3PL Perspectives 2008
Discovering 3PL market insight and trends.
The chemistry of outsourcing is an important component of today’s competitive business environment. The demands of the marketplace bring to bear the merits of isolating non-core business functions from value-driven growth initiatives, then finding the right quantity and mix of service providers and solutions to capably fill these vacuums.
For many businesses, outsourcing is an evolving science. Economic and corporate-driven influences routinely spin supply chains in different directions. Centrifugal supply and demand forces pull businesses away from their comfort zones to explore new consumer markets, supply locations, product offerings, business alliances, or go-to-market strategies.
These pressures trigger supply chains to expand, synthesize, then contract—always at the risk of going too far, not far enough, or cracking under the weight of cost and service expectations. Businesses outsource to neutralize these variables and reallocate resources and capital to more productive areas.
3PLs, by virtue of their specialized service capabilities and operational breadth, provide companies with the scale and scope to better visualize, then execute, their supply chains.
From tactical silo optimization to strategic end-to-end business process change, outsourcers turn to 3PLs to break new ground and unearth better ways to match supply to demand.
Inbound Logistics’ annual 3PL Perspectives presents a similar binary approach to breaking down outsourcing into its molecular parts.
First, we analyze empirical data culled from our 3PL Market Insight Survey. This year, IL received nearly 300 questionnaire responses from a diverse group of third-party logistics providers, ranging from large, global players serving Fortune 500 companies to niche 3PLs targeting specific verticals or logistics disciplines. We pry, probe, and pull apart this information to identify market drivers shaping global outsourcing trends.
From this sweeping overview of the 3PL segment, we then narrow our focus to scope out the top 100 3PLs in the marketplace—a class of logistics service providers lifting outsourcing science to new levels of sophistication.
Together, our 3PL Market Insight Survey and Top 100 3PL directory provide a blend of strategic analysis and nuts and bolts information: Perspectives that make 3PLs and outsourcing such integral elements of today’s supply chain.
Outsourcing Under the Microscope
By all accounts, outsourcing continues to evolve by leaps and bounds—market pressures have businesses inclined to take the leap toward functional and strategic logistics partnerships; and the efforts and investments 3PLs have made to build transportation and distribution networks, and tailor value-added services to end-user demands, show no bounds.
Even as a U.S. economic downturn puts the squeeze on operational and financial efficiencies across industrial sectors, the outsourcing segment remains robust, eclipsing $108 billion in 2007, according to Inbound Logistics’ 2008 Market Insight Survey.
Service providers responding to this year’s study indicate as much, with 77 percent reporting sales growth of 10 percent or more, and 24 percent surpassing the 20-percent threshold. Sales data is slightly off last year’s mark, reflecting a general U.S. malaise.
“Stagnant sales are generally attributed to the weak economy, which is negatively impacting our customers’ activity levels,” observes one 3PL executive.
Profitability has similarly fallen as mounting fuel, insurance, and equipment costs, and a “competitive” reluctance to pass on increased costs to customers blanket the 3PL sector.
Some service providers, heavily entrenched in underperforming markets, feel a corollary pinch. “Our flatness in sales is due to current customer volumes being down as a direct result of retail sales,” reports one 3PL.
Despite these soft spots, most 3PLs report positive numbers, with nearly one out of two growing revenue more than 10 percent, compared to 63 percent in 2007.
Across industries, manufacturing is still the most likely to seek outsourced logistics expertise as it comprises 97 percent of our survey respondents’ customer base, followed by distribution and wholesale (93 percent), and retail/e-business (86 percent).
Compared to last year’s data, manufacturing remained unchanged, the retail market shrank six percent, and wholesale interests jumped five percent—a reflection of the precipitous slump among brick-and-mortar retailers and the growing adoption of demand-driven logistics practices that push inventory back upstream.
Other verticals, such as the services and government sectors (69 percent), are maturing quarries for 3PL mining.
Over the past five years, the mean data for 3PL market penetration has remained uniform. This stability suggests businesses are increasingly inclined to divorce themselves from non-core operations, regardless of economic conditions.
Even as sales and revenue tracked somewhat downward in 2007, 3PLs had more luck finding new customers this year, with 56 percent growing their customer base by 10 percent or more, compared to 54 percent in 2007.
This trending generally reflects the short-term, counter-cyclical nature of outsourcing, as well as ongoing efforts by service providers to diversify their customer base.
