Current State of the 3PL Market

Tags: 3PL, Logistics, Third-Party Logistics, Supply Chain

Shipper demands, customer expectations, and 3PL capabilities increase, pushing supply chain to the forefront, according to the 2018 22nd Annual Third-Party Logistics Study.

The 2018 22nd Annual Third-Party Logistics Study shows the continuation of positive relationships between shippers and third-party logistics (3PL) providers. Greater data availability and the ability to make real-time decisions are driving both parties toward more meaningful partnerships, which is leading to innovative solutions that can provide a competitive advantage for shippers.

Among respondents to the 2018 study, 73 percent of 3PL users and 92 percent of 3PL providers agree that 3PLs provide new and innovative ways to improve logistics effectiveness, and 81percent of 3PL users (shippers) and 98 percent of 3PL providers agree that the use of 3PLs has contributed to improving services to the ultimate customers.

Open Communication

The 2018 study shows the need for and importance of openness, and transparent and effective communication between 3PLs and shippers. And 39 percent of 3PL users and 81 percent of 3PL providers agree that collaborating with other companies, even competitors, can achieve logistics cost and service improvements.

The most frequently outsourced activities continue to be those that are more transactional, operational, and repetitive. Interestingly, the percentage of users who outsource information technology services increased to 27 percent in the 2018 study from 17 percent in the previous year.

This comes as the "IT Gap" has grown slightly, with the percentage of shippers indicating satisfaction dropping to 56 percent this year from 65 percent last year. It has become clear, however, that there is significant demand among shippers in general to look to their 3PLs as a source of needed IT technologies.

Supply chain operations continue to provide a competitive advantage to shippers and can be a key differentiator between businesses in all sectors. This year's study shows that shippers rely on their 3PL partners for a broad range of logistics and supply chain services, and that some of these are exhibiting growth over time.

Time-sensitive deliveries, lean inventories, and shorter product lifecycles place greater demands on the supply chain. Shippers have higher expectations for what they want their logistics providers to accomplish, and properly aligning those expectations is the key to success for both parties. The Third-Party Logistics Study shows shippers are continuing to collaborate with 3PLs to strengthen their relationships and optimize the supply chain.

In today's marketplace, all types of customers are better informed and expectations are increasingly set higher. The growth of e-commerce, increased consumer demands, and the speed at which new technologies enter the market make the supply chain more relevant. This comes as demand patterns shift and new competitors enter the market, challenging established business models.

Conversations surrounding supply chain have made their way into the boardroom and an effective supply chain can be a key differentiator between businesses in all sectors.

From Delivering Boxes To Delivering Outcomes

"Supply chain used to be a function. Now it is a value-add, and it is fundamental to your customer's experience," says Kim Breland, director of finance, supply chain operations for Sprouts Farmers Market, a supermarket chain based in Phoenix. "It has gone from a box hitting a location to delivering an outcome." Breland was among the logistics executives who took part in the study's workshop.

Total logistics expenditures as a percentage of sales revenues have increased, reaching 11 percent in the current year's study from 10 percent in the previous year. Over the same time frames, the percentage of shippers' transportation spend 3PLs manage increased to 55 percent from 53 percent, while the percentage of shippers' warehousing spend managed by 3PLs decreased slightly to 39 percent from 40 percent.

The functioning of today's supply chains relies significantly on the abilities of all involved parties to have access to vast amounts of data in near real time or, increasingly, real time. This allows them to make decisions earlier, and as a result, shippers and 3PLs are moving away from transactional relationships and toward meaningful partnerships. Those pairings lead to innovative solutions that improve the end-user experience for customers and create a true competitive advantage for shippers and their 3PL providers.

For more than 20 years, the Annual 3PL Study has found that shippers increasingly leverage what 3PLs offer, maximizing the supply chain, driving out costs, and creating value. This year, the number of shippers reporting that 3PLs helped them lower costs has increased, as has the number of shippers reporting that 3PLs have contributed to improving services to the ultimate customer.

Relationship Goals

The results and findings of the 2018 22nd Annual Third-Party Logistics Study provide current perspectives on shipper and 3PL relationships—why they are generally successful, and some ways they could be improved.

The current retail landscape is evolving rapidly, and e-commerce is disrupting the traditional retail world. Technology makes it easier for consumers to make purchases, sometimes with a single keystroke, and more retailers offer one-hour, same-day, or next-day deliveries. Amazon, big-box retailers, and grocers are investing in omnichannel network capabilities that allow them to capitalize on consumer demand for even greater speeds and ease.

