dividends.
Understand the Cost of Shipping and Other Logistics Activities
No self-respecting 3PL can even begin to do business until it understands, down to the penny, exactly how much various logistics assets and activities cost. Some of these costs such as paying carriers and buying (or leasing) systems and facilities are fairly easy to plug in. Others are a bit more difficult to quantify but every bit as important to consider. For example, what is the cost of poor logistics quality such as a late shipment? How much do you typically have to pay for rework and returns? What is the incremental expense associated with compensating non-shipping personnel such as customer service representatives who interface with shipping personnel on a frequent basis? And what is the expense associated with operating out of one geographic location versus another? Perhaps most important of all, what is the cost of carrying inventory?
The rationale behind this exercise is simple: unless you understand all of the dollars that are going out the door due to shipping and shipping-related activities, · you can't begin to project how many shipping-related dollars your company will need to break even (or factor into product price).
Understand the Value of Shipping and Other Logistics Activities
Successful 3PLs understand the true worth of each and every logistics service they provide and they price their contracts accordingly. For example, they know they're not just selling specific services; they're selling reliability, speed, cost-efficiency and convenience. They're also selling success because they know exactly how expensive a late or undelivered shipment can be and what it can mean in terms of repeat business. And they're selling strategy, at least the good ones are. Even though you may not formally charge for them, your in-house shipping department "sells" many of these same benefits. And before your company can run a truly profitable shipping operation, it must at least try to put some numbers around the value these benefits add to the bottom line. If you're in doubt as to how to do this, try finding out what the "going rate" is for various 3PL services. Benchmark against competitors. Or, analyze what your market your customers and potential customers is willing to bear for the cost of shipping.
Once you've done that, compare your final evaluation to your tally of costs to see what your current return on investment is. Ideally, it will be positive with your value outweighing your costs. But even if it isn't, you've now established an important baseline for running a more profitable department.
Run Shipping Operations Like a Business
Like your company, all 3PLs are in business to turn a profit. The only difference is that the bottom line is completely dependent upon excellent logistics performance optimal shipping and logistics efficiency. Needless to say, this has a powerful effect on how and when 3PLs spend logistics dollars.
On the one hand, a 3PL is probably more careful with its money than in-house shipping departments, analyzing even small decisions to the nth degree. For instance, although it may not always choose the cheapest carrier for moving shipments, you can bet a 3PL has done its homework on exactly what carrier alternatives there are and which offers the best balance between costs and benefits. In addition, you better believe a 3PL knows exactly where it makes the most financial sense to ship in and out of for each given client and how the cost by location breaks down in terms of labor, capital, transportation, etc. At the same time, a 3PL also knows that sometimes you have to spend money to make money, which is why it doesn't hesitate to invest in more efficient systems, facilities and equipment and why it doesn't balk at spending a lot of money in up-front planning and analysis.
If you truly want your shipping operations to be more profitable, you would be advised to run your operations in much the same way, pretending that your department alone will make or break your company's profitability. Each time you make shipping or other logistics decisions, ask yourself honestly, "If I had to defend this decision to a paying client or stockholders, would I be able to do so?" Better yet, as you make long-range plans, try asking this, "If I were a 3PL, how would I have to change my shipping operations to ensure I was still in business by this time next year?"
Don't Try to Do Everything
Finally, a word to the wise: even the "full-service" 3PLs occasionally outsource some of their logistics. My company, for example, uses a variety of LTL and small package carriers to help meet our clients' shipping needs even though we also operate some dedicated trucking fleets. Why? Because it makes more financial sense for us to focus on our logistics core competencies.
If you find that you can no longer make a plausible business case for profitably coordinating all of your shipping in-house even after employing all these helpful hints you may want to consider not only emulating a 3PL but using one.
After all, the important thing isn't who's taking care of each of your shipping activities but that you're getting the best value for your logistics dollar.
Todd Carter is the senior vice president of Global Business Development, GATX Logistics Inc., soon to be APL Logistics.