2015 3PL Perspectives
Inbound Logistics’ annual market research report documents how 3PLs are evolving their value proposition as growth enablers.
A rising economic tide is lifting boats, trucks, trains, and planes in the U.S. transportation and logistics space. While shippers are still mindful of the Great Recession, and the detritus left behind in its wake, many companies have anchored their future to 3PL-managed growth strategies.
One glaring misconception about logistics and supply chain outsourcing is that it's countercyclical—focused solely on averting risk and reducing costs in down times. Those are important drivers. But as industry moves forward, outsourcing's role as a growth enabler is coming full circle again.
Following the recession, many manufacturers and retailers leaned on 3PLs to help streamline supply chains, offload bloated assets and overhead, and squeeze out costs. Austerity was a natural reaction to widespread attrition and contraction. But now, as the U.S. economy continues its rebound, and talk of a manufacturing renaissance resonates in some circles, the outsourcing value proposition is changing once again.
Actually, it's reverting back to pre-2008 conditions, when industry was still in hyper-growth mode. That's the nature of outsourcing. Logistics service providers act as change agents within the customer's enterprise, capable of flexing to different demands and challenges. 3PLs are morphing as well. The days of fixed-asset truck and warehouse companies and short-term contracts are long gone. The third-party logistics sector is considerably more diversified and sophisticated—matching the long, slow climb of supply chain management up the corporate ladder of decision-making.
The 2015 3PL Perspectives report documents these changes. Economic optimism provides an unfamiliar backdrop compared to past years, when shipper outsourcing behavior was considerably measured. A number of trends and opportunities—from e-commerce and omni-channel growth to emerging consumer markets—have opened doors for manufacturers and retailers to leverage their supply chains and seize market share. Logistics intermediaries, true to their calling, are in the thick of it.
A New Era of Growth
Following 2014's data, 91 percent of service providers surveyed in Inbound Logistics' 3PL Perspectives market research report acknowledge growing their client base by at least five percent over the past year. This compares with 92 percent in 2014, 90 percent in 2013, 88 percent in 2012, and 73 percent five years ago. The takeaway? Outsourcing conversions have seen steady growth following the recession. Accordingly, 94 percent of 3PLs have increased sales at least five percent during the past year, comparable to 2014 figures.
The biggest change over the past two years has been revenue growth. Ninety percent of service providers indicate profits in excess of five percent, up from 82 percent in 2014. Remarkably, 30 percent cite revenue gains in excess of 20 percent. This is a notable trend, as it suggests 3PLs are operating more efficiently. Much of the groundwork laid over the past several years in terms of investing in technology and equipment, developing processes, and recruiting talent is now paying dividends. Falling oil prices have also contributed to better margins.
With expenses under control, as one 3PL explains, intermediaries can be more assertive when selling and cross-selling services.
It's a welcome reprieve for asset-based 3PLs hard hit since 2008. Following the recession, the growth of neutral, asset-light service providers and freight brokers exploded. Even legacy trucking 3PLs started leaning fleets to cut costs.
In 2015, 46 percent of 3PL respondents identify themselves as non-asset-based, compared to 11 percent as asset-based; 43 percent pass as both. These numbers are holding steady.
The brokerage industry has seen a lot of consolidation, partly driven by the $75,000 surety bond mandate, as well as aggressive venture capital that recognizes a sure investment when it sees one. The bigger brokers are getting bigger. As capacity continues to tighten, asset-light logistics companies become more valuable—to shippers and carriers alike.
The pendulum appears to be swinging back toward asset-based providers, however, especially as fuel costs moderate. Transportation intermediaries that have capacity will come at a premium.
3PLs point to improving economic conditions as the major impetus behind increasing sales and profit growth. Shippers that have made the leap to outsourcing are also expanding their engagements—a healthy sign for the industry. It speaks to the reality that manufacturers and retailers are using 3PLs to grow sales rather than simply improve the bottom line.
"We've seen significant rate and volume increases driven by demand—especially given truck capacity concerns, regulatory changes, weather disruptions, rail congestion, and market share gains," says one 3PL survey respondent.
Others acknowledge they are cross-selling services to existing clients with great success. There's also a lot of pent up demand as companies start taking more risks after years of hunkering down.
"The increase in profit and sales is attributed to market demands and growth in the past few years compared to the previous five," adds a 3PL respondent. "The stability in the customer base is supported by a focus on customer development rather than simple volume gain."
To that end, logistics companies are increasingly embedded within their customers' supply chains. Whereas traditional outsourcing arrangements were transactional in nature, today they are true partnerships. More 3PLs are using Lean principles (27 percent in 2015 vs. 24 percent in 2014) and Six Sigma (25 percent in 2015) to extend the terms of fixed contracts. Continuous improvement mandates drive the 3PL value proposition, especially as the big data trend accelerates. Service providers are vested in customer success or failure. Additionally, greater emphasis on data analytics and business process strategy tether 3PLs to customers in a much more integrated way—for better or worse.