In today's environment, shopping is no longer defined as someone getting in a car and driving to a store. The transaction becomes an ambient activity that is executed anywhere, at any time.

Increased package volumes are driving changes in distribution networks, and last-mile capabilities are essential to the rapid deliveries consumers and shippers expect. Shippers are looking for enhanced fulfillment capabilities, efficient supply chains, and data that can help them improve operations. At the same time, shippers better understand their organizations' core businesses, and that improved supply chain capabilities can help to achieve overall organizational objectives.

Core Strength

For several years, the study has seen shippers refocus efforts on their core strengths to stay competitive, which often leads to greater reliance on third-party logistics providers. This demonstrates that shippers are becoming more secure with their partnerships and value the reliability 3PLs can provide.

Supply chain activity is accelerating, and shippers have improved their ability to determine when and why investing in third-party logistics services can be useful and how best to work with commercial providers to create the best results for their organizations and their supply chains. The 2018 study confirms these observations, given that high percentages of 3PLs and shippers view their relationships as successful.

As always, uncertainties within the economy temper developments within the supply chain sector. In 2017, the economy sent mixed signals, which makes it difficult for shippers to know which mode to invest in and when. The U.S. economy grew at a low, annualized rate of 1.2 percent in the first quarter of 2017, but grew to a rate of 2.6 percent in the second quarter. In mid-2017, the unemployment rate fell to its lowest level in a decade, and the International Monetary Fund predicted 3.5 percent worldwide economic growth in 2017.

Global Trade Strategies

The global economy faces uncertainties as well, which can affect global freight balances, directional imbalances as a result of trading patterns, and available capacity. That volatility could drive prices higher for transportation services, and 3PLs will have to closely monitor and manage relationships and their transportation networks. To remain successful, 3PLs must focus on both immediate and strategic solutions.

When economic conditions exhibit uncertainty or variability, companies need the ability to react quickly and remain nimble with their supply chain options. To an increasing extent, shippers that rely on 3PL capabilities are asking for, and benefit from, service offerings that are sufficiently flexible and robust to accommodate changing business and market conditions.

Supply chains are becoming more complex, and time compressions continue to take place. In addition, consumers demand greater convenience, shippers and retailers work to streamline inventories, and many industries experience shorter product lifecycles. This means 3PLs must be able to react quickly when change arises and scale up or down promptly based on demand.

Logistics providers have gained flexibility by being mode-agnostic, allowing them to select the most cost-effective transport methods. Truckload capacity, fluctuating fuel prices, and congestion at ports or border crossings can alter preferred modes. Shippers increasingly expect 3PLs to serve as a single solution, and mergers and acquisitions among 3PLs continue as they look to fill gaps in markets, services, and geographies.

Demands and expectations of outsourced logistics services constantly evolve and shift, and 3PL providers are investing in the talent, processes, and technology that can drive the business forward. The 22nd Annual 3PL Study reinforces the suggestion that 3PLs and shippers are becoming more proficient at what they do, which enhances the quality of 3PL relationships and improves performance.

As relationships between 3PLs and shippers become more collaborative and less transactional, logistics providers are able to streamline overall operations within shippers' supply chains, improve service levels, and increase efficiency. They are also able to focus on supply chain security, sustainability, and, increasingly, philanthropy.

As 3PLs continue to refine and improve their core offerings, they develop new ways to enhance customers' supply chains. Shippers are able to take advantage of the advanced visibility, data collection, and analysis that more and more 3PLs are providing.

Retailers are working to reduce the amount of inventory they carry, which frees up capital and increases the pace at which companies can react to changing consumer demands. A highly functioning supply chain plays a key role in ensuring the functionality of a just-in-time inventory system, and shippers rely on logistics providers for services and increased visibility that can help them strengthen and streamline their supply chains and react quickly.

Changing Course

In today's environment, shippers can modify a shipment's course at nearly any point in the supply chain. Due to real-time visibility, a product is no longer on a set course once it leaves the warehouse. Weather disruptions, traffic delays, or even a shift in consumer demand can alter a product's course to ensure it arrives when and where it is needed. Innovative solutions to capture and analyze data, as well as the ability to optimize the supply chain, provide greater value and flexibility to shippers.

