Burned in the past by deals gone sour, 3PLs have become wary of investing in warehouses, trucks and even forklifts. Now they're asking their customers to share the risks.
In these days of technologically supercharged logistics services, it's almost possible to believe that cargo can be willed across the country by the right software—not hefted onto trucks by forklifts and hauled down dusty highways. Certainly, judging from the way most third-party logistics companies (3PLs) talk, you'd think ownership of assets like distribution centers, forklifts and tractor-trailers was simply too mundane to bother with. In the last three or four years, most 3PLs have advertised an "asset-light" philosophy, strategically shying away from investments in these areas. Capital, it seems, is for growing through acquisition and installing whiz-bang computer systems to help serve the customer better.
BDP International Inc., a freight forwarder turned 3PL, is typical. "Our assets are people and technology, and we look to partner with people with assets," says Richard Bolte Jr., president of BDP International in Philadelphia. "We prefer to concentrate on the things we feel we do best and allow the asset providers to do the same."
But the reality is that most 3PLs still make most of their money by providing warehousing and trucking services. According to industry analyst Dick Armstrong, last year 22 percent of the $65 billion spent on 3PL services went for transportation management, and 21 percent was spent on warehousing services. So-called lead logistics services,where a 3PL takes over the entire logistics operation and coordinates the activities of all service providers, accounted for only 4 percent. "They're still providing basic services," says Armstrong.
Covering their assets
If that's the case, why are 3PLs publicly moving away from owning a fleet of shiny trucks or a well-appointed DC? And what does it mean for customers?
3PLs argue that keeping out of the realty business allows them to be more flexible in the s ervice they provide. There's some merit to their argument: If your 3PL has a million square feet of warehousing in Long Beach, Calif., but you want to shift your receiving operations to Oakland, you don't want your logistics service provider to be a drag on that change.
"Those companies that are getting into warehousing services today tend to lease space rather than purchase their own space, primarily because they want to [be free] to take advantage of growth opportunities and also to add value to their customers' businesses," says Joel Hoiland, president and chief executive of the International Warehouse Logistics Association (IWLA ), which increasingly represents 3PLs. "One of the intangible offerings [of 3PLs] is flexibility, and owning assets doesn't necessarily imply flexibility."
Big 3PLs, such as U.K.-based Exel, do still own large amounts of real estate they can leverage to serve the customer. But any dreams shippers may have had about simply shifting the capital risks associated with logistics operations to their third-party logistics providers are all but gone.
"All of the 3PLs are much less adventuresome about the projects they get into and are much more conservative about having their assets covered," says Armstrong."Back in the mid-'90s, you had 3PLs that were going after really big clients and really got their fingers burned." The public falling-out between Ryder and Office Max is a good example, Armstrong says. In that case, the contract ended over bickering about who was paying for what.
Joel Hoiland sees another reason for the shift. "Twenty or 30 years ago, the entrepreneurs who were getting into the warehousing business were purchasing assets and making fortunes, and then they built strong operations around those assets.But then,in the '90s,the industry began changing. Mergers and acquisitions became prevalent, venture capitalists and investment bankers became interested in the logistics industry, and investors wanted different performance results, which look better without significant investment capital sunk into assets."
When UTI Worldwide bought Standard Corp., a logistics provider, the handover included none of Standard's assets, which are now owned and leased separately. Likewise, USCO divested itself of many of its assets when it was bought by Swiss 3PL giant Kuehne & Nagel.
However, 3PLs are service providers first and foremost and,in a highly cut-throat business,there's huge pressure to provide the car rier and warehousing services the customer wants. As a practical matter, 3PLs shy away from sinking dollars into truck and warehouses in markets where there's plenty of capacity. But when there are problems getting hold of storage space and reliable transport elsewhere, 3PLs are forced to take a more hands-on approach.
Indiana-based transportation and logistics provider Air Road Express is one company that has come to realize that not all assets are dirty. The company specializes in less-than truckload shipments for automotive companies manufacturing in Mexican maquiladoras. Because good trucks that don't break down can be hard to find in Mexico, the company has found itself buying trucks to service parts of that business. "This is a good example of where assets have strategic value,"says Ben Gordon, a logistics consultant based in Boston.
