IL Exclusive Research: 3PL Perspectives

The Inbound Logistics 3PL Market Insight Survey provides a new perspective on the 3PL market, as seen through the eyes of leading 3PL executives. Where and how is the 3PL market going and growing? What challenges do 3PLs face and how will they face them? What do 3PLs think you want and how will they deliver?

How much do you value your 3PL? If the growth of the outsourced logistics market is any indication, a whole lot—and maybe even more than you realize. 3PLs responding to Inbound Logistics’ annual survey of the 3PL market report a whopping $88 billion in revenue for 2005—more than 25-percent growth over last year.

For companies large and small, local and global, logistics service providers are no longer simply a vital cog linking supply to demand; 3PLs are also an extension of their business—a name, a face, a phone number to call 24 hours a day, 365 days a year. They can be a supplier’s first call for help in managing complex inbound shipping and routing protocol; or they can be a retail outlet’s last resort for finding extra capacity during the holiday season rush.

As such, the outsourced logistics partnership has evolved into a people-to-people dynamic rarely seen before. Technology and process fuel the supply chain engine, but people are the key to the ignition.

The importance of having an attentive 3PL partner attuned to a company’s unique needs is as important as it has ever been. As businesses compete to meet growing customer expectations, and expand market share and global presence, they face a litany of obstacles—capacity constraints, soaring transportation costs, security compliance, contingency planning, and technology implementation—that obscure their core competencies.

Third-party logistics providers have evolved their portfolio of services and customer outreach to ensure outsourcers can meet logistics challenges head-on without compromising service to their customers.

The outsourcing dynamic works both ways. 3PLs rely on their customers to mine new growth opportunities, working back through the supply chain to organically grow their business. Increasing customer demand for new and innovative services and technologies has afforded 3PLs equal leverage in expanding their value proposition to other markets and industries.

How much does your third-party logistics provider value your business? As much as you value its services. Here’s why.

The 3pL Landscape

To better reflect the changing dynamics of global outsourcing, we sharpened the focus of our yearly 3PL Market Insight Survey. In addition to statistical information, we asked third-party logistics providers specific questions about their growth—in terms of customers and revenue.

We also asked them to drill down on some of the challenges they and their customers face moving forward. Their responses offer a compelling snapshot of where and how the outsourcing industry is trending.

Businesses increasingly rely on third-party logistics providers to navigate the complexities of global trade. 3PLs, for their part, say they are up to the task and reaping the benefits.

More than 80 percent of respondents report at least 10-percent growth in sales in 2005, with 37.1 percent seeing growth surpassing 20 percent.

While overall profitability did not track sales growth—only 65 percent of surveyed 3PLs indicate revenue growth topping 10 percent—logistics providers are still managing double-digit revenue gains, despite considerable M&A activity and soaring operational costs.

Perhaps even more compelling, 60 percent of 3PLs acknowledge they have grown their customer base by at least 10 percent (see Figure 1). Clearly, logistics outsourcing is growing at a rapid clip. 3PLs large and small are stretching their capabilities to target new customers.

Small providers are focusing their core competencies on niche verticals or services to enhance their expertise and grow their presence in those spaces.

Large 3PLs are taking a different tact, trying to deepen their market penetration by courting small and mid-size businesses with the guarantee of world-class logistics capabilities.

Industry contraction has further complicated this dynamic. Big 3PLs are getting bigger and their M&A aggressiveness is squeezing “middle-of-the-pack” providers out of business or to the highest bidder.

By contrast, small 3PLs with a specific industry focus are finding welcome interest from like-sized shippers who are perhaps wary that “worldly” providers may not offer the same level of customer service.

Consolidation has also cleared the way for more hybrid 3PLs—manufacturers and retailers spinning off logistics divisions to meet the unique demands of their verticals (see article, page 95).

This influx of 3PL expertise gives businesses more qualified options when they decide to outsource, which in turn has led some to seek multiple partners with unique specialties and market penetration.

3PL respondents validate this trend, with 53.2 percent indicating customers should partner with more than one 3PL versus 37.1 percent who think they should work with only one (see Figure 2). The remaining 9.7 percent report that outsourcing strategies depend on the customer and the nature of the task.

The one-stop shop philosophy is no longer as practical as it once was. Businesses have less flexibility with only one 3PL, particularly when planning contingencies or shifting in and out of markets.

Having multiple logistics providers also gives companies greater leverage to benchmark performance, which in turn holds 3PLs accountable for meeting expected service requirements.

This trend also supports the growing importance of lead logistics providers (LLPs) and 4PLs that can coordinate and oversee multiple outsourcing ventures.