“While total revenues/sales were up, we realized a slight decline in profit margin due to increased sales and marketing costs,” observes one survey respondent. “The cost of securing a single new customer or penetrating a new industry is naturally higher than expanding or renewing existing business/customers.”
Some of this slack sales and revenue growth may be partly attributed to service providers targeting new industries as well as business beyond their traditional geographic scope.
3PLs overwhelmingly report that they are growing their business organically through increased cross-selling efforts (82 percent), while a smaller fraction (18 percent) expanded their operations through strategic acquisitions.
In terms of organic sales growth, survey respondents were mixed in how they attract new outsourcing business. One 3PL whose customer base remained unchanged during the past year reports it is mining cross-sell opportunities to develop international business with existing domestic customers, and vice versa.
Instead of specifically targeting new business in different verticals, some 3PLs are looking to become more integrated with current customers across supply lines as demand for comprehensive solutions moves beyond pure transactional services.
This may similarly entail developing capabilities outside of conventional disciplines to expand existing outsourcing relationships.
“We are diversifying our capabilities into areas such as kitting and pick-to-pack, where a need did not necessarily exist in the past,” shares one service provider.
Alternatively, 3PLs indicate they are purposely diversifying customer outreach to become “more recession proof” and to “mitigate significant exposure to one company.”
A flourishing global economy, combined with a deflated U.S. dollar, has made U.S.-manufactured products more attractive, triggering a shift among some service providers looking to target global markets from the export side.
Service providers are also attuned to leveraging existing resources and capabilities, as well as market expertise, to entertain new business growth in verticals or areas where logistics and supply chain dynamics are proximate—high-value cargo, for example.
One 3PL describes piggybacking on its core disciplines in the retail and healthcare sectors to expand into prescription pharmaceuticals and electronics.
Last year, we observed large 3PLs attempting to deepen their market penetration by courting small and medium-sized businesses (SMBs) with world-class capabilities. In light of the current economic slump, this trend has reversed itself, according to one 3PL executive.
Given the associated costs of attracting smaller-yield business, “larger” players are instead targeting “larger” companies, looking to expand working relationships, and mine new business opportunities through deeper chains of custody. Consequently, SMB outsourcing is trickling down to smaller 3PLs in spades.
Another trend that has evolved over the past three years is that a best-in-class global service provider is largely untenable given the specialization of logistics and supply chain functions, the geographic scope of supply and demand markets, and the increasing importance of customer service.
In the three years since IL began tracking this data, there is hardening consensus that a majority of 3PLs recognize their strengths and weaknesses and believe businesses should consider multiple outsourcing partnerships.
This trend is reflected in the fact that 55 percent of 3PLs surveyed this year indicate customers should partner with more than one service provider, while 30 percent feel customers should work with only one partner.
Additionally, 15 percent of 3PLs suggest that outsourcing decisions are contingent on customer needs. In sum,—70 percent favor considering more than one 3PL relationship, which validates 2006 and 2007 data.
Arguably, many outsourcing customers still prefer the simplicity of having one point of contact, or one throat to choke, managing their supply chains—but this does not preclude multiple 3PL relationships.
The growth of outsourcing, in terms of geographic scope and process sophistication, has amplified the relevance and role of fourth-party logistics providers (4PLs) and lead logistics providers (LLPs). Among 2008 survey respondents, 78 percent offer LLP services, a three-percent increase over the four-year mean average.
Sequencing Global Outsourcing
The pace of globalization continues to shape outsourcing’s evolution, as world-wandering businesses recognize the efficacy of divesting non-core logistics and supply chain functions, especially in areas and markets that are new to them.
3PLs remain committed to meeting their customers’ changing global needs both near and afar, with 45 percent serving North America, 42 percent operating globally, and 13 percent offering U.S. services only, according to this year’s survey.
While the quest for low-cost labor remains a cardinal objective for offshore speculation, prevailing U.S. economic conditions and a weakening dollar provide further incentive for businesses to consider growth opportunities in emerging consumer markets—marrying sourcing and selling strategies, where appropriate, with global expansion plans.
In turn, they rely on 3PLs and their wealth of global resources, facilities, management, and technologies to penetrate new markets and integrate supply and demand chains. Nearly 30 percent of 3PL respondents offer global expansion capabilities specific to sourcing and selling, compared to 18.4 percent in 2007.