Logistics providers are investing in their IT solutions, replacing legacy systems and processes with innovative solutions and leading-edge approaches. This is already evident in the adoption of transformative supply chain software, greater use of mobile technologies in key supply chain processes at both shipper and 3PL organizations, and greater movement toward the use of cloud- based systems to facilitate management of supply chain processes and activities.

Although global demand for logistics and supply chain services has shown mixed results over the past several years, variability in global markets and global economies resulted in differences by region. Figure 1 (page 216) shows global 3PL revenues by region for 2013 to 2016 as reported by Armstrong & Associates Inc., and the percentage increases (or decreases) from year-to-year. Compounded annual growth rates (CAGR) of 3PL revenues from 2010 to 2016 are also included.

Show Me the Money

Overall, variations in 3PL revenues are due to relevant economic and political differences that distinguish regions from one another. Recessionary environments in some regions have a major impact on 3PL revenues.

3PL users report an average of 50 percent of their total logistics expenditures is related to outsourcing, which, coincidentally, is the same amount reported in the two most recent years of this study. Total logistics expenditures include transportation, distribution, warehousing, and value-added services.

Interesting to note is that the 50 percent recorded for the current and past two years represents an increase over historical results, a trend the study will continue to monitor.

Outsourcing vs. Insourcing

A primary observation throughout the 22 years of Annual Third-Party Logistics Studies is that while some customers report an increased use of outsourced logistics services, others indicate a return to insourcing some or all of the same services. Moves to either increased or decreased use of outsourcing may be measured in terms of funds expended on outsourced logistics services, percent of overall logistics spend represented by outsourcing, or number of activities outsourced.

Outsourcing: 61 percent of shippers are increasing their use of outsourced logistics services this year, compared to 58 percent reported last year. In comparison, 83 percent of 3PL providers agree their customers evidenced an increase this year in use of outsourced logistics services, which compares to 88 percent last year. These figures are consistent with the generally positive growth rates for 3PL services, particularly in the North America and Asia-Pacific regions.

Insourcing: This year, 28 percent of shippers indicate they are returning to insourcing many logistics activities, which is higher than the 26 percent reported last year but still lower than the 35 percent reported two years ago.

Also, 42 percent of 3PL providers agree that some customers are returning to insourcing, a slight increase from the 38 percent reported last year. While these percentages may seem to conflict, individual shipper responses pertain only to their organization's directions, while the 3PL responses reflect the providers' thoughts about their overall group of customers.

Reducing or consolidating 3PLs: This year, 53 percent of 3PL users report reducing or consolidating the number of 3PLs they use, compared to 47 percent reported in the 2017 study as well as the 57 percent reported in the 2016 study.

An observation identified in recent years is that the percentage of 3PL users (shippers) reporting increased use of outsourced logistics services has outstripped the percentage of 3PL users indicating they have returned to insourcing many logistics activities by 3:1. For this year and the past two years, the ratio is closer to 2:1 (61 percent divided by 28 percent for the current study).

Measures of Success

Among this year's survey findings, 92 percent of shippers report their relationships with 3PLs generally have been successful, only a slight measurable increase from 91 percent last year. Among logistics providers, 99 percent report that their relationships generally have been successful, an increase from 97 percent last year.

Considering the margin of error in these percentage figures, the most accurate statement is that both shippers and 3PLs have similar thoughts about the success of their relationships from last year to this year.

As noted in previous years' studies, the percentage figures from 3PL respondents typically run higher than those from shipper respondents.

  • 73 percent of 3PL users and 92 percent of 3PL providers agree that 3PLs provide new and innovative ways to improve logistics effectiveness. 

  • 71 percent of 3PL users and 97 percent of 3PL providers agree that the use of 3PLs has contributed to reducing overall logistics costs. 

  • 81 percent of 3PL users and 98 percent of 3PL providers agree that the use of 3PLs has contributed to improving services to (ultimate) customers.

Third-party logistics providers can add value to customers that go far beyond cutting costs, which is shifting the conversation from moving loads at the lowest possible cost to maximizing value realized from the overall network. That means today's supply chain is no longer just about moving products from Point A to Point B, but also about creating dynamic and responsive supply chains that can create a competitive advantage for shippers.

Also, it is widely recognized that 3PLs can help shippers meet fulfillment requirements while ensuring shipments are accurate and on time. 3PLs also help shippers speed products to market and flex up or down based on demand.