Lessor of two evils?
Asset ownership has also turned out to be advantageous for 3PLs operating in non-U.S. locations, especially the burgeoning trade zones in Asia such as China, Taiwan and Malaysia. " In China, it's not the same kind of business as in the United States" says BDP's Bolte. "It may be difficult to get warehousing in Shanghai, or the warehouse-owning partners there may not be reliable. So there might be times in emerging markets where we take on a long-term lease, but even then we would look for customers to … share the risk."
Neil O'Connell is of the same mind. "We lease warehouses when it's necessary," says O'Connell, who is chief technology officer at Stonepath Group, a Philadelphia-based 3PL started two years ago by Dennis Pelino, the former president of Fritz Cos. "But we don't seek to become a large warehouse lessor."
Bob Voltmann, president and chief executive of the Transportation Intermediaries Association, says he sees a new issue developing, as more and more asset-heavy carriers try to get into the business of providing 3PL services. "The carriers now see that the value-add is in the 3PL service, including information expertise, as opposed to moving a piece of equipment along a fixed rail or roadway. So we're seeing more carriers enter this space, and they are by definition more asset-based. But they need to form themselves on an asset-light basis or they're not performing on the best basis."
Voltmann acknowledges that customers are wary of 3PL services tied to asset-owning parent companies, as they were when the big ship-owning companies like APL and Maersk set up their own logistics divisions. "To be successful, they're going to have to operate as if they didn't have assets," he says. "Some will be able to and some won't."
Spreading the risk
This is the new, complex face of logistics services. A shipper might end up using a 3PL provider that was originally a freight forwarder or customs broker, or perhaps one formed from a conglomeration of several companies' logistics departments. Or it could be a trucking or ocean shipping company that's decided to branch out. Or even a brand-new company funded by venture capitalists, with an entirely different approach to financial management. Tibbett & Britten, the U.K.-based logistics company, creates a whole new subsidiary every time it enters into a major contract with a shipper. "I suppose the issue is that with everybody migrating into the same space it becomes confusing," says BDP's Bolte.
Confusing or not, one clear trend is toward asking customers to take more financial responsibility for the assets they require. Especially in the case of warehousing, a customer might have to take on responsibility for a lease before the 3PL will sign off on it. This is partly because customers need increasingly customized warehousing and distribution as they ask 3PLs to do more for them than simply store and ship products.
"When you take on a half-million square-foot facility, along with the entire workforce, computer systems and everything else involved, it's a completely dedicated, non-leverageable deal, so they have to agree they'll be there for a certain amount of time ," says Bob Bianco, president and chief executive officer of Menlo Worldwide Logistics of Redwood Shores, Calif.
Even investments in technology—an area in which 3PLs have spent a huge amount of their own money—are becoming increasingly deferred to the customer, Armstrong says. "A company like Exel is probably running three different warehouse management systems, but its customers will ask it to use their own systems on the contract, because that's what they have in the rest of their network. So Exel will spend money on these things, but it's usually spending it only if there's a guarantee on the use of the assets," Armstrong says.
Creative teams
The 3PLs talk more and more of entering into partnerships with their customers, based on changes in their needs as well as increased demand for technology-based services such as tracking and order management. As shippers outsource and defer many of their core logistics functions, and especially as shippers ask for more international service,the idea of using a 3PL as a non-asset-owning logistics management partner makes sense. "I think the scale and geographic scope of some of the contracts these guys are signing mean you're not going to be able to own everything yourself. It's just not feasible," says Robert Lieb, professor at Northeastern University in Boston.
Ultimately, shippers continue to benefit from the 3PLs' ability to leverage their buying power into better leasing and service deals from the companies that do own those assets. They're also in a good position to pick and choose cutting-edge technology for better transportation management.
"There are a lot of creative solutions out there," says IWLA's Hoiland. "Our mem bers come in as solution providers, which means they need to be creative and definitively add value for the customers. The assets become somewhat irrelevant." If a 3PL happens to own a warehouse that would be useful to a customer, then it's a boon. But if not, the 3PL will find warehousing elsewhere.
