If you're looking for a skyrocketing growth industry, you need look no further than the third-party logistics service business. Over the course of a decade, the third-party contract logistics business has exploded from a not insignificant $30.8 billion industry to one that pulled in $85 billion last year. Put another way, the industry that once took in about 4 percent of every logistics dollar spent in the United States now rakes in about 8 percent.
That galloping growth was confirmed last month, when the results of the 10th annual third-party logistics study were released during the Council of Supply Chain Management Professionals' annual meeting. The study, conducted by John Langley of the Georgia Institute of Technology* and co-sponsored by Capgemini, SAP, and DHL, showed widespread use of 3PL services in North America, Western Europe, Asia-Pacific, Latin America, South Africa, South Africa and the Middle East. In North America, for instance, fully 80 percent of the companies that responded to the survey said they made use of 3PL services (see Figure 1).
But perhaps more importantly, survey respondents report that the overall level of service from 3PLs is improving. Still, there appeared to be a significant shift in the way customers judge their 3PLs: while most say that collaboration between the customer and the 3PL is the key to improving the 3PL's performance, the responses also indicate that pricing has become the most important attribute in selecting a provider. And, interestingly, in a complete reversal of past survey findings, the respondents, who come from industries ranging from automotive and retail to food/beverage and high tech, now say they consider a 3PL's proficiency in delivering core services—like warehousing, transportation and forwardingservices—more important than its ability to deliver value-added services.
| FIGURE 1 | |
| world domination (percentage of respondents using 3PLs, by region*) | |
| Percentage | |
| North America | 90 |
 | |
| Western Europe | 77 |
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| Asia-Pacific | 83 |
| |
| Latin America | 72 |
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| South Africa | 74 |
| |
*The researchers caution that while percentages are comparable year to year, 3PL users are more likely to respond to the survey than non-users and that this may be particularly true in the Asia-Pacific region.
SOURCE: 2005 THIRD-PARTY LOGISTICS, RESULTS AND FINDINGS OF THE 10TH ANNUAL STUDY, GEORGIA TECH, CAPGEMINI, SAP, DHL
AN OUTSOURCING EPIDEMIC: NO CONTINENT HAS BEEN LEFT UNTOUCHED BY THE OUTSOURCING TREND.
The core of the matter
That emphasis on core services took the researchers by surprise. "[I]n past surveys, a 3PL provider's delivery of core services was considered a 'given,'" the report says, noting that in prior years, respondents were more focused on the value-added services.
But for some, that news wasn't totally unexpected. Herb Shear, CEO and chairman of Genco, a third-party logistics provider, believes that shippers' growing reliance on 3PLs to provide the most basic of services may well reflect chronic and long-term understaffing of logistics departments. In his 35 years in the industry, Shear says, he's seen in-house logistics staffs trimmed through several waves of layoffs, leaving them no choice but to outsource.
Another reason may be the growing complexity of supply chains. Even the most sophisticated logistics and distribution operation cannot be everywhere, maintain DCs in every corner of its market, or keep up to date on trade rules for every country on the globe. The obvious solution? Hire a 3PL.
But that's not to say 3PL customers are solely focusing on the basics. Despite the emphasis on core services, shippers also report that they're asking their 3PLs to take over a variety of other tasks. They're asking them to handle reverse logistics and waste disposal, product assembly, rate negotiations, fleet and materials management, and freight bill auditing, to name a few. Some even want their partners to assist with product repairs and trade financing.
The newest study also reveals a nascent trend among companies to outsource more strategic services, such as inventory planning, says Gary Allen, who led the study for Capgemini in recent years. (Since September, Allen has been a vice president for Exel, a big international 3PL.) "There are still some companies using outsourcing for labor augmentation or asset shifting, but it's becoming much more strategic," he says. He notes, for example, that the latest survey of 3PL users shows that supply chain planning has risen to near the top of the list of what buyers are looking for from providers. "There are customers who say they would never do that," he says, "but we see that changing."
Tough customers
As for how well the 3PLs are meeting those varied demands, the news is generally good (see Figure 2). Across most regions, survey respondents reported that handing off tasks to a 3PL had led to a 10- to 11-percent reduction in logistics costs, as order fill rates improved, and order cycle and cash-to-cash cycle times shrank. Inventory turns increased for North American and Asia-Pacific users as well.
