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Healthy Debate and Perspectives on Who Assumes Logistics Supply Chain Risk

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A Supply Chain Digest commentary makes the observation of a trend indicating that shippers are shifting more responsibilities concerning supply chain risk management to their third part logistics (3PL) providers.  The Digest authors argue that few 3PLs today really have skills and resources for assessing supply chain risk, along with how to factor that risk assumption into pricing and contracts.  They also point out that shippers lack the knowledge themselves about how to provide the right risk information to their 3PLs so it can be appropriately quantified.  The key takeaway seems to be that transparency is in the end really in the shipper’s best interest as well as the 3PL’s.

A posting on Spend Matters referring the above commentary observes that within the broader procurement and supply chain outsourcing sector that it is rare to see buying organizations purposely attempt to hide important details from potential BPO partners during the sourcing and selection process. Supply Chain Matters finds that observation somewhat simplistic since when it comes to supply chain risk, the analogy of see no evil, hear no evil often prevails.  There is probably substance to the observations transferring risk to a logistics partner does occur because shippers in essence, have concluded that a 3PL is in a better position to control and manage logistics fulfillment needs.

From our lens, we believe that 3PL’s own more of the responsibility of identifying and mitigating risk in the context of logistics fulfillment.  Our commentary on the latest troubling state of U. S. logistics raised the concern that logistics costs over these past three years have increased at twice the rate of GDP growth.  As was the case in 2011, both inventory carrying and transportation costs rose for shippers in 2012.  There was a 7.6 percent increase in the cost of warehousing in 2012 in spite of rock bottom interest rates and a claim of reduced inventory levels.

Our conclusion is that 3PL’s have benefited from a period of being able to increase overall rates because shippers have demanded more services from their logistics providers.  Now factor the observation that burdens of supply chain risk may or may not have been clearly identified.

We believe the most important takeaway in these commentaries is for 3PL’s to invest in upgraded skills among their staff that includes supply chain risk identification and mitigation for individual clients. If shippers are indeed unaware or unwilling to overtly identify risks, 3PL’s can provide an important benefit for helping to bring awareness and mitigation to these risks.  If risk management is not properly identified and quantified in contracts, a mutual dialogue and collaborative interchange helps to more clearly identify risks and responsibilities for liabilities for such risks up-front, not after the event occurs. Hiding the existence of significant risks in the end, does not help either party.

The certain reality is that supply chain risk and mitigation should be identified by all partners involved in the extended supply chain.

Bob Ferrari

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