Welcome to The 3PL Zone

Submitted for your approval: logistics outsourcing is morphing in ways that businesses and their supply chain partners find increasingly difficult to manage on their own.

For manufacturers and retailers, the converging forces of globalization and growing domestic consumer demand are pushing supply/demand chains to new sourcing and manufacturing locations while pulling greater volumes of inventory through capacity-choked pipelines that wax and wane at market will.

Already dazed by spiraling transportation costs, and at the risk of running too lean, businesses are exploring new ways to reinvent their supply chains to build additional flexibility into their networks.

Lacking the scalability and control necessary to handle these initiatives on their own, companies often turn to 3PL partners that can be both visionary and elementary in their approach to managing end-to-end product movement.

Shippers seek partners that can take the lead, for example, in finding and engaging contract manufacturers in China, while also helping locate extra capacity stateside.

Successful partnerships raise expectations, and 3PLs are relentlessly charged with finding innovative ways to expand their value proposition to customers both new and old.

In this emerging scenario, the outsourcer and the logistics intermediary rely on each other to explore and engage new supply chain strategies and services as well as enter new markets—while growing their businesses along the way.

Manufacturers and retailers are willing to piggyback on their 3PL’s assets and experience to grow market share and expand their global presence; in turn, service providers are keen to drive solution designs up the chain, organically mining new growth opportunities.

Such reciprocity inevitably demands a level of collaboration, imagination, and innovation that takes logistics partnerships beyond the realm of traditional outsourcing to another dimension—one where time and speed are relative, but visibility and accountability are absolute.

There’s a signpost up ahead. You’re about to cross into Inbound Logistics’ 3PL Zone.

SIGNPOST #l: Outsourcing Is a Process

To give definition and shape to this new dimension of global outsourcing, Inbound Logistics presents a two-fold approach.

First, we engage and drill down on empirical data culled from our annual 3PL Market Insight Survey to offer one perspective of the market drivers shaping global outsourcing trends. We then marry this analysis with anecdotal case studies of outsourcing best practices in action.

Second, we capture reader insight from our yearly Top 10 3PL Survey to identify how and why shippers value 3PL partnerships, thus bringing our 3PL industry focus full circle.

IL’s in-depth analysis of the 3PL Zone holds no bounds; neither does outsourcing’s growth potential. The U.S. 3PL market continues to expand by leaps and bounds, totaling $102 billion in revenue in 2006.

It’s A Good Life

Providers responding to IL’s 3PL Market Insight Survey validate this trend—more than 80 percent indicate at least 10-percent sales growth during the past year, and 36.6 percent report growth in excess of 20 percent. These numbers closely match last year’s findings.

Profitability still lags behind sales (63.4 percent of 3PLs report revenue growth exceeding 10 percent compared to 65 percent last year), a reality attributed to rising operational costs, ongoing consolidation in the segment, and, as one 3PL reports, “increased cost pressures from customers that are also under pressure to reduce supply chain costs.” 3PL profitability overall, however, is still impressive.

In 2006, the biggest obstacles 3PL customers faced were reducing costs and accessing capacity, say respondents.

This year, with softening demand for truck capacity and growing acceptance of rising transport costs, 3PLs tell us their customers’ top wishes run the gamut from “reducing costs,” “vendor management,” and “entering new markets” to “global coverage” and “finding new alliance partners.”

This shift in attention reflects varying economic conditions and consumer demand, but also points to the fact that 3PLs are ultimately following their customers’ lead and absorbing their costs and concerns.

The Hunt

As revenue chases sales growth, service providers are becoming more aggressive in how they grow existing partnerships and target new ones.

More than half (53.7 percent) of 3PLs polled specify augmenting their customer base by at least 10 percent during the year. This further cements the importance manufacturers and retailers place on outsourcing initiatives.

Respondents attribute this growth to a number of factors. One provider, for example, specifies “a general market increase in outsourcing and new offerings to customers as a result of a recent merger.”

Respondents also point to focusing on high-volume customers and vertical markets as means for increasing their customer base.

Logistics service providers are capitalizing on existing customers by helping them drive efficiencies further back in the supply chain to enhance their value proposition and organically grow their business.

Interestingly, a number of 3PLs at both extremes of the sales growth spectrum identify “finding customers” as their most important challenge, suggesting that diversifying and growing client rosters is a pivotal strategy for leaders and laggards alike.

An intriguing question arises from this analysis, and it’s difficult to ascertain by empirical data alone: how are 3PLs expanding and selling their value proposition to current and potential customers?

The decision to outsource often emerges as a company grows beyond its management bandwidth to properly control logistics and supply chain functions without negatively impacting its own core competency.

