July 2002 | Commentary | Checking In

3PL Growth: Strange But True

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In any field, find the strangest thing and explore it," said renowned physicist John Wheeler. "You can learn a lot about your world if you take that approach."

Well, perhaps the strangest thing in our world of transportation is the advent of the 3PL. Many say buying transportation is just about buying a commodity—"I don't care what color the trucks (boats, planes, warehouses) are. Just get me the cheapest price!" How is it then that a formidable group of intermediaries evolved, turning that sentiment on its ear, and thriving by getting in between buyer and seller of these services?

Legend has it that a fired traffic manager came up with the 3PL idea. Faced with unemployment or becoming a consultant, he chose a third path. Visiting a truck lease company, he suggested putting his skills to work at other than traditional problems—optimizing pickup and delivery routes, for example. "You could then compete with other leasing companies by offering services they do not!"

Warehouse guys tell another tale, that outsourced logistics started when their customers asked for more than just contract space. "Can you help in simple assembly? Can you talk to my vendors about more than just "the shipment didn't get here?'"

Freight forwarders also say they have been providing these services for a century, they just didn't know they were 3PLs.

Like the invention of the Internet or the discovery of America, we'll never know the real story. But as the saying goes, success has many fathers, failure is an orphan. The outsourced logistics segment is successful. So much so that some wonks call it a countercyclical industry segment—doing better as the economy worsens. Countercyclical? That's a good trick for an industry with profits tied to shipment transactions, isn't it? Risk aversion is one reason to partner with 3PLs, but I don't think that explains a 7.4-percent (industry analysts) or 12.4-percent segment increase in one year.

The wonks forgot about 3PL growth in an up economy so other drivers are in play. Greater acceptance of inbound logistics practices creates complexity 3PLs can usually manage. "Scope creep" is another reason. That's where customers gradually morph the mission of the 3PL, usually leading to expectation gaps and contract failure. Flip that and look at scope creep again. Isn't it an indicator that, when customers sign with 3PLs, they invariably find other things the 3PL can help them with? Handled correctly by both customer and 3PL, scope creep leads to a high level of organic growth in the segment. 3PLs are performing better also, particularly in vetting relationships on the way in. That cuts the number of failures, leads to market willingness to outsource, driving more growth. 3PL growth is also driven by what I call the "why buy the cow if the milk is free?" phenomenon. Many turn to 3PLs to get the latest logistics technology instead of buying it themselves, getting it as part of the package or paying by the drink. 3PLs are also finding new revenue streams, branching out into short-term consulting jobs, and reselling logistics IT solutions without 3PL contracts in force.

Perhaps it was strange that 3PLs came about at all, but evincing the flexibility, adaptability, and performance they have of late, it is true they fill a need. No wonder they continue to grow.

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