Third party logistics challenges in Lithuania

  • 2006-04-26
  • By Marius Pilibas and Kristine Kolosovska
Lack of qualified personnel and growing costs of existing staff should become the main drivers behind full third party logistics (3PL) services outsourcing in Lithuania. The understanding that an idle professional is just as costly as an idle truck, if not more so, is slowly taking hold in a competitive market.

Besides simple transportation and storage, 3PL services are assumed to add value with advanced IT systems, unique logistics problem-solving and reduced information costs (e.g., idle stocks and goods damages). In Lithuania, the largest part of logistics services still consists of simple distribution and rent for vehicular parking. In comparison to integrated 3PL services, simple distribution does not assume significant value-added. Competitive forces on the market and integration into the international system of movements of goods have gradually begun to shape the effective demand for more sophisticated and value-added services in the country.

Multinationals, with their local presence and need for product distribution, are often considered to be the key 3PL service clients. However, the size of the market makes it of relatively little interest to such players to take part in it, and as a rule they outsource their supply chain activities to local distributors and wholesalers. Such local marketing and distribution players as Sanitex represent international FMCG manufacturers locally and use their own assets and warehousing facilities to distribute the product that would otherwise be serviced by a third party logistics service provider.
At the same time, local market players' demand for external logistics is in many cases limited to plain national or international transportation services. But the market gradually begins to learn that, in many cases, the local 3PL arrangements are the way to reduce costs and investment in vehicles. This is why commissioning third party transportation services to reduce own vehicle assets or simple transport park rent are becoming common practice. Some of the local retailers, led by VP Market, have outsourced transportation between warehouses and stores to external service suppliers. Leading retailers are forced to outsource more and more because the scarcity of qualified personnel, growth of salaries and other business expenses across the board support outsourcing as a cost optimization measure.

The most important component in any supply chain is the existence of necessary infrastructure and facilities. The stock of warehouses owned by local businesses consists of either owned or rented non-renovated facilities pre-dating 1990. Warehousing costs related to such assets are minimal, and since the technical requirements for warehouses introduced post-EU accession are mostly applied to newly developed properties, the economic gain of 3PL is in many cases outweighed by the cost related to switching from existing run-down warehouses to the modern facilities of a service provider.

New modern facilities development is induced by professional logistics services providers, both local and international. Such well-known players as Ad Rem, Girteka, and DFDS Transport have either recently opened or are about to launch new logistics centers that are to a large extent custom built for 3PL services provision. Demand for more sophisticated external logistics services is to increase with international consumer goods manufacturers move to enter the new EU market directly rather than be represented by local players. As potential local customers grow in scale and require new logistics facilities, high costs associated with development of new warehouses can be the factor that directs them to a specialized warehousing, logistics and distribution service provider who can minimize such investments and costs. Demand for more sophisticated professional logistics services throughout the product value chain is likely to appear.

Maruius Pilibas and Kristine Kolosovska are analysts at Bridge Capital