The Prime Mover

Transportation management is often a prime target, given its high cost and a general aversion among manufacturers and retailers to sink capital into non-core infrastructure and asset investments. As expected, a lion’s share of 3PLs (73.2 percent) report “cutting transport costs” as their customers’ top challenge.

While businesses are still inclined to outsource transportation-related activities, other strategic initiatives are also closing the distance and turning heads in corporate boardrooms.

Businesses may approach 3PLs with specific transportation and distribution challenges, but these flashpoints often illuminate strategic problems elsewhere in the demand/supply network.

Given the fact that transportation costs have become institutionalized—largely as a result of high fuel prices and longer supply chains—and that outsourcers expect more value from their logistics partners, 3PLs are more adroit at helping customers drive efficiencies in other areas of the supply chain.

By example, 3PLs also tell us their customers are concerned about technology strategy and implementation (48.8 percent), reducing inventory (46.3 percent), business process improvement (43.9 percent), and reducing assets and infrastructure (41.5 percent).

Noticeably, “reducing inventory” jumped 14 percent this year and offers a good example of the types of growing pains exacerbated by lengthening and deepening supply chains.

By looking at strategies that reduce or better position inventory in the pipeline, follow demand-driven signals, and control inventory movement from point-of-origin, businesses are leveraging their 3PL partners to become savvy supply chain practitioners.

This level of complexity also indicates that companies are equally judicious in how they envision their supply chains and the roles their 3PL partners play within their organizations.

What’s In The Box

Case in point: specialized mold manufacturer Siamons International requires its 3PL to support myriad logistics activities. In its partner, Siamons found a logistics bricoleur capable of not only handling core responsibilities including order processing and product packaging, but also out-of-the-box tasks such as building and shipping in-store product displays.

Outsourcing in the new dimension is no longer simply a quick-fix solution to a tactical problem, but rather a strategic process that identifies areas for improvement, designs solutions, and streamlines these solutions beyond implementation.

As part of this emerging dynamic, 3PLs are inclined and equipped to move past day-to-day operational problem-solving to create and execute value-driven initiatives—and customers are beginning to expect this.

The real value-add for Siamons is the collaborative relationship that has developed between the two companies—a relationship that transcends the usual 3PL expectations and is indicative of the new global outsourcing trend.

SIGNPOST #2: The Power of Collaboration

Over the past few years, the 3PL segment has settled into a two-horse race between large, resource-laden intermediaries and smaller niche players that rely on strong customer service to capture market share.

Increasing polarization within the industry is pushing medium-sized service providers into the crosshairs of larger 3PLs keen to expand their businesses through new acquisition targets.

3PLs were mixed in their explanations for how they were growing, citing M&A activity, organic growth, and increased sales as the primary reasons. This variety of opinion reflects the bifurcation of the 3PL market.

Large 3PLs can leverage their capital and clout to acquire complementary businesses as well as seek out new growth opportunities by canvassing their customers’ customers.

A majority of 3PLs indicate they have made or are seeking key business acquisitions in areas such as China, Eastern Europe, Canada, and Mexico to broaden their operational scope.

In addition to growing inbound logistics practices domestically, globalization is a key factor in this shifting cycle, as businesses extend their reach into new markets and develop relationships with myriad transportation, warehousing, and technology partners.

The Changing of the Guard

In less obvious ways, the growing complexity of supply chain management is helping small 3PLs gain market penetration.

For one, the sheer size and scope of global supply chains has rendered the idea of a best-in-class global service provider nearly untenable, and logistics companies that specialize in a niche vertical, region, or capability are of value to large and small outsourcers alike.

Increasing complexity is also pressuring logistics companies across all sectors to enhance value-added services beyond core operating strengths, ultimately blurring the distinction between freight carriers, IT developers, consultants, and 3PLs.

Small intermediaries that offer stand-alone, specialized service capabilities, and are committed to their core customer base, are more likely to stand out amid this mosaic—especially as some companies migrate away from the “one-stop shop” approach to outsourcing.

3PLs attuned to this shift recognize the strengths and weaknesses of their market position and how they match up with prospective clients’ needs.

This is reflected in the fact that more than half (51.2 percent) of 3PLs polled in the 3PL Market Insight Survey believe customers should partner with more than one service provider, while 39 percent feel that a customer should work with only one partner.

The remaining 9.8 percent of respondents say outsourcing strategies are contingent on the customer and the scope of the venture.

Compared to last year’s data, more 3PLs identify using one service provider as the route outsourcers should take.

This increasing parity presents a striking anomaly: while the majority of 3PLs see multiple 3PL partnerships as a sound outsourcing strategy, citing the necessity to maintain “balance” and “options” in today’s unpredictable environment, an increasing number cite the value of having one point of contact over their supply chains.

