What Does Your 3PL Really Think?

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MORE TO THE STORY:

• WHO’S WHO

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Uncharacteristically sluggish growth in the 3PL market in 2002 has compelled providers to devise new strategies in an effort to recapture the soaring growth trends of the past few years.

Maintaining costs continues to be a difficult proposition, given rampant fuel, security, and insurance expenditures. Creating more value for customers, however, specifically in terms of service capabilities, has been an important driver among 3PLs, according to a survey of 3PLs Inbound Logistics conducted for this issue.

The International Warehouse Logistics Association’s (IWLA) 2003 Business Outlook reports similar findings. The IWLA report finds that 98 percent of service providers surveyed offer some form of value-added services, with 48 percent adding value to a “great extent” and 50 percent to “some extent.”

While potential customers may be more cautious about entering into long-term agreements, 3PLs are pulling out all the stops to make their services and assets more attractive. The challenge for outsourcing users is finding the 3PL that can ensure these “value-adds” add value to their business over the long term.

To make that process a little easier for you, Inbound Logistics asked a number of 3PL providers—big and small, diversified and niche players—to comment on the market over the past year. And, looking forward, we asked for their perception of changing customers needs, and how they hope to sustain value in their business relationships.

According to both the Inbound Logistics survey and the IWLA report, 3PLs are embracing this value-added phenomenon as a focal part of their go-to-market strategies, but they are doing so in different ways. Some have adopted a holistic approach, offering a diverse suite of logistics services while targeting new outsourcing opportunities. Others have focused specifically on core business strengths and niche markets. Still others are revisiting their roots, offering less-sophisticated solutions where demand dictates.

A Panoramic View

Broadening service capabilities and expanding customer demographics has been favorable to 3PLs in two ways. First, it has helped stave off the deleterious effects of economic “slowth.”

“We have been negatively impacted by fuel costs in 2003, but that impact would have been greater had we not diversified our portfolio over the last several years and created a broader base of customers with less dependence on any one segment,” says David Kulik, president and CEO, TNT Logistics North America.

Second, diversifying logistics solutions and integrating appropriate technologies has enabled 3PLs to mine new markets and revenue opportunities.

“There’s clearly a movement among companies to work with 3PL providers who can offer a greater array of services and more complex solutions,” says Ken Landego, vice president supply chain solutions, USF Logistics. “We have undertaken initiatives over the last few years to continue to grow our infrastructure in terms of the systems we have available for our customers, and how we can effectively deploy and integrate them.”

Conversely, where some 3PLs have expanded their services, others are applying a laser-like focus to niche specialties and markets. These providers are magnifying their vertical capabilities with integratable solutions and expertise that customers can easily plug into.

ServiceCraft Logistics, for example, has built a knowledge base to meet the demands of the consumer goods industry. This singular focus has led it to begin automating its S.C.O.R.E solution, a program that allows mass merchandisers to consolidate product across multiple vendors, products, and purchase orders. As a result, “value-add services such as S.C.O.R.E. are attracting more interest among consumer goods manufacturers and their retail customers,” says Chuck Taylor, president and CEO of ServiceCraft.

When Opportunity Knocks, Open the Warehouse

Despite the proclivity for complex, high-end solutions, some opportunistic 3PLs are simply reverting to their roots—be it truck lease, warehousing or IT—to meet less-sophisticated customer demands. Traditional warehouse-based 3PLs, for example, contract out their facilities to companies that are looking for leased warehousing space rather than keep fixed assets on their balance sheets.

The flip side of this trend is that some manufacturers and even retailers, similarly impacted by diminished volume in their warehouses, are capitalizing on their warehousing and distribution expertise by spinning off their own logistics divisions. That’s exactly what Supervalu, the 10th-largest food retailer in the United States, did to better leverage its distribution network.

“Customers are very concerned with their 3PL partner’s ability to execute on the plan. This is an extraordinary performance-to-expectations gap in the 3PL market and one of the primary reasons Supervalu launched Advantage Logistics,” says Chris Owens, Advantage Logistics.

Outsourcing success is ultimately driven by a 3PL’s ability to continually prove its worth over time. As the economy trends upwards, 3PLs will be increasingly obliged to demonstrate how logistics can enhance customers’ shareholder value, validate their value proposition, and ultimately keep customer needs in focus to develop and ensure lasting and successful outsourcing partnerships.

