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Contract logistics: opportunities, challenges, perspectives

2019.05.07
For several years now, contract logistics has been gaining more and more interest among customers, which can be attributed both to the good market situation and the development of this particular service sector. From the operators' point of view, this is obviously a positive trend. At the same time, the logistics industry, which operates in a highly competitive environment and under the pressure of customer demands, faces many challenges and must constantly adapt operations to meet them.

In many cases, contract logistics services form a vital link of the chain, at the one end of which are consumers with their demand for goods, and on the other - customers who manufacture these products. The latter, especially in the situation of increasing demand for their products, don’t always have adequate knowledge and technical facilities to handle logistics in an optimal manner. Acting on their own, they are not able to efficiently deliver their products to the market, which may endanger the company situation - its reputation, profits, and growth. In such circumstances, the logistics operator, with its operational knowledge and resources, is a certain kind of guarantee of delivery to the recipient.  A different type of contact logistics customers are purely trading companies which bring goods produced abroad to Poland. Such enterprises focus on searching for clients while outsourcing logistics.

Many operators, not enough employees

Thanks to the fact that they have modern technologies and implement processes more efficiently, logistics operators are becoming valued, reliable partners for producers or distributors. It is worth noting that despite the high competition, there is now a place on the market for large businesses, which usually operate on the international market and provide comprehensive logistics services, as well as for smaller ones, targeting specialized services: a selected industry or a specific customer, or even ones with limited territorial coverage. The thing that counts is whether the range of services is tailored to the needs of the customer the logistics operator is supposed to deal with.

Expanding the portfolio of services and continuous improvement of quality, however, sometimes poses difficulties. The logistics services sector, like the entire Polish economy, is struggling with the shortage of employees, and not only of highly qualified ones. The decline in supply in this area has contributed to a significant growth of rates for logistics services, which is a consequence of wage increase in recent years. In turn, the use of employees from across the Eastern border, which could offset the lack of manpower in warehouses to some extent, revealed the problem of language barrier in handling the WMS systems/scanners or Voice technology, and this in turn forced additional implementation of the systems functionalities to work in a multinational environment. In this situation, operators are strongly focused on the automation of operations to replace some employees with the work of machines. Unfortunately, in the case of contract logistics, it is not always a simple and financially beneficial solution. Usually, the processes are tailored to the needs of each customer which, together with short, maximum 5-year-long contracts, prevents the amortization of a specific investment at the market level.

Data warehouses and drones

Fortunately, the development of technology facilitates streamlining of work - today probably in every industry, whereas in logistics it is used primarily in data management. Large logistics operators use many information systems cooperating with each other based on the same data: WMS and TMS, systems supporting the management of financial data, human resources, customers (CRM) and visualizing the distribution status for customers.

Having data collected in one place, one can manage not just their transmission by creating the so-called data warehouse, but also transform them into information used to increase the efficiency of management, which may translate into a growth of competitiveness. Such activities include Business Intelligence, i.e. business analytics. Appropriately configured visualization of incoming information allows for online tracking of processes, resources and stocks as well as making the right decisions in advance or counteracting possible problems. The next step may be deep data exploration and finding connections in the processes taking place between them which are invisible after a general analysis - which is referred to as Data Mining.

In the area of equipment, there are automated guided vehicles (AGVs) which can work without an operator, as well as automatic self-loading and self-unloading racks. Perhaps this is not a technical innovation any more, yet so far, due to low labour costs and short terms of logistics contracts, they have not been considered by operators as options presented to contract logistics customers - however they are an interesting opportunity on the demand-driven labour market. Also drones are worth mentioning which are used for stock-taking in warehouses, with a still wide potential for application, or VR goggles offering a virtual and augmented reality to visualize the workplace of a warehouse worker.

The future - virtual operator

In the case of contract logistics, where the offer is tailor-made for almost every customer, it is difficult to talk about a fixed set of services. It is largely determined by the needs of the customer and price. However, the pillars of contract logistics are unloading, loading, picking or storing. Very strong growth has been noted in the recent years in VAS services due to the demand generated by recipients from the modern distribution channel. At the same time, the lack of people to work increases the interest in in-house solutions, in which the customer rents or owns the warehouse, while the operator is responsible for employing, training and management of human resource. Sometimes the customer requires work to be performed on his own WMS system, on his own equipment. He delivers his own labels and foils whereas the operator is only responsible for providing employees just like a specialized temporary employment agency. In such conditions, it is unlikely that the operator will generate added value since he has no impact on the process managed by the external system.

Currently contract logistics, i.e. mainly handling, storage and distribution services, as well as increasingly value-added services (VAS), is provided in the 3PL model. To a large extent, it takes into account the resources of the operator who provides logistics in his own warehouse using his own forklifts and mostly people employed permanently (except VAS). However, it should be expected that in the future, contract logistics will begin to shift towards the 4PL model. In such a system, the logistics operator is somehow virtual: he doesn’t need his own investments in resources directly involved in logistic operations, such as forklifts or warehouse capacity. The key to his success is knowledge, and on its basis, the selection and integration of resources, technologies and experience of other businesses and the organization of all processes to generate the added value for the customer using synergy between all the involved parties. The 4PL operator may, as part of the operation, rely on 3PL operators as subcontractors - then we have a case of double outsourcing.

Regardless of the adopted model, it is important that the operator, after establishing the cooperation, does not rest on laurels. Services subject to the requirement of continuous improvement of performance while maintaining or improving quality, and the volumes increasing year-on-year, covering more and more areas of the market - logistics in such conditions often turns out to be too much for producers who want to focus on the core business. This approach creates business opportunities for logistic operators, however, acquiring a customer is only a half success - it is equally important to retain him. The market of logistic services does not differ significantly from other areas of the economy and is a scene of competitive war, and above all the pursuit of change and innovation, which is the driving force of success. 

Author
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Marek Pluciak

Logistics Solutions Design Manager

Raben Logistics Polska