Manufacturing (91 percent), retail (88 percent), and service (83 percent) industries—which include 3PLs, carriers, and warehouses—remain the top three verticals that logistics service providers target. The explosion in non-asset 3PLs and freight brokers ensures the industry serves both sides of the aisle, shippers and intermediaries alike.
One interesting footnote is a noticeable shift in 3PLs taking a more sector-specific approach to developing and delivering supply chain solutions. "We're growing vertically through other product lines," says one respondent. "Our focus is on developing niche specialization in different verticals," adds another.
A few factors drive this trend. First, there's demand. It makes sense for 3PLs to develop specialized solutions for hyper-growth industries, especially those with unique requirements. This year, 3PLs report marked upticks serving healthcare (66 percent vs. 60 percent in 2014), oil and gas (44 percent vs. 39 percent), furniture (66 percent vs. 58 percent), and renewable energy (43 percent vs. 34 percent).
The growth in furniture business is likely tied to economic recovery and robust housing growth; healthcare is driven by the Affordable Care Act and an otherwise bloated system; oil and gas growth reflects the cost pressures global commodity industries face in a bear market; and renewable energy is a popular investment given increasing environmental regulations.
A second reason behind the sector-specific approach is that shippers are becoming more amenable to working with competitors on the supply side. Whether it's helping to create industry standards, sharing environmental best practices, or pooling freight to reduce costs, they have greater incentive to collaborate—especially where unique requirements, regulations, and risks add cost.
Shipper Challenges, 3PL Solutions
Considering the challenges confronting shippers in today's market, it's still back to basics. Sixty-five percent of surveyed 3PLs identify capacity as their customers' biggest concern (see Figure 1), followed by technology investment (58 percent), recruiting and retaining labor (57 percent), and regulations (47 percent).
"The driver shortage that has impacted our entire industry has forced many new customers to seek out partners that can secure capacity," says one 3PL source. The motivation to outsource is as simple as that.
Otherwise, cost reduction across the board is the bait that attracts customers.
Among shippers, priorities are slightly different. Cutting transport costs is the top-rated challenge, according to 47 percent of respondents (see Figure 2). Business process improvement (26 percent), better customer service (23 percent), and supply chain visibility (17 percent) follow respectively.
3PLs rate technology investment highly among customer concerns because IT is ultimately the means to reduce costs, increase visibility, and affect business process change. The advent of cloud networks and on-demand solutions, have unlocked new potential in the supply chain. It's also another reason why shippers make the initial decision to outsource.
Technology implementation is a major undertaking—and risk. Some asset-light service providers are leveraging IT to develop managed services that reinforce their value proposition. Not all 3PLs moonlight on the development side, but many have a track record helping companies integrate and optimize new solutions.
Alternatively, the 3PL sector has become yet another wholesale channel for logistics and supply chain technology vendors. 3PLs can better bundle solutions and services that best meet customer demand.
As for specific solutions, EDI compliance has become standard, with 94 percent of 3PLs providing this capability. TMS (85 percent), visibility (82 percent), optimization (70 percent), and WMS solutions (66 percent) round out the top IT capabilities that logistics intermediaries offer.
One notable shift in 2015 is the growing use of predictive analytics, which jumped from 28 percent traction among 3PLs in 2014 to 38 percent this year. In concert with supply chain design solutions—which 53 percent of logistics service providers offer—shippers are relying on service providers to assume a more strategic role in how they align and optimize their supply chains.
Whether it's configuring distribution nodes and networks to match omni-channel expectations, modeling contingency plans, or integrating new sourcing and selling locations, service providers are taking on an additional layer of responsibility beyond tactical operations.
As further evidence of this shift, when asked "What strategies are 3PLs and shippers using to manage current challenges?" 55 percent of service providers note supply chain design—tops on the list (see Figure 3).
Transportation and Distribution
Reducing costs remains the primary driver behind outsourcing activity in today's market. But the context is changing. During the Great Recession, shippers were challenged by slack consumer demand, declining freight volumes, poor asset utilization, and fluctuating fuel costs. The market contracted and industry had to respond in kind.
Today's economics present a different dynamic. E-commerce growth is rampant. The evolution of omni-channel retailing and expedited deliveries places more pressure on shippers to match consumer expectations without breaking the bank. All the while, driver shortages and trucking capacity remain concerns.
These pressures directly impact the types of services 3PLs provide customers. On the transportation side, little has changed. Truckload is still the sweet spot for asset- and non-asset-based 3PLs alike with 95 percent of respondents indicating as much. This is followed by LTL (91 percent), intermodal (87 percent), rail (75 percent), and ocean (69 percent).