Open it Up

The current 3PL study also reinforces the need for and importance of openness, and transparent and effective communication between 3PLs and shippers. Both parties must be sufficiently agile and flexible to accommodate current and future business needs and challenges. To achieve maximum results, shippers and 3PLs continue to rely on gainsharing and collaboration to strengthen relationships and increase efficiencies.

Survey results this year suggest that 39 percent of 3PL users and 81 percent of 3PL providers agree that collaborating with other companies, even competitors, can help to achieve logistics cost and service improvements. More broadly, success with these types of initiatives may be a key facilitator to achieving the more strategic goals relating to the need for alignment.

Figure 2 (page 220) shows the percentages of shippers outsourcing specific logistics activities. Among the general observations:

  • Similar to last year, the most frequently outsourced activities are domestic transportation (83 percent), warehousing (66 percent), international transportation (63 percent), customs brokerage (46 percent) and freight forwarding (46 percent).
  • The less frequently outsourced activities continue to be strategic and customer-facing: service parts logistics (18 percent), inventory management (17 percent), supply chain consulting services (15 percent), customer service (11 percent), lead logistics provider/4PL services (11 percent), and fleet management (10 percent). Comparing these figures with last year's study indicates some movement towards increased outsourcing of these types of activities.
  • Interestingly, the percentage of users indicating the outsourcing of information technology (IT) services increased to 27 percent in the 2018 study from 17percent in the previous year. Clearly, this one data point does not represent a trend, so additional years' data will be needed to comment further.

Overall, the data from this year's study supports the idea that shippers rely on their 3PLs for a broad range of logistics/supply chain services, and that some of these are exhibiting growth over time. This suggests that as 3PL offerings mature, shippers increasingly take advantage of their various areas of expertise.

Tapping IT for Customer Service

Findings from the current study reinforce how important it is for 3PLs to provide a range of IT-based services to create value for shipper-customers. Figure 3 (page 222) summarizes shipper responses to the question: "Which information technologies, systems, or tools must a 3PL have to successfully serve a customer in your industry classification?"

The most frequently cited technologies are more execution- and transaction-based capabilities. Examples include warehouse/ distribution center management, transportation management (planning and scheduling), visibility, and electronic data interchange. Other commonly cited technologies: web portals, barcoding, network modeling and optimization, supply chain planning, transportation sourcing, and global trade management tools.

Among the IT-based capabilities that are candidates for future growth are yard management, advanced analytics and data mining tools, cloud-based systems, and distributed order management.

Beginning 16 years ago, this study has tracked measurable differences between shippers' opinions as to whether they view information technologies as necessary elements of 3PL expertise and whether they are satisfied with their 3PLs' IT capabilities.

Referred to as the IT Gap, Figure 4 (page 222) charts the behavior of this analytic from 2002 to present. Two major trends are evident:

1. The percentage of shippers indicating that IT capabilities are a necessary element of 3PL expertise has remained at a very high level since the question was added to the study (91 percent in the current study).

2. The percentage of shippers indicating satisfaction with 3PL IT capabilities has increased to 56 percent in the current study from 27 percent in 2002.

The percentage of shippers indicating satisfaction dropped somewhat, however, to 56 percent this year from 65 percent last year. This could be because shipper expectations have increased as technology has improved, or because shippers seek enhanced analytical capabilities to help drive more effective supply chain decisions.

The amount of available technology can also leave some feeling like they are missing out on certain capabilities, even if they are unsure of its applicability. Visibility and timely reporting is expected, but those expectations aren't always defined, which may explain the current shift in the IT Gap.

Table Stakes

Basic reporting of relevant data has become table stakes, and many shippers seek greater analysis to drive supply chain decisions. Many shippers have realized that the information collected is worthless if it isn't easily accessible and actionable, which is increasing reporting expectations.

Nevertheless, it has become clear that there is significant demand among shippers in general to look to their 3PLs as a source of capable IT technologies. Although the "tangible" services provided by 3PLs may be viewed in terms of operational and execution-based capabilities, competencies in the IT area are fast becoming differentiating factors when shippers are making selection decisions.

That will likely increase as the industry embraces data-driven decision making, blockchain supply chain capabilities, and streamlined delivery networks.


ABOUT THIS STUDY

Dr. C. John Langley initiated this study in the mid-1990s to capture the evolution of third-party logistics providers as they worked to transition from vendors of individual services to logistics partners offering integrated services and building meaningful, collaborative relationships with shippers.

Sponsors include Infosyss Consulting, Korn Ferry, Penn State University, and Penske Logistics.

For more information: www.3plstudy.com






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