As a direct reflection of evolving and impending U.S. Customs regulations, such as 10+2 Importer Security Filing, 69 percent and 40 percent of 3PLs, respectively, provide import/export/customs and global trade solutions, both equal to last year’s data.
In addition to serving as functional vendors, third-party logistics providers are fast developing the value-added logistics bandwidth necessary to help customers strategically align global supply chains.
3PLs are evolving these capabilities in two ways: through global expansion and investment in offshore facilities; and through the appreciation, application, and integration of technology-driven supply chain solutions and services.
From an operational perspective, 70 percent of global 3PLs responding to this year’s survey indicate they own and operate offshore facilities, with 22 percent operating more than 100 offshore facilities, 35 percent maintaining between 10 and 100 locations, and 35 percent operating fewer than 10 sites.
In 2007, only 17 percent of polled companies reported more than 100 offshore facilities, with 46 percent managing between 10 and 100 locations, suggesting large 3PLs are swiftly expanding their offshore presence.
In terms of geography, Asia remains the top offshore target with 88 percent of 3PLs locating operations there, followed by Europe (81 percent), Latin America (49 percent), Southeast Asia (40 percent), and the Middle East (19 percent.)
For small 3PLs wary of sinking capital into proprietary facilities and assets abroad, yet eager to follow demand into new markets, opportunities to find alliance partners abound.
Shared regional networks and operational capacity, combined with overarching technologies that integrate globally, help service providers compete, regardless of size or capital outflow.
Meeting the Challenges
Complementing this outward growth, 3PLs are appropriately expanding and tailoring their service and technology footprints. To more completely understand how 3PLs are evolving internally, consider what they perceive to be outsourcers’ greatest challenges.
Not surprisingly, 88 percent of surveyed 3PLs cite cutting transport costs as a top priority for customers, followed by reducing inventory (60 percent); business process improvement (52 percent); reducing assets and/or infrastructure (46 percent); technology strategy and implementation (46 percent); and managing supply lines and improving customer service (45 percent).
As an interesting aside, 80 percent of outsourcers voting in our annual Readers’ Choice Top 10 3PL Excellence Awards say they value customer service above all else. This suggests that what 3PLs don’t know, or fail to acknowledge, may steal business away while they focus instead on cost optimization algorithms.
Several 3PL respondents observe that reducing total costs trumps transportation optimization, which demonstrates 3PLs are aggressively trying to move outsourcing relationships beyond silo optimization to expand their value proposition and increase revenue. Many customers, however, are still focused on rapid ROI and quick-fix, cost-cutting measures.
“Many times, customers want to see transport cost reduction, but are wary of process change, vendor management, or other areas that can lead to significant cost savings,” one 3PL executive observes.
“Many customers are reactive to current market conditions but not yet considering business process changes that could positively address cost pressures,” reports another.
Lengthening supply chains and rising fuel costs place a premium on transportation optimization, which shippers, carriers, and 3PLs find increasingly difficult to manage. Many are looking at ways to more efficiently flow product through distribution networks to account for these difficulties.
Reducing inventory when the economy is soft and consumerism is flat presents its own inherent challenges. Of late, businesses have been less efficient at managing product in the system, largely as a result of demand volatility and lengthening supply lines.
This has created a buildup of unsold inventory beyond safety stocks, presenting a major bleed to the bottom line as warehousing and inventory-carrying costs continue to rise.
Where logistics service providers are proving their mettle, particularly from a global perspective, is helping customers configure and control their supply chains to better rationalize and position inventory.
Relying on 3PLs to cover their assets enables businesses to more proactively engage and benchmark vendors and carriers to squeeze out costs and eliminate inefficiencies before they trickle out of control—call it strategic optimization.
Consequently, inbound logistics and integrated logistics services remain a top priority according to service providers, with 92 percent and 86 percent offering such capabilities—both up three percent over 2007 data.
Over the past five years, the percentage of 3PLs offering inbound logistics capabilities has remained static (88 percent), suggesting that demand-driven strategies have become acyclical—appropriate in good times and bad.
Service providers are similarly “teching-up” to help customers better anticipate demand and control inventory from point of origin; 12 percent and 35 percent of survey respondents invested in demand management and vendor management technologies, respectively, according to this year’s survey.