E-commerce continues to rewrite outsourcing rules. It's a growth area for 3PLs, with 59 percent specifically targeting e-business.
The biggest change between 2015 and 2014 is the number of service providers that offer final-mile transportation services—54 percent vs. 49 percent. This growth is indicative of how e-commerce impacts transportation. Last-mile logistics, especially when capacity is tight, presents obvious cost challenges—especially for retailers. If companies such as Amazon and Walmart offer "free shipping" to consumers for a nominal yearly fee, they need to amortize that added cost. Other retailers have been forced to consider delivering similar guarantees to customers. Supply chain, then, becomes a competitive advantage.
This complexity is equally apparent inside the four walls. There's a corollary spike in 3PLs that provide fulfillment services in 2015—72 percent vs. 67 percent in 2014. Meanwhile, crossdocking remains the top 3PL warehouse service, according to 80 percent of respondents.
More telling, 3PLs are ramping up direct-to-store (79 percent in 2015 vs. 73 percent in 2014) and direct-to-home services (48 percent vs. 38 percent). As final-mile velocity picks up, shippers have to reduce touches, increase turns, and reduce costs. How and where they position inventory becomes a competitive differentiator. To that end, 63 percent of service providers help facilitate vendor-managed inventory programs that share risk and cost.
Exploring New Markets
One decade ago, 3PLs were helping manufacturers and retailers make inroads in new sourcing locations—notably China. Today, they are helping companies expand into consumer markets as well. The pendulum has swung from supply to demand as global economies continue to develop. To point, 23 percent of 3PLs provide global expansion services, compared to just eight percent in 2014.
There's room for growth, as more shipper respondents are challenged by expanding to new markets to sell into (13 percent) than source from (11 percent), according to 2015 data.
A growing global middle class challenges manufacturers and retailers to think carefully about how they align their supply chains. Is nearshoring production the best option if future growth is centered on Asia? Does regionalizing supply chains and sourcing closer to demand make better sense than centralized control?
Global e-commerce opens the door to small and mid-sized businesses as well. Retailers are no longer beholden by brick and mortar. 3PLs provide the technology, connections, and infrastructure on the ground to help businesses test new markets with less upfront investment and risk.
Outside North America, logistics service providers are expanding their coverage in Europe (80 percent) and Asia (46 percent) (see Figure 4). Shippers are outsourcing more in Asia (22 percent) than Europe (20 percent), which is to be expected given more localized challenges. South America/Central America (15 percent) follows in terms of need.
As the economy improves and capacity tightens, shippers have less leverage to negotiate. They can't dictate terms as they did during the recession. So, while cost containment is still a priority, shippers invariably are looking to squeeze more value out of their outsourcing engagements.
In 2015, 70 percent of surveyed shippers (see Figure 5) say that customer service is more important than cost.
Customer service is increasingly important as consumer expectations ramp up. E-commerce has skewed perceptions of acceptable speed and availability. Consumers expect as much in the store and online. These new standards bubble up throughout the supply chain. B2B transactions are impacted just as much.
That's why shippers have to assess their cost to serve, segment customers accordingly, and work back through the supply chain to assure they meet expected service level requirements. This is the new norm.
This dynamic feeds into the 3PL value proposition. It's not just about cost anymore. Such expectations breed more collaborative partnerships that focus on qualitative factors as much as quantitative ones. Many shippers are relying on 3PLs to help drive data analytics and modeling that provide deeper operations detail—where they can better forecast demand and supply variables, as well as identify where problems exist and why.
Customer service is the number one reason 3PL partnerships fail, according to 43 percent of polled shippers, followed by failed expectations (16 percent), cost (15 percent), and more competitive options (14 percent). The latter consideration is important. An abundance of 3PLs are waiting to pick up business where peers have failed. The cost of recruiting new customers is far more expensive than retaining existing clients, putting even more pressure on service providers to meet expectations.
3PL specialization—by vertical, function, and geography—has similarly given shippers more reason to consider multiple outsourcing partners. Logistics providers recognize this as well.
Eighty-nine percent of 3PL respondents believe customers should consider partnering with more than one service provider, while only 11 percent feel customers should work with one partner (see Figure 6). Shipper respondents hold a common view—72 percent use more than one 3PL, while only 28 percent have found a one-stop-shop solution (see Figure 7).
Such reciprocity is also driving more 4PL-type partnerships between shippers and service providers. This trend is likely to grow as 3PLs drive Lean best practices and assume a more strategic oversight role. Accordingly, 53 percent of service provider respondents cite 4PL/LLP partnerships as another favored strategy for meeting customer challenges.