Yet 3PL-customer relationships are not without strain. For example, while customers are generally pleased with the immediate savings they realize when they contract with a 3PL, a large proportion report that they're bothered by what they see as a lack of continuous improvement. "The bar has been raised in terms of customer expectations," says Scott McWilliams, CEO of Ozburn-Hessey Logistics. "Their focus is on execution, the pressure to reduce inventories ... on [wringing out] that last 1 or 2 percent of costs [and productivity]."
Another source of dissatisfaction appears to be information technology. Customers consider a 3PL's information technology capabilities to be crucial to the relationship, yet less than half are satisfied with their providers' capabilities.
| FIGURE 2 | |
| satisfied customers (3PL customers who rate their relationship with 3PL providers as "very successful" or "extremely successful," by region) | |
| Percentage | |
| North America | 90 |
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| Western Europe | 88 |
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| Asia-Pacific | 89 |
| |
| Latin America | 77 |
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| South Africa | 93 |
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*The researchers caution that while percentages are comparable year to year, 3PL users are more likely to respond to the survey than non-users and that this may be particularly true in the Asia-Pacific region.
SOURCE: 2005 THIRD-PARTY LOGISTICS, RESULTS AND FINDINGS OF THE 10TH ANNUAL STUDY, GEORGIA TECH, CAPGEMINI, SAP, DHL
NOT QUITE SO HOT, HOT, HOT: LATIN AMERICA LAGS BEHIND OTHER REGIONS WHEN IT COMES TO CUSTOMERS' SATISFACTION WITH THEIR 3PLS.
That pressure has led many of the 3PLs that once relied on homegrown IT systems to consider some outsourcing of their own—that is, they're subcontracting some or all of their IT needs to supply chain software specialists. Tom Kozenski, a marketing executive for supply chain software provider RedPrairie, notes that his company's 3PL customers tend to have much more complex IT requirements than its shipper customers. What makes the 3PLs' job all the more challenging, he says, is that their requirements are constantly in a state of flux. Every time they add a new customer or expand their services, their systems are likely to need tweaking. "Their work is never done," Kozenski says. "And because they work with so many customers, [they have] a lot more integration to do."
That growing customer demand for IT expertise, strategic services or broader geographic coverage has altered the face of the industry. "There has been a convergence of companies," Allen says. Warehousing or transportation companies remain the dominant players, but others are jumping into the game. Today traditional consultancies or even contract manufacturing companies like Solectron are offering their customers logistics services. Allen reports that it's not unusual to see different types of players team up to offer the specialized mix of financial, IT and logistics services requested by their ever-more-demanding clients.
Keeping up with the customer
As they scramble to meet these customer demands, some 3PLs are overhauling their own operations. For example, Warehouse Specialists Inc., a Wisconsin-based third-party logistics provider with 13 million square feet of warehouse space in 40 locations around the country, has traded in its largely manual, labor-intensive inventory management system for a much more sophisticated process (it's using Microsoft's CE.NET, vehicle-mounted terminals from LXE, and wireless printers from Zebra)—in an attempt to boost both productivity and customer service.
But investing in technology isn't always enough. "What we've had to do is broaden and deepen our knowledge in each functional area," says Ozburn-Hessey's McWilliams. "The challenge is to come up with client solutions that we can replicate across industries or across the same verticals. It takes a lot of customization to wring out that last bit [of productivity]. It used to be that you could implement a solution that could run for a while. But if you're not out there constantly evaluating ways to improve, you're not going to keep the customer happy."
As Gary Kowalski, COO of Menlo Worldwide, sees it, the job will only become more challenging as foreign trade explodes. "As customers go more global, it's clearly a challenge to manage their supply chains. Take the data alone: As supply becomes more global, it becomes more complex and more difficult to manage." He says today's customers are putting more emphasis on integrated, cross-functional management of their supply chains than in the past. That means 3PLs must do the same.
If they hope to succeed, Kowalski says, 3PLs must become expert at designing supply chains, implementing supply chains and managing those supply chains on an ongoing basis. "Today," he says, "the pressure to do all three is greater than ever."
Shear would agree. "If you can do only one thing," he warns, "you might be left out in the cold."
Wreaths Across America