Magazine Article | November 14, 2009

Set Your Sights On 3PL Providers

This independent software vendor (ISV)/integrator achieved 20% revenue growth in 2009 by targeting the growing number of third-party logistics (3PL) providers.

Business Solutions, December 2009

Over the past 12 months, a recurring theme amongst VARs was to shift business focus to verticals less affected by the economy. The problem with this notion is that two of the most talked about opportunities, government and healthcare, are to most VARs nothing more than a dangling, out-of-reach carrot. As you probably know, the amount of red tape (forms and processing) required to even bid on government business is daunting. Additionally, and equally the case with healthcare, long sales cycles mean the recession could have been over (assuming we're truly coming out of it) by the time a VAR's efforts showed any traction. All that said, the poor economy of 2009 did create some very real opportunities. Consider 3PL providers. Essentially, 3PL providers are companies that are providing storage and handling services for someone else's inventory. In 2009, many companies turned to 3PL providers to reduce their own overhead. That's helped ISV/integrators like Datex that create solutions aimed at solving the basic problems 3PL providers face. While other integrators struggled to make it through 2009, Datex celebrated 20% revenue growth. According to Michael Armanious, president, and Samir Armanious, CEO of Datex, this growth was achieved by addressing four common pain points to which 3PL providers respond.

3PL Providers Need Metrics
When it comes to any warehouse, the integrator says that 3PL providers need to ensure they're capturing details of every transaction (shipping, receiving, picking, packing, etc.). "Without warehouse automation, without the capability of having a mobile device that records the start and end time of a transaction, 3PL providers don't have a way to provide valuable metrics of their profitability," says Samir Armanious.

For instance, in the food industry (60% of Datex' customers), one of the most important things to these customers is lot traceability. "When a product comes in, it needs to be assigned to a particular lot number, which is attached to that product for its life for tracking purposes," Armanious says.

Prior to the integrator installing its solution (which includes its own warehouse management system [WMS] software and hardware), one of Datex' cold storage provider customers had a system which wasn't giving it accurate data. "With the implementation of our system, the customer was able to automate its facility and increase throughput by more than 50% because of the real-time data visibility," he says. The customer's old system was only providing information at the end of the day.

3PL providers catering to pharmaceutical customers (warehousing any product typically found in a drugstore) have similar needs. With pharma (10% of Datex' customers), traceability is a huge component, and inventory transactions require multiple signatures and different authority levels to get product moving. The use of technology allows these providers to go paperless, but still maintain a level of traceability and auditability throughout the process.

In another example, Samir Armanious explains that in the apparel industry (30% of Datex' customers), a big challenge is what's known as the apparel matrix. "For every piece of clothing there are the three major attributes of color, style, and size," he says. "If you're looking at inventory of 10,000 SKUs, you'd have to multiply it by a factor of three." Essentially, 3PL providers of the apparel industry need to manage a large number of SKUs and ensure inventory is being accurately picked. One of Datex' customers was constantly shipping out the wrong product to the point where truckloads of wrong products were being shipped to Wal-Mart and other major retailers. A supply-chain-fixated company like Wal-Mart doesn't like receiving the wrong products. Indeed, it charges steep fines for incorrect shipments. Datex' customer was hit for approximately $200,000 in penalties. While the cost of Datex' solutions vary, Samir Armanious says the average install is between $125,000 and $150,000 without hardware. When you consider the ability to eliminate penalties like those of Datex' apparel provider, the system can pay for itself in a few months.

Add Profitability To Your Customer's Supply Chain
The second major pain point 3PL providers face is managing multiple customers within their warehouse. Indeed, there could be 50 accounts storing inventory in the same facility. "3PL providers have to determine which customers are profitable, which are not, and what margins are associated with each customer," Michael Armanious continues. "Therefore, 3PL providers need activity-based management tools as part of their WMS to look at the profitability of accounts." These management tools can help a 3PL provider determine if an account is worth keeping, or if there's a need to increase rates. The tools provide an accurate picture of warehouse profitability.

Win 3PL Sales By Reducing Supply Chain Costs
Additionally, Michael Armanious says another reason 3PL providers are keen to adopt Datex' solutions is cost savings. "If you ask a customer about their inventory accuracy, often the first response is that they have 99.9% inventory accuracy," he says. "Once we ask follow-up questions, we often discover that one of the primary reasons they have such great inventory accuracy is because they have 15 people to double- and triple-check every order." Basically, the 3PL provider has increased their amount of labor to be able to have such great accuracy.

If a provider is doing things manually, Armanious says the most conservative numbers show a WMS can create a 14% to 30% reduction in warehouse labor. Additionally, with the same amount of space, throughput can be increased by 30%. Between those two values, ROI is very clear, and systems often have a 9- to 12-month payback.

Make Your 3PL Customers More Marketable
The final reason 3PL providers adopt WMS solutions is to make themselves more marketable. "When manufacturers are looking at potential 3PL providers, they look for a provider that can be accurate and provide as much visibility as possible into the inventory," says Samir Armanious. "The 3PL provider that can grant daily, hourly, even real-time reporting is going to win the business." With a 3PL WMS, providers can gain a competitive edge in retaining existing customers and bringing in new accounts. In fact, Armanious says his apparel customer was able to land its largest account because of the capabilities of the WMS solution Datex installed.

Selling WMS Solutions To 3PL Providers
To address all these issues, Datex created its own WMS software named Footprint, which helps handle and manage a 3PL provider's operations at the warehouse level. Using mobile devices like a Honeywell handheld mobile computer (see sidebar on page 26) and WMS systems like Datex Footprint, it's possible to automate and provide real-time data for every warehouse transaction that takes place. Third-party billing, system-directed picking, cycle counting, container and yard management, temperature control, and online visibility are just a few benefits of such solutions. The sum of all the benefits equals a reduction or elimination of errors and lead times, therefore reducing extra material handling, excess travel, and time spent looking for items in the warehouse.

The integrator isn't aware of how many 3PL providers exist, but Michael Armanious says new ones pop up every day. As you could imagine, the majority of 3PL providers are located in areas where major shipping and receiving takes place (coastal cities like Long Beach, CA; New York; and Savannah, GA). To find new providers, Datex is a member of the International Association of Refrigerated Warehouses (IARW) and the International Warehouse Logistics Association (IWLA). Armanious says 3PL providers typically join one or both of these organizations. Combined, these associations cost the integrator approximately $2,000 a year in dues.

In talking with Samir and Michael Armanious, it's clear that while selling solutions to 3PL providers does require knowledge of the market's unique needs and challenges, 3PL sales aren't an out-of-reach carrot for most VARs already selling supply chain solutions. With the continued need for such providers in the import-heavy United States, your next (or first) 3PL customer could be just around the corner.