QUESTION 1: To what extent has your business grown, if at all, in the past 12 months? What impact has the past year had on your profitability?

“We continue to be profitable because we operate within a gain-sharing environment. The languishing economy has left shippers scrambling for money-saving solutions. Shippers need to cut costs and cannot afford to take financial risks in the process. Gainsharing is the perfect solution—one in which shippers can save and 3PLs can profit. Additionally, shippers are exploring non-traditional means of cost cutting, which has had a positive impact on our profitability. Increasingly, we are operating within a collaborative network environment. We combine partial shipments from multiple clients—sometimes competitors—into full truckloads to cut costs for all participating shippers.”

&emdash;Dennis Schoemehl, CEO, Logistics Management Solutions

“The primary factor negatively impacting our fleet operations revenue in this period has been the price of fuel. Although we have allowances in most of our contracts, they have not been enough to offset the cost. Tractors have had a lesser impact on profitability since new engine regulations went into effect in October 2002. Salaries and wages have either held or increased as projected, and have therefore had little impact. One clearly positive factor has been facility leases. Current economic conditions have led to greater availability, competitive rates, and flexible terms and volume commitments.”

—Dan Singer, VP of Supply Chain Solutions, Averitt Express

“Having a diversified mix of international services and regional contract logistics has enabled us to weather some of the economic downturn. For example, while our U.S. warehousing and distribution segment was exposed to the sluggishness of the economy and associated declines in our customers’ inventory, our presence in Asia benefitted from production shifting to China and provided robust growth in our consolidation and other international logistics services.”

—Vin Gulisano, Senior VP Global Sales, Marketing, and Engineering, APL Logistics

“An area of growth has been in our national program management and final-mile services. We have expanded our network of service providers beyond our own locations to better meet our clients’ needs.”

—Dan Colleran, President/General Manager, Suddath Logistics Group

“Our business has grown in two areas over the past year. One is in distribution of electronic goods manufactured offshore. These companies are headquartered in Asia and have no U.S. infrastructure. They use our network to meet distribution requirements. The second growth area is with manufacturers who are responding to demand for more efficient response to retailer requirements for consumer goods. Our S.C.O.R.E. program allows mass merchandisers to consolidate delivery of multiple purchase orders from multiple manufacturers to the same retailer at one time. Value-added services such as this are attracting more interest among consumer goods manufacturers and their retail customers.”

—Chuck Taylor, President and CEO, ServiceCraft Logistics

“We have had solid year-over-year growth by adding new customers and expanding into new service areas with existing customers. The cycle time from initial engagement to close is lengthening and customers are asking for cost-saving commitments as part of performance metrics. Profitability is strong where mechanized systems are used and less robust when manual processes are required.”

—John W. Healy, VP Supply Chain Solutions, Hub Group

“We have been negatively impacted by fuel costs in 2003. But that impact would have been greater had we not diversified our portfolio over the last several years. We now have a broader base of customers with less dependence on any one segment. On the near horizon we see more pressure on labor costs, insurance rates, and accelerating benefits costs for employees. We must continue to become more efficient to offset these expenses because price increases are rare in this market.”

&emdash;Dave Kulik, President and CEO, TNT Logistics North America

“One challenge we’ve faced is that we are highly retail-focused and many of our customers have had double-digit negative growth. We had to bring on a lot of additional business to get to the positive numbers. In terms of profitability there continues to be margin pressure, driven by the soft economy, overcapacity, and pressure on our customers. Business is tough for them—volumes and sales are down—so they respond by reducing the frequency of shipments, which impacts our growth and net margins. “

—Ken Landego, VP Supply Chain Solutions, USF Logistics Services

“We’ve grown year over year thanks to picking up some new contract facilities. In recent months, however, we have seen a definite slowing in new business opportunities. Our profitability has been less than we hoped. Rising costs, especially for insurance and fuel, have hurt, as has customer resistance to pricing changes. “

&emdash;Bruce Abels, President, Saddle Creek Corporation

QUESTION 1: OUR TAKE

Let’s not mince margins. 3PLs grew in 2002. Responding to the economic climate, struggling to keep expenses low, and eating costs they couldn’t pass along to customers, 3PLs sought out new revenue veins in order to maintain positive growth. They expanded their service capabilities vertically and horizontally, and targeted new customers.