Most of the apparel sold in North America is manufactured in Asia, meaning the finished goods travel long distances to reach end markets, with all the associated greenhouse gas emissions. On top of that, apparel manufacturing itself requires a significant amount of energy, water, and raw materials like cotton. Overall, the production of apparel is responsible for about 2% of the world’s total greenhouse gas emissions, according to a report titled
Taking Stock of Progress Against the Roadmap to Net Zeroby the Apparel Impact Institute. Founded in 2017, the Apparel Impact Institute is an organization dedicated to identifying, funding, and then scaling solutions aimed at reducing the carbon emissions and other environmental impacts of the apparel and textile industries.
The author of this annual study is researcher and consultant Michael Sadowski. He wrote the first report in 2021 as well as the latest edition, which was released earlier this year. Sadowski, who is also executive director of the environmental nonprofit
The Circulate Initiative, recently joined DC Velocity Group Editorial Director David Maloney on an episode of the “Logistics Matters” podcast to discuss the key findings of the research, what companies are doing to reduce emissions, and the progress they’ve made since the first report was issued.
A: While companies in the apparel industry can set their own sustainability targets, we realized there was a need to give them a blueprint for actually reducing emissions. And so, we produced the first report back in 2021, where we laid out the emissions from the sector, based on the best estimates [we could make using] data from various sources. It gives companies and the sector a blueprint for what we collectively need to do to drive toward the ambitious reduction [target] of staying within a 1.5 degrees Celsius pathway. That was the first report, and then we committed to refresh the analysis on an annual basis. The second report was published last year, and the third report came out in May of this year.
Q: What were some of the key findings of your research?
A: We found that about half of the emissions in the sector come from Tier Two, which is essentially textile production. That includes the knitting, weaving, dyeing, and finishing of fabric, which together account for over half of the total emissions. That was a really important finding, and it allows us to focus our attention on the interventions that can drive those emissions down.
Raw material production accounts for another quarter of emissions. That includes cotton farming, extracting gas and oil from the ground to make synthetics, and things like that. So we now have a really keen understanding of the source of our industry’s emissions.
Q: Your report mentions that the apparel industry is responsible for about 2% of global emissions. Is that an accurate statistic?
A: That’s our best estimate of the total emissions [generated by] the apparel sector. Some other reports on the industry have apparel at up to 8% of global emissions. And there is a commonly misquoted number in the media that it’s 10%. From my perspective, I think the best estimate is somewhere under 2%.
We know that globally, humankind needs to reduce emissions by roughly half by 2030 and reach net zero by 2050 to hit international goals. [Reaching that target will require the involvement of] every facet of the global economy and every aspect of the apparel sector—transportation, material production, manufacturing, cotton farming. Through our work and that of others, I think the apparel sector understands what has to happen. We have highlighted examples of how companies are taking action to reduce emissions in the roadmap reports.
Q: What are some of those actions the industry can take to reduce emissions?
A: I think one of the positive developments since we wrote the first report is that we’re seeing companies really focus on the most impactful areas. We see companies diving deep on thermal energy, for example. With respect to Tier Two, we [focus] a lot of attention on things like ocean freight versus air. There’s a rule of thumb I’ve heard that indicates air freight is about 10 times the cost [of ocean] and also produces 10 times more greenhouse gas emissions.
There is money available to invest in sustainability efforts. It’s really exciting to see the funding that’s coming through for AI [artificial intelligence] and to see that individual companies, such as H&M and Lululemon, are investing in real solutions in their supply chains. I think a lot of concrete actions are being taken.
And yet we know that reducing emissions by half on an absolute basis by 2030 is a monumental undertaking. So I don’t want to be overly optimistic, because I think we have a lot of work to do. But I do think we’ve got some amazing progress happening.
Q: You mentioned several companies that are starting to address their emissions. Is that a result of their being more aware of the emissions they generate? Have you seen progress made since the first report came out in 2021?
