“There are a lot of people in this space who came out doing supply chain somewhere and could do it faster and better with their logistics knowledge by renting warehouse space … so many of these companies compete on location, price and the ability to handle a specific type of commodity or good,’’ notes David Novak, executive vice president of Sales and Business Development, at SPS Commerce, which provides on-demand supply chain management solutions. “So once you boil all that down, it’s pretty hard for [third-party logistics providers] to differentiate themselves.”

There are, of course, providers who specialize in areas like cold storage, hazardous materials, large items, repackaged good and freight forwarding, so that gives them somewhat of an edge. But for the most part, a lot of their business tends to come via word of mouth and references, “instead of the big marketing game that service providers use,’’ says Novak, since that doesn’t tend to be an effective vehicle for 3PLs. So his first piece of advice is to “get in the game and be seen as a potential provider.” Additionally, 3PLs need to try and win business on something other than price and professionalism.

The development and implementation of value-added, technology-based services and solutions is the best way for 3PLs to differentiate themselves from the competition and reduce pressure on profitability, he says.

Their network is one service 3PLs can use to promote themselves, says Novak. “So a third-party logistics provider can articulate to a potential prospect they can service and fulfill the largest network of potential buyers on behalf of their buyer, meaning retailers. That’s a differentiator. If that 3PL can say, ‘We’re already prewired to all the retail organizations you have today and may have in future,’ that gives the 3PL strength.”

For example, if a supplier is looking for a third-party provider with enough warehouse space in the port of Los Angeles, and is deciding between three candidates, all of whom have the same sized warehouse facility for the same price, what’s going to differentiate them? Novak says the nod will go to the one that says it is already pre-certified to fulfill the customer’s goods to 1,500 retailers today and the ones they may have in the future, versus the others that say they can serve anybody on a custom basis.

Delving further down in that scenario, that supplier making the decision “is primarily concerned about [the fact that] the 3PL has to act and behave in a way that is fully compliant with the retailer, who is their customer,” he says. If shipping is not the supplier’s forte or if it knows it doesn’t provide quality service, or if it is fulfilling the order itself, it’s on the hook to do what the retailer asks for, Novak points out.

“But when the supplier has a third-party logistics firm fulfilling orders, it has to make sure that 3PL can service the retailer in the way retailer is asking for, otherwise it gets expensive for the supplier,’’ and it faces getting fined for late or short shipments. “So if I’m the third-party logistics provider and I’m fully compliant with 1,600 retailers, as a supplier I’m going to probably pick that 3PL” since that is a differentiator.

“The ability to be compliant and be prewired to that network of retailer and grocery buyers is a differentiation point,” and that’s where bulk of compliance requirements comes from, Novak says.

Another differentiator is the ability to provide inventory visibility to a supplier. If a supplier receives a purchase order from a retail buyer for 500 units of something, the supplier has to know whether it can fulfill that order. If it doesn’t have or own inventory it needs to have visibility into its 3PL system to see what’s available. That means systems have to be integrated so the supplier can fill that order for its customer.

But when the supplier releases that inventory management function to a third party, it risks loosing that visibility, Novak says. “Everybody can find way to do it, but the question is, how easy or hard is it and how much will it cost me to get our systems to talk?” Most small- to medium-sized 3PLs are not that technologically advanced, he adds, so they won’t use that as a selling advantage. It’s a very different thing to say your system is really, really good and can integrate into a customer’s ERP system directly and get an accurate picture of inventory levels any time you want, versus saying you can get inventory information by providing a spreadsheet every night indicating this is how much inventory the 3PLs has available to fulfill that order, he points out.

Turning to 3PLs is the logical solution to help companies tackle their distribution challenges for their most demanding customers, Novak says. But because the competition is so fierce, 3PLs must ensure that they can differentiate themselves by adding new services, new capabilities and higher degrees of operational efficiencies, and often they turn to software as a service (SaaS) providers.

The SaaS or on-demand delivery model allows 3PLs to pay for only the technologies and functions they need, which can dramatically lower their initial investment cost, Novak says. By reducing their internal IT staffing and infrastructure costs using SaaS solutions, 3PLs can pass along those savings in the form of more competitive rates to customers while improving their services. SaaS also enables 3PLs to be more nimble than they otherwise would be.

“That’s the Holy Grail,” says Novak, “a 3PL who can have predictability in their own costs … and they can then offer predictability in their pricing models to their own customers.”