Building a Case for LSP Mechanization

Is your LSP actually taking advantage of economies of scale resulting from servicing multiple clients? Put another way, does your LSP leverage the total handled volume of multiple clients thus allowing for profitable investments in mechanized processes which can lead to increased productivity, lower costs and hence lower rates for you?  Or on the other hand, are the economies of scale limited to the volume he handles on your behalf and likely limited to your contract period?

If your situation is like most you probably have to answer with a resounding NO. Usually an LSP relates investment to a specific client and makes a separate business case for each individual client and considers the contract period of the client alone in its calculations. A result of this approach is that the business case has to achieve a profit within the contract period of the specific client. A contract period of 2 to 3 years is common; however, an ROI of less than 3 years for a mechanized system is very short. As a consequence, the business case typically does not show much of a positive result, if any, and thus the typical LSP will elect not to invest in a mechanized solution to support your logistics. One can argue that this short ROI period requirement forces them to invest and implement only those mechanized projects that are deemed substantially profitable from this type of business case analysis. This holds some validity. Then again, I would propose that a wider scope of opportunities needs to be considered.

One of the main questions for an LSP to consider when contemplating investments in mechanized systems, is whether the characteristics of the handled units will change in the long term after the current contract period. Unfortunately, at least from our experiences, if you were to pose this question to most COOs in the recent past, the COOs would have likely responded that in most cases this would not be factored into their investment decision. Yet the need for this fundamental question is supported by the fact that LSPs tend to focus on customer type and hence on product characteristics per site.

So is the LSP holding back on investments in mechanization even though it could achieve lower costs levels and higher productivity that would in turn lead to more business and lower rates for you as the client? If not, what's holding them back? Risk mitigation is the argument that is often put forward. The biggest fear is that flexibility of mechanized systems is limited. And, therefore there is a potential risk of ending up with a lot of steel that does not have a function anymore after a contract period concludes. However, it's Groenewout's experience that the flexibility of mechanized solutions can be increased by implementing flexible solutions to the system's hard-and software by applying a modular design and construction. This will lower the risk substantially. 

Some more forward thinking LSPs are beginning to slowly adopt a broader concept in their mechanized solutions investment decisions. I suspect that the forced reflection period brought on by the economic crisis in Europe and elsewhere in the world will change the approach of LSPs regarding warehousing strategies, focusing more on long lasting partnerships, collaboration and the willingness to invest in a multiple client concept instead of a single customer concept. This type of approach can provide a win-win for both the LSP and the client.

I would be delighted to receive personal accounts of logistics obstacles and challenges that readers of this blog have encountered.  Please email me at mail@groenewout.com