You won't read about it on the providers' web sites or in their marketing materials, but the third-party logistics service industry is undergoing a seismic shift. What's changed is not what they do or how they do it, but who they'll do it for. A decade ago, third-party service providers were eager to serve just about any client that came a-knocking. These days, if they decide that a potential client just doesn't measure up to their requirements, they won't hesitate to show it the door.
"Everybody [in the third-party logistics business] is going through the process of pruning the customer list," says Dr. Robert Lieb, professor of supply chain management at Boston's Northeastern University and author of an ongoing survey of third-party logistics service providers (3PLs). And it appears that no one's exempt from being cut from the client rolls. Third parties are becoming more discriminating not just about what new business they'll accept, but also about whose contracts they'll renew.
For evidence, you need look no further than the results of Lieb's latest study, The North American Third-Party Logistics Industry in 2006: The Provider CEO Perspective. All 22 of the CEOs of North American 3PLs, all 11 of the European 3PLs, and nine of the 11 Asian 3PLs who responded to the survey said they had become more selective about the customers they would work with. There's nothing haphazard about their selection approach, says Lieb; they're making these decisions based on the numbers. "All these companies have gone through a customer profile process to determine ... the dimensions of an attractive account."
If they've become choosier, it's because they can afford to. Two decades ago, players in the fledgling 3PL industry had little choice but to take on any client that presented itself. But as the third-party service business has burgeoned into a market worth an estimated $100 billion worldwide, service providers have become more sophisticated in their approach. "The industry has matured to the point where there's a lot more emphasis on taking on business that has proper profit margins," says Richard D. Armstrong, chairman of Armstrong Associates in Stoughton, Wis., which publishes an annual guide to the 3PL marketplace. "They are less inclined to do things with taking on market share. They want to make every account pay."
Choosing a specialty
For many 3PLs, that's meant abandoning the notion of trying to serve everyone and instead, choosing a market niche. That might mean targeting customers of a certain size or in a certain geographic region. But most often, it means specializing in a certain industry—automotive, say, or chemicals, consumer products, or electronics. "3PLs are trying to evaluate which verticals and which markets offer the most upside and provide more consistent revenue streams and profitability," says Scott McWilliams, CEO of Nashville, Tenn.-based 3PL Ozburn-Hessey Logistics.
"It's too difficult to serve a number of areas and have the systems and expertise to service all those areas and understand the customers," says Joel R. Hoiland, former head of the International Warehouse Logistics Association, a Des Plaines, Ill.-based trade group representing warehouses and 3PLs. "They [3PLs] have to figure out their niche where they can be successful. Typically, it's a type of customer or industry segment."
Along with targeting specific industries, 3PLs are also focusing on arrangements that are longer-term in nature. Greg Humes, president of National Logistics Management in Detroit, says that his ideal customer is one that's willing to enter into a partnership that lasts three or more years.
For 3PLs, these longer-term arrangements represent more than just job security. A long-term deal also gives the service provider a chance to recoup any investments it might make in order to fulfill a client's special requests. It's not unusual for customers today to ask their 3PLs to provide special services not normally associated with logistics, like custom packaging, contract manufacturing or final assembly, says Robert Koerner, president and CEO of Total Logistic Control (TLC), a third-party logistics company based in Zeeland, Mich. Third parties are willing to accommodate these demands, but they also want assurances that they won't do it at a loss.
Better yet, locking in long-term business can free up a 3PL from having to respond to a lot of requests for proposals (RFPs). Third parties have come to dread RFPs not just because bidding wars tend to promote low margins, but also because they're a drain on resources. "From the 3PL's point of view, preparing a good proposal can take a lot of time and resources," says C. John Langley Jr., a professor of supply chain management at the Georgia Institute of Technology who conducts an annual study of trends in 3PL use. "[B]ig proposals can be expensive for 3PLs."