This difference in opinion may in fact be recognition that some customers prefer having “one throat to choke,” or need management simplicity because logistics challenges are growing beyond their capacity to control them. It may also reflect the growing complexity of logistics and supply chain outsourcing relationships.

Either way, such a split could perhaps create a breaking point for service providers as they look to balance their customers’ best interests with their own.

In the context of today’s global environment, partnering with multiple service providers gives companies greater leverage to benchmark performance, while also holding partners accountable for agreed-upon service requirements.

With increasing need for flexibility and reliability—given the inevitable supply chain disruptions and volatility of consumer demand—a roster of 3PL partners provides additional resources and support to scale and adapt sourcing patterns as the need arises.

The growth of outsourcing, in terms of scope and number of providers, consequently has raised the presence and value of fourth-party logistics providers (4PLs) and lead logistics providers (LLPs).

But while these specialized service providers have traditionally been used to manage multiple outsourcing partnerships, companies are now driving the 4PL solution design beyond these parameters.

Cleveland, Ohio-based industrial manufacturer Eaton Corporation, for example, decided to rethink its global supply chain strategy three years ago, using LLPs to aggregate control over and visibility into its disparate networks. It currently partners with five primary LLPs to marshal supply chain activities in North America, Europe, and Asia.

Where Is Everybody?

Eaton’s goal is to pare down to one provider as prudence and time dicate. This 4PL solution strategy lets Eaton leverage control over protocol where necessary and follow the lead of its 4PLs in emerging markets—all while using feedback from partners to further streamline and organize its global network.

This ongoing progression from a fragmented supply chain management approach to a more centralized LLP-driven model presents another example of how outsourcers and 3PLs, working in tandem, are raising the bar and taking logistics outsourcing to a new stratum of innovation and collaboration.

SIGNPOST #3: Outsourcing’s True Value

This push toward collaborative outsourcing partnerships, and the concessions 3PLs and LLPs are willing to make to facilitate these arrangements, indicates that logistics intermediaries are not only mindful of their own limitations, but also the “value add” companies can glean from partnering with multiple specialized players.

For outsourcers seeking greater objectivity, customized solution designs, and more effective customer service, this level of cooperation augurs even greater growth for the outsourced logistics industry moving forward.

The types of partnerships companies such as Siamons and Eaton are forging with their partners, coupled with empirical data from the 3PL Market Insight Survey, reveal three emerging trend lines:

1. 3PLs are helping customers execute sophisticated supply chain initiatives beyond simply reducing transportation costs.
2. They are growing their customer bases at an annual double-digit clip, both organically and through strategic acquisitions.
3. Some service providers are looking to add further value for their customers by working collaboratively among themselves.

All in all, telling proof of the exciting new dimension of global outsourcing.

But while 3PLs may see the value of their services and capabilities—and the value of outsourcing in general—in terms of “dollars and sense,” outsourcers provide more revealing testimonies to the special relationships that exist with their logistics partners.

Consider, If You Will…

Here’s what companies responding to our annual Reader’s Choice: Top 10 3PLs survey had to say about the merits of their 3PL partners:

• Maple Leaf Bakeries says Total Logistic Control “is not as well known as the bigger players, but does a much better job.”
• For YKK AP America Inc., working with Ryder is good for business: “Ryder helps us provide customers with the right product, at the right time, in the right quantity, and in the best quality.”
• MeadWestVaco appreciates C.H. Robinson’s willingness to go the extra mile: “C.H. Robinson has always been responsive and willing to try different approaches to satisfy customers.”
• Unilever trusts Transplace to meet whatever challenges come its way: “Transplace representatives do everything they possibly can to resolve emergencies and last-minute changes. Their everyday execution is great, too.”

If a common thread exists among these sentiments it is that 3PLs are going above and beyond their technical expertise and capabilities to meet and exceed the unique service demands of their customers.

Such reactions aren’t that surprising considering the increasing symbiosis between logistics service providers and their customers.

The 3PL has become an extension of the enterprise, sharing the risks of operating in a time-sensitive, capacity-constrained, cost-conscious environment, while dually reaping the rewards of helping companies match supply to demand and tap new opportunities to grow market share.

As businesses continue to expand offshore interests and streamline domestic distribution networks to flex with shifting market conditions, the demand for service providers that can work in concert with customers and other 3PLs to efficiently integrate disparate supply chain links and expedite the inbound flow of global goods will only increase.

Where manufacturers/retailers and 3PLs will take the outsourcing dynamic beyond the present is difficult to discern, but the pathway is clear: the 3PL Zone is marked by collaboration and innovation.