A: Yes. When we published the first roadmap back in 2021, our statistics showed that only about 12 companies had met the criteria [for setting] science-based targets. In 2024, the number of apparel, textile, and footwear companies that have set targets or have commitments to set targets is close to 500. It’s an enormous increase. I think they see the urgency more than other sectors do.
We have companies that have been working at sustainability for quite a long time. I think the apparel sector has developed a keen understanding of the impacts of climate change. You can see the impacts of flooding, drought, heat, and other things happening in places like Bangladesh and Pakistan and India. If you’re a brand or a manufacturer and you have operations and supply chains in these places, I think you understand what the future will look like if we don’t significantly reduce emissions.
Q: There are different categories of emission levels, depending on the role within the supply chain. Scope 1 are “direct” emissions under the reporting company’s control. For apparel, this might be the production of raw materials or the manufacturing of the finished product. Scope 2 covers “indirect” emissions from purchased energy, such as electricity used in these processes. Scope 3 emissions are harder to track, as they include emissions from supply chain partners both upstream and downstream.
Now companies are finding there are legislative efforts around the world that could soon require them to track and report on all these emissions, including emissions produced by their partners’ supply chains. Does this mean that companies now need to be more aware of not only what greenhouse gas emissions they produce, but also what their partners produce?
A: That’s right. Just to put this into context, if you’re a brand like an Adidas or a Gap, you still have to consider the Scope 3 emissions. In particular, there are the so-called “purchased goods and services,” which refers to all of the embedded emissions in your products, from farming cotton to knitting yarn to making fabric. Those “purchased goods and services” generally account for well above 80% of the total emissions associated with a product. It’s by far the most significant portion of your emissions.
Leading companies have begun measuring and taking action on Scope 3 emissions because of regulatory developments in Europe and, to some extent now, in California. I do think this is just a further tailwind for the work that the industry is doing.
I also think it will definitely ratchet up the quality requirements of Scope 3 data, which is not yet where we’d all like it to be. Companies are working to improve that data, but I think the regulatory push will make the quality side increasingly important.
Q: Overall, do you think the work being done by the Apparel Impact Institute will help reduce greenhouse gas emissions within the industry?
A: When we started this back in 2020, we were at a place where companies were setting targets and knew their intended destination, but what they needed was a blueprint for how to get there. And so, the roadmap [provided] this blueprint and identified six key things that the sector needed to do—from using more sustainable materials to deploying renewable electricity in the supply chain.
Decarbonizing any sector, whether it’s transportation, chemicals, or automotive, requires investment. The Apparel Impact Institute is bringing collective investment, which is so critical. I’m really optimistic about what they’re doing. They have taken a data-driven, evidence-based approach, so they know where the emissions are and they know what the needed interventions are. And they’ve got the industry behind them in doing that.
Chief supply chain officers (CSCOs) must proactively embrace a geopolitically elastic supply chain strategy to support their organizations’ growth objectives, according to a report from analyst group Gartner Inc.
An elastic supply chain capability, which can expand or contract supply in response to geopolitical risks, provides supply chain organizations with greater flexibility and efficacy than operating from a single geopolitical bloc, the report said.
"The natural response to recent geopolitical tensions has been to operate within ‘trust boundaries,’ which are geographical areas deemed comfortable for business operations,” Pierfrancesco Manenti, VP analyst in Gartner’s Supply Chain practice, said in a release.
“However, there is a risk that these strategies are taken too far, as maintaining access to global markets and their growth opportunities cannot be fulfilled by operating within just one geopolitical bloc. Instead, CSCOs should embrace a more flexible approach that reflects the fluid nature of geopolitical risks and positions the supply chain for new opportunities to support growth,” Manenti said.
Accordingly, Gartner recommends that CSCOs consider a strategy that is flexible enough to pursue growth amid current and future geopolitical challenges, rather than attempting to permanently shield their supply chains from these risks.
To reach that goal, Gartner outlined three key categories of action that define an elastic supply chain capability: understand trust boundaries and define operational limits; assess the elastic supply chain opportunity; and use targeted, market-specific scenario planning.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”