While 3PLs may not have exceeded the soaring profits of 2001, every 3PL that responded to our survey reported positive growth in 2002 and looking forward to 2003—some as little as six percent (diversified 3PLs), others as much as 200 percent (niche 3PLs).

QUESTION 2: What outlook do you foresee for the outsourced logistics market in the next 12 months? How will that impact your operations?

“Because shippers need to do more with less, they will increasingly outsource execution functions, especially those involving optimization, such as freight consolidation. Other functions, such as contract buying, are less likely to be outsourced because the 3PL benefit just isn’t there. Most shippers have enough freight volume to leverage better pricing on their own. Additionally, shippers will continue to demand low-cost, fast-entry technology to better manage freight operations—TMS technology within an ASP environment, for example. A strong emphasis on cost and service continues, and shippers need tools to help them manage the transportation functions of remote operations. But they cannot afford to incur substantial costs in the process.”

—Dennis Schoemehl, CEO, Logistics Management Solutions

“The market will continue to expand as companies focus on cost reduction and put all intellectual and financial capital into their core competency (which is never logistics). Also, as demand rises, more and more 3PLs will be exposed as under-performing entities, creating heightened market opportunity for 3PLs able to execute as promised.”

—Chris Owens, Advantage Logistics

“Outsourcing supply chain management services has helped manufacturers improve performance and reduce costs during tough economic times. Based on the benefits third-party logistics providers have delivered, customers will continue to turn to outsourcing to improve their businesses. Looking ahead, logistics providers need to take steps to ensure they have the resources, people, and technology required to manage increased business.”

—Vincent Hartnett, President, Penske Logistics

“Companies will be looking for more flexibility and service partners who can allow them to focus on their core business and spend less time managing the supply chain. As economic development continues to improve, more emphasis will be placed on improving communication and the flow of product, and reducing direct costs.”

—Dan Colleran, President/General Manager, Suddath Logistics Group

“The outlook for outsourced services will be positive over the next several years. Many companies feel that they have a grip on their supply chain when in fact they are actually losing control! The move for companies to focus on their core competencies will remain strong, thus increasing the numbers for outsourcing.”

&emdash;John W. Riske, Director, Business Development, Next Generation Logistics

“The speed of decisions regarding outsourcing has not improved. Customers are understandably cautious. They are writing more parameters into our contracts that require efficiency gains and performance improvements.”

&emdash;Dave Kulik, President and CEO, TNT Logistics North America

“Customers are looking at the inbound side of the supply chain and moving aggressively to take control of inbound transportation that has historically been supplier-controlled and shipped on a delivered basis. “

—John W. Healy, VP Supply Chain Solutions, Hub Group

“We are forecasting much slower growth for the rest of 2003 and into 2004 than in recent years. This will cause us to place greater focus on cost control and productivity improvement. Also, we will need to focus on helping customers understand how they can help us lower their costs to avoid price increases. Long term, we are still optimistic about growth in the 3PL area although as the industry gets bigger and customers consolidate we expect that growth rates will be slower than they were in the 1980s and 1990s.”

&emdash;Bruce Abels, President, Saddle Creek Corporation

“We see continued growth of third- party services, especially in parcel shipping, because of increasing home-delivered product demands. We foresee a growth of at least 20 percent next year.”

—Doug Doretti, President, Federal Fulfillment

QUESTION 2: OUR TAKE

3PLs, by and large, predict moderate growth over the next few years as companies continue to realize the advantages of outsourcing. As a result, they are continually evolving and adapting their services to better match the demands of the marketplace.

Expect to see more 3PLs dabbling in contract manufacturing and warehousing and developing proprietary technologies to grow their client base. While there are perhaps some reservations among providers that too much diversification could dilute their value proposition—especially if the economy picks up—the flexibility that 3PLs currently afford customers will remain an attractive selling point. As long as they remain experts at what they do, and businesses continue to focus on their core competencies, 3PLs will see positive growth.

QUESTION 3: Have the concerns and needs of 3PL customers changed recently? Given events of the past two years, are customers expanding their needs or is their greater emphasis on lower costs (yours?/theirs?)