In terms of current logistics priorities, 3PLs rank capacity, costs, and IT investment as the top three challenges they face today. By comparison, respondents overwhelmingly identify cutting transport costs (71 percent) as their customers’ top priority, with technology strategy and implementation (41.9 percent), business process improvement (38.7 percent), managing supply lines (37.1 percent), and reducing inventory (32.3 percent) showing discernible interest as well (see Figure 3).

Clearly, logistics outsourcers are using 3PL partnerships to strategically shift the way they approach and manage their supply chains. It’s no longer simply a matter of cutting costs or accessing capacity. 3PLs and their customers are digging deeper into the supply chain to look at how they can apply technology to business processes—beginning with suppliers and inbound product movement—to reduce inventory, match available capacity to demand, and streamline costs in a more organic way.

3PLs Go Global

The global marketplace continues to grow at a feverish pace as businesses extend their footprint into new markets around the world. 3PLs report customers from a wide spectrum of industries, notably manufacturing, retail, wholesale, distribution, government, and services (see Figure 4). Accordingly, outsourcers’ demands are equally as varied as the unique pool of 3PLs courting their business. This year’s 3PL Market Insight Survey data reinforces the escalating impact of globalization on corporate growth initiatives. Nearly half of respondents—47.3 percent—offer global logistics services, up 6.1 percent over last year’s findings (see Figure 5). This change suggests more businesses are leveraging the experience and resources of outsourced logistics providers to tap new markets and/or scale growth in burgeoning regions.

Still, the fact that more than 50 percent of 3PLs continue to focus solely on the North American market—with 13.8 percent specifically targeting the United States—brings to bear the importance inbound specifiers place on integrating offshore supply chains with domestic distribution networks, especially as capacity and transportation costs impact efficiency and economy.

To this point, 3PLs continue to shape their logistics solutions portfolios with the U.S. consignee in mind. Inbound logistics and integrated logistics services rank high among those surveyed, with 84.1 percent and 78.4 percent respectively offering capabilities in these areas (see Figure 6).

The velocity of the “solution evolution” has further compelled companies to use their 3PLs as technology banks rather than make costly investments themselves—and for good reason. On average, 3PLs report they have been building and adapting their solution profiles for 15 years.

Globalization is also changing the course of how businesses manage their supply chains, and specifically how they combine strategy and technology to streamline information sharing and logistics processes among disparate and remote partners. 3PLs report growing interest in vendor management and product lifecycle management solutions from customers, with 61.9 percent and 37.5 percent respectively providing solutions to meet these demands.

The importance of better managing the inbound supply chain from point of origin, and therefore developing better synergies with global suppliers, is key to streamlining costs and transportation as well as managing exceptions.

Businesses also face pressure from top-level executives to reduce costs—at all costs—and many logisticians are using this ultimatum to rethink how they manage products through their entire lifecycles.

As businesses integrate and streamline supply chain functions, they use industry benchmarks to measure performance. One interesting anomaly is the downturn of 3PLs reporting ISO certification. Only 37.7 percent of providers surveyed this year indicate they are ISO-certified, with 62.3 percent choosing to forgo the process.

The time and expense of rolling out corporate-wide standards, especially given today’s volatile M&A environment, may dissuade some 3PLs from maintaining or complying with current ISO standards. Ultimately, customers dictate whether or not 3PLs seek out certification.

Transportation and Technology

On the transportation side, 3PLs are all the rage, as businesses find it increasingly irksome to manage rising fuel expenses, capacity and truck driver shortages, and equipment costs. Service providers are finding a ripe vine for picking. Truckload and less-than-truckload continue to be the most popular services, offered by 92 percent and 83 percent of 3PLs respectively (see Figure 7).

As 3PLs duly report in the 3PL Market Insight Survey, reducing transportation costs is the top concern among their customers. One of the difficulties for logistics providers is trying to prove their value in a marketplace where accessing capacity and reducing freight costs are veering in opposite directions.

Intermodal logistics is one area 3PLs are targeting to create economical transport options for customers—76.7 percent of respondents have the capabilities to help businesses mix and match available capacity across different modes. Rail freight services in traditional long-haul TL markets and in heavily congested areas are also gaining traction. Among 3PLs surveyed, 66.5 percent offer rail-specific logistics solutions.

Shippers with predictive capacity or those resigned to pay higher freight costs to meet their customers’ time-sensitive demands, are more inclined to seek dedicated contract carriage services from 3PLs—an option that 71.6 percent of respondents offer.

The challenge of accessing capacity in constrained markets—be it on trucks or in warehouses—also calls into question the long-debated argument over asset- and non-asset-based 3PLs.