Going for value
Along with targeting customers in specific industries, 3PLs say they're looking for clients willing to move beyond the conventional customer-supplier relationship and work with them as partners. "We trend toward customers who take a more collaborative approach," says Bob Bassett, vice president of sales and marketing for Menlo Logistics in San Mateo, Calif. "We try to sort that out in the process early on because relationships based on a non-collaborative approach don't work."
Herb Shear, chairman and CEO of GENCO, a third-party logistics service provider based in Pittsburgh, agrees. The relationships most likely to succeed, he says, are partnerships in which the two parties work together to build "value-added" supply chains. "If we don't have a value proposition for the customer, then all the work is at low margins and it's not profitable," says Shear. In most cases, that value proposition comes from the third party's ability to bundle services together to create what's known as an end-to-end supply chain solution. In essence, it takes over full responsibility for moving the client's freight from the plant to the end customer's doorstep. In fact, in Shear's view, there are really only two types of customers—transactional and partnering—and he prefers the ones willing to partner. If a 3PL is going to offer suggestions for improvements, it will need to be intimately acquainted with its client's supply chain operations, he points out. That means the client must be forthcoming about its warehousing, distribution and supply chain activities. "With partnership customers, you can work [toward] continually improving the supply chain and driving costs out," he says. "The transactional customer doesn't want to work with you and doesn't want to give you anything back in return."
Though it might come as a surprise to some, third parties say they're finding their best partnering prospects among medium-sized companies, not the giant corporations. The mid-sized enterprises are willing to collaborate, says Koerner of TLC, while the larger companies tend to focus on the bottom line. "For most of the big Fortune 100 companies, it becomes about cost. It's not necessarily about the value," he says. "From a selectivity perspective, we're spending more time with the Fortune 500 customer."
Internal affairs
It's one thing to talk about partnerships, of course, and another to make good on the talk. But it's pretty clear that the third parties are backing up their rhetoric with action. The respondents to Lieb's study, for example, reported that they had undertaken a number of initiatives aimed at fostering collaborative arrangements with customers. These included forming executive sales teams to focus on key accounts, setting up customer advisory councils to hash out industry-specific problems, and inviting key customers to join the company's board of directors.
Lieb's study also indicated that 3PLs were investing in technology to support these collaborative relationships— systems designed to provide visibility of items as they move through the supply chain, for example, or to measure transportation and warehousing performance and offer suggestions for improvement. "Systems with the right functionality can give you the information to take costs out," says Koerner. "It's becoming a business of data," adds Shear. "Customers are expecting us as 3PLs to become more strategic, so we've got to become very good at managing and analyzing data. Give me visibility of data and you make good management decisions."
In the end, however, 3PLs say their major selling point isn't technology but expertise. An experienced third party can help its clients re-engineer their supply chains, improve customer service and cut costs. Of course, that assumes the client is receptive to their suggestions and willing to make changes. "The 3PL can't be ... effective," says Bassett of Menlo, "unless the customer is willing to embrace process change in [its] organization."
State of transition
For all the 3PLs' efforts to promote strategic relationships, there will always be holdouts. Some companies simply aren't interested in anything beyond outsourcing a single function—warehousing, say, or freight management—at a fixed price. Others remain wary of letting an outsider manage something as critical as their supply chain.
"Selling the value proposition of the 3PL continues to be a challenge," admits Hoiland. "There's an apprehension to letting go. If they hire a 3PL to handle their supply chain, they can save on capital costs. But to give up and lose control, it's too great a risk."
For the time being, at least, those "transactional" customers should still be able to find a 3PL when they want one. After years of searing growth, the 3PL market has softened slightly (the CEOs who participated in Lieb's study projected growth of 10.5 percent in North America next year). That should help keep the 3PLs' ambitions in check. Although they'll continue to be choosy about their customers, they won't be foolhardy. "We have better discipline today to walk away from a customer who's all about price," says Koerner, "but the reality says you've got to eat, too."
Gartner, Inc.