“Customers are very concerned with their 3PL’s ability to execute on the plan. This is an extraordinary performance-to-expectations gap in the 3PL market and one of the primary reasons Supervalu launched Advantage Logistics. Let’s face it, even the largest and best 3PLs woefully under-deliver the performance promised. A true objective analysis of performance indicators and feedback from executive management not influenced by a 3PL’s sale process will reveal that not many 3PLs perform, regardless of size. Our customers are focused on continually reducing costs while service requirements are increasing. That is a difficult combination, considering that higher service usually produces higher operating cost. That is why we focus on identifying the value of providing a service rather than the cost of providing a service.”

—Chris Owens, Advantage Logistics

“Many customers continue to expand their needs. For example, we see strong growth in the automotive and retail sectors. We also see strong potential across other verticals, in spite of continued concerns over a weak economy, as contracts with our competitors expire. All customers, however, are focusing on lower costs (both internally and from their suppliers) and flexible solutions that won’t bind them to an operation that will no longer meet their needs at some point in the future. “

—Dan Singer, VP of Supply Chain Solutions, Averitt Express

“Cost management is an ongoing concern for our customers, and we expect they will continue focusing on supply chain efficiencies to reduce costs. A clear change in customers’ needs and concerns has been in the area of supply chain security. This started post Sept. 11, and with government initiatives such as C-TPAT and CSI getting into full swing, customers are asking us to help them design and execute programs that not only build supply chain contingency but also improve supply chain flexibility and response.”

—Vin Gulisano, Senior VP Global Sales, Marketing, and Engineering, APL Logistics

“There has been increased customer interest in outsourcing the inbound portion of their supply chains, and we have seen an increase in the demand for third-party freight management services. Customers have also become much more interested in gainsharing arrangements and partnerships. “

—Vincent Hartnett, President, Penske Logistics

“The concerns of the last two years have been reflected in the economy and post-Sept. 11 security issues. Because our primary focus is in consumer goods, however, we haven’t seen much change in customers’ concerns and needs as these areas are not traditionally susceptible to cycles based on economic conditions. ”

—Chuck Taylor, President and CEO, ServiceCraft Logistics

“Everyone is still cost conscious and wanting to become more efficient. I believe companies that have not taken advantage of technology to improve their business are seeing the results from those who have. Most companies are gaining a better understanding that we no longer live in the industrial age, but rather the technology age, and we have to adapt to remain competitive. This is and will be the competitive advantage.”

—John W. Riske, Director, Business Development, Next Generation Logistics

“Lowering supply chain costs continues to be the major driver for customers in evaluating logistics services. The economy is still not strong enough for vendors and suppliers to pass along price increases. Customers are willing to discuss outsourcing logistics services only if there is a compelling value proposition that reduces supply chain expense, improves productivity, or provides visibility. Logistics companies are investing more time and money performing consulting services to customers as part of the sale process. “

—John W. Healy, VP Supply Chain Solutions, Hub Group

“Transportation as a percent of total cost of logistics tends to be relatively small and many cases have already been addressed, so there is a limited impact on what can be done there. But if you can take days of inventory out of the supply chain, or you can improve in-stocks to help drive more sales, those are very important savings areas. We’re focusing on how we can improve the reliability of a customer’s supply chain so that it has the confidence to reduce safety stock and drive costs out. Price is a part of it, but it’s not a major part—that’s not where you’re going to make the greatest impact. “

&emdash;Ken Landego, VP Supply Chain Solutions, USF Logistics Services

“Customers continue to raise the bar in regards to both service level expectations and performance against those expectations. We continue to see customers wanting more variety of services from their providers, yet they are not inclined to pay for these services, especially in areas such as EDI development where there appears to be a “free lunch” mentality. Customers do seem to have a more realistic approach to sharing or helping with startup costs on large, new operations.”

—Bruce Abels, President, Saddle Creek Corporation

“Customers are looking to subcontract out pick, pack, and shipping services to reduce their labor and space overhead. They are concerned with the rising costs of shipping rates, and are shifting package shipping to ground vs. higher costs of airfreight due to fuel surcharges.”