Asset-based providers tout their investment in equipment, and the control they can leverage in coordinating transportation processes; non-asset 3PLs claim to bring a more objective and flexible approach to negotiating and securing capacity. Judging from their survey responses, both asset-based and non-asset-based 3PLs will go out of their way to meet customer requirements.

Nearly 46 percent of 3PLs surveyed are asset based, versus 18.6 percent that are non-asset-based. More importantly, 37.1 percent report that they are both, suggesting that even if they don’t own the requisite assets, they will go and get them based on customer needs. Logistics service providers are also adding value to their services in an effort to massage shipper concerns over increasing freight costs.

Mission-critical technologies that facilitate visibility and communication, drive efficiency, and build flexibility deeper in the supply chain help 3PLs enhance their value proposition. Electronic data interchange (EDI) and visibility technologies remain outsourcing standards, with 88.6 percent and 74.4 percent of 3PLs providing these services (see Figure 8).

This is also an indication that these offerings have become mainstream, and with current technology, it is easier for 3PLs of all sizes to provide similar capabilities.

IT/web services—in the guise of e-commerce, e-fulfillment, enterprise web enablement, e-operations, and e-SCM—continue to grow in popularity, particularly as businesses begin to migrate from inflexible, expensive legacy systems.

As supply chain networks become interconnected, with more diverse global links, Internet-based services promise easier, faster, and cheaper integration capabilities. Web solutions also help map inventory capacity as supply/demand information is aggregated across multiple 3PL customers. Nearly half of logistics providers surveyed offer competency in the e-services niche.

The ongoing development of technologies such as RFID, wireless, satellite, and cellular services also promises to be a growth market for 3PLs. Many businesses are still wary about investing in these technologies as standards continue to evolve and change and the cost of implementation remains high.

3PLs are helping businesses avoid technology speculation by assuming the responsibility themselves, with more than 61 percent providing wireless capabilities.

Distribution and Warehousing

Despite the current transportation malaise, 3PLs are noticeably helping outsourcers reduce costs by streamlining warehousing and distribution operations. Nearly 77 percent of 3PLs surveyed offer some form of warehousing solution.

Given current capacity constraints at U.S. ports, and surging inbound volume from Asia, supply chain fluidity is contingent on efficient warehousing and DC processes.

Forward-thinking enterprises are leveraging 3PLs to set DC management strategies in two ways: first, looking beyond the four walls at how and where they locate stateside distribution facilities; then, reengineering operations within their facilities to more efficiently move product and expedite turnaround times.

Recognizing the need for a strategic approach to DC network design and utilization, 61.4 percent and 66.1 percent of 3PLs, respectively, offer DC management and location services (see Figure 9).

Site selection, in particular, has become an important priority for U.S. businesses that are sourcing product from multiple global locations and need to consider how they redistribute product once it lands stateside.

Some businesses are opting for a big box DC approach, consolidating existing facilities so they can serve a large geographic reach. Others are decentralizing their stateside networks, locating smaller, quick-turnaround facilities in markets with heavy demand.

Regardless of strategy, ensuring that facilities are armed with appropriate technologies and equipment to expedite inbound and outbound product flow is paramount.

Inside warehouses and DCs specifically, crossdocking remains a top priority for consignees and 3PLs alike, with 73.3 percent of service providers offering solutions targeting this niche.

Pick/pack, and sub-assembly solutions are equally important in today’s marketplace—with 72.2 percent and 71 percent of 3PLs providing these services—as businesses look to increase picking capacity, reduce and better manage errors when they occur, and increase product flow.

Choosing the Top 100 3PLs

The 3PL Market Insight Survey, together with the Top 100 3PL Providers list, offers a broad perspective on how the industry is changing, how 3PLs are staying ahead of the outsourcing curve, and most importantly, how they perceive your logistics challenges and needs.

Selecting the annual Top 100 3PL Providers is no small task, given the pace of change and the number of new entrants in the global outsourcing game. IL editors whittled this year’s list from more than 500 companies through a comprehensive process of evaluating questionnaires and personal interviews.

Our goal? To provide a balanced and accurate assessment of our readers’ needs, and the 3PLs we believe are best suited to meet their specific requirements.

After you read through this issue, we want to know what you think: How much do you value our 3PL issue? Does the information we provide capably serve as a resource for your business? E-mail us: [email protected].

Also, if you’re a third-party logistics provider not on the Top 100 list this year, find our questionnaire at www.inboundlogistics.com/3pl, and tell us about your capabilities so we can consider you for next year’s list.