Unpacking Risk Shifting

Gresham’s Law is an economic principle that states bad money will drive good money out of circulation.

We argue there is a “Gresham’s Law” scenario occurring in the transportation and logistics industry as Global Shippers and Consignees (GSCs) seek extreme commoditization of those services and also apply bad contracting practices to them.

This drives away good Third Party Logistics (3PL) providers.

The good news? Organizations have gotten very smart about buying 3PL services. The centralization of procurement functions and automated procurement practices have enabled GSCs to have great success bundling highly complex logistics activities and reducing them to their simplest expression, allowing for savvy procurement professionals to commoditize the services and reduce the price per transaction.

The bad news? Many GSCs have gone too far in their efforts. Many want innovation and investment by the 3PLs. However, the 3PLs are reluctant to deliver, arguing razor thin margins and short term commodity-based contracts create a disincentive for 3PLs to make investments.

Still worse, these same contracts also onerously shift an extraordinary amount of unreasonable risk to 3PLs by including significantly lopsided and aggressive terms and conditions. We argue that transactional ways to procure 3PL services are at a tipping point, and ripe for change.

The Genesis
This white paper was inspired by a discussion between Phil Coughlin, President of Global Geographies and Operations, Expeditors International of Washington, Inc., and Kate Vitasek, faculty member, the University of Tennessee’s Haslam College of Business Administration, about poor contracting practices in the logistics and transportation sector.

The discussion expanded and the concept of a white paper challenging better contracting practices for 3PL services was born. Passionate industry leaders joined in the discussion, becoming authors and contributors. All felt strongly that the entire industry - buyers and suppliers - will benefit from this paper.

This white paper highlights the poor commercial practices currently in place in the 3PL industry. The goal is to help GSCs and 3PLs be more aware of the need to create fair and balanced commercial agreements that promote healthy businesses on both sides. It has five main parts:

1. How GSCs are changing the landscape for buying 3PL services.
2. Identifying emerging trends where GSCs are shifting risk to suppliers.
3. Discusses our premise that the 3PL industry is at a tipping point, using the analogy of Grehsam’s Law.
4. Proposes a new approach for GSCs to change from a value extraction and risk shifting mindset to one of long term value creation.
5. Finally, we summarize our discussion and conclude with a call to action for GSCs and 3PLs to drive proactive and positive changes in the transportation and logistics industry.