—Doug Doretti, President, Federal Fulfillment

QUESTION 3: OUR TAKE

Thrift is always in vogue. Outsourcers are bargain hunters, so they want more for less. But while customers continue to haggle with their 3PL partners, there are obvious limitations as to how much cost can actually be taken out of the supply chain. Increased security restrictions, and rising insurance and fuel costs, have made it difficult to markedly lower transportation costs. Instead, 3PLs are looking at streamlining time and costs throughout the entire supply chain process, from procurement to returns processing. They are concentrating on offering customers more value-added services, delivering better customer service, encouraging more collaboration, and implementing innovative technologies.

QUESTION 4: How do you continually create value for your customers over the long term?

“Customers want us to be operationally excellent in the services we provide for them. But increasingly they want us to offer a broader array of services, integrate those services, and help synchronize their global and complex supply chains. Many 3PLs respond well to customer requests, but in a reactive way. Our focus is to be proactive in applying creativity and innovation in solving our customers’ logistics challenges. The benefits of what we do must be quantifiable and be clearly linked to our customers’ balance sheet and income statement. That means demonstrating how logistics activities help create shareholder value.”

&emdash;Vin Gulisano, Senior VP Global Sales, Marketing, and Engineering, APL Logistics

“An optimized supply chain can significantly improve shareholder value. By improving supply chain performance, we help our customers expand into new markets, differentiate themselves from their competitors, streamline processes, speed up cycle time, and gain visibility across the supply chain.”

—Vincent Hartnett, President, Penske Logistics

“While it is important to be focused on creating value and servicing our clients’ needs today, it is similarly critical that we work with them to understand their strategy for the future. With this, we can apply our expertise to best determine where we need to be and what we need to be doing in order to bring more value to their enterprise.”

—Dan Colleran, President/General Manager, Suddath Logistics Group

“We need to create a relationship based on deliverables other than just price. If all a 3PL can offer the customer is a lower price, then it’s my contention they are on the way out of business. Once a contract is secured, we have an obligation to get more deeply involved in our customers’ business and provide a broader array of solutions.”

—Dave Kulik, President and CEO, TNT Logistics North America

“There has clearly been a movement toward working with providers who can offer a greater array of services and more complex solutions. In order to do those things we have undertaken initiatives over the last few years to continue to grow our infrastructure in terms of the types of systems we have available to offer our customers and just as importantly, being able to deploy and integrate them effectively. One of the things it will take to drive success and profitability for ourselves and our clients in the future is to be able to improve the ability to respond to problems that arise from the supply chain. So we are investing heavily in terms of supply chain event management programs and focusing a lot on integrating order management into our core offerings. Information is only beneficial to the degree that you can efficiently and effectively share it with the customer in a meaningful manner. “

—Ken Landego, VP Supply Chain Solutions, USF Logistics Services

“We need to think differently about how we approach customers, need to ask more penetrating questions, offer ideas to customers on how to lower costs and improve service. We may also need to be more aggressive with the type of customer that asks for input and ideas but then never acts on them. If the customer chooses not to act, we still need to gain credit and recognition for being creative.”

—Bruce Abels, President, Saddle Creek Corporation

“Continuous improvement through application of Six Sigma and investments in next-generation information technology will help us create value. “

&emdash;Ron Kruse, President, Client Services Division, Cat Logistics

“We need to be consistent in our service every day, utilizing a selected pool of carriers without migrating between carriers, increasing use of technology that is easy to understand and use, and providing a trained staff that looks outside the box to assist our customers in resolving their logistics problems. The most important thing is not being everything to everyone. We have defined our niche and do not deviate from it.”

—Bob Schwieger, VP Marketing, AES Logistics Inc.

QUESTION 4: OUR TAKE

This, no doubt, is the million-dollar question—3PLs that have the answer will be around for the long haul. Customers are clearly more wary about signing long-term contracts today, so the onus is on 3PLs to ensure that their value proposition remains credible over time.

Collaboration is certainly one key to ensuring lasting relationships and 3PLs are working more closely with their customers to look beyond just short-term goals to strategize and develop guidelines with an eye toward the future.

Further innovation, investment in technologies, and a concerted effort to partner for success will similarly help 3PLs drive more value for their customers. Most importantly, though, customers will want to know how outsourcing is improving their bottom line. 3PLs that can tie supply chain management initiatives to shareholder value will stick.

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