More broadly, 94 percent and 88 percent of 3PLs report offering Web enablement and visibility capabilities. This data reflects a remarkable 35-percent and 13-percent increase over four-year mean averages.
The Path of Least Resistance
The traction of inbound logistics capabilities among 3PLs, however, does not necessarily reflect broad industry acceptance.
Even as 3PLs invest in facilities, assets, and technologies that facilitate or even warrant demand-driven strategies, when push comes to pull many customers take the path of least resistance, relying on upstream suppliers to move product.
Reducing inventories and assets and improving business processes remain outsourcers’ greatest challenges, according to surveyed 3PLs, indicating businesses by and large are not specifying inbound moves.
A hands-on approach to managing inbound transportation necessarily effects a sea-change business process shift, allowing shippers the visibility and control to consolidate shipments, rationalize capacity and asset requirements, and reduce inventory-carrying costs.
Inventory control, especially given unbridled fuel and transport costs, remains a common thread wending its way through supply chains from global suppliers to stateside DCs.
Uncertain economic conditions and slackening consumer demand raise the importance of supply chain scalability and flexibility as measures to mitigate risk and contain costs.
Some manufacturers, for example, are tasking their 3PLs and vendors with value-added activities such as kitting; packaging; source tagging; and postponement to customize product per specific end-user demands, rationalize inventory, reduce product obsolescence, and create additional flexibility. This trending is especially significant as businesses begin selling product into new consumer markets.
Among other value-added logistics services, inventory management and vendor management rank high among service providers, with 77 percent and 65 percent offering such capabilities.
Greater attention to inventory management is also steering many global businesses into uncharted territory, as green initiatives, a spate of product recalls, and further cost-cutting measures magnify the importance of reverse logistics processes.
While some governments have mandated aftermarket support for certain industries (notably the EU’s waste electrical and electronic equipment (WEEE) directive), businesses across all verticals are beginning to recognize that supply chain efficiency and environmental sustainability go hand-in-hand.
The challenges of managing product from raw material sourcing to recycling, then building enough redundancy in the supply chain—both downstream and upstream—to manage demand expectations and supply exceptions, are increasingly outsourced to 3PLs.
Among survey respondents, 84 percent offer reverse logistics services, 49 percent contingency/crisis planning capabilities, and 40 percent product lifecycle management.
Optimizing Transportation—or Splitting Atoms
While businesses continue to expand globally, looking for cheaper production networks and promising consumer markets, reducing transportation costs remains the litmus test for successful outsourcing partnerships.
That said, success in today’s demanding transportation segment is increasingly measured by infinitesimal degrees. Beyond the strategic, 3PLs are committed to addressing their customers’ tactical optimization needs.
In a soft domestic freight market, capacity has been less of a concern than in years past, placing direct pressure on service providers and their carrier partners to deliver the impossible—find, then cut, hidden soft costs.
In terms of technology investment, 65 percent of service providers are powering up with transportation management systems (TMS), either through IT vendor partnerships or with homegrown systems—far more than any other functional area.
Having TMS capabilities, and the capacity to integrate with other areas of the enterprise, allows 3PLs to manage and evaluate transportation costs and performance at a more atomic level.
At the same time, the emerging presence of TMS-enabled 3PLs suggests more shippers are outsourcing both the operational and technological aspects of transportation.
From a services perspective, truckload (TL) and less-than-truckload (LTL) remain in high demand, offered by 97 percent and 92 percent of 3PLs, up from 95 percent and 91 percent in 2007.
Even with capacity flush, there has been a noticeable shift toward moving more long-haul freight off highways and onto railroads and inland waterways to reduce fuel spend.
While intermodal traffic has been down on the global import side, demand remained steady domestically—80 percent of 3PLs provide intermodal services and 69 percent offer rail-specific transportation solutions, echoing data from the past four years.
As shippers continue to offload equipment and asset liabilities, 3PLs in turn are augmenting their networks and services to account for this demand. Among survey respondents, 48 percent offer equipment/driver services and 30 percent provide fleet acquisition and management capabilities—a four percent and six percent increase over last year’s data, respectively.
The number of 3PLs providing dedicated contract carriage, long a popular option for shippers when capacity is tight, demand is stable, and pricing is immaterial, surprisingly saw an uptick this year, with 72 percent of survey respondents offering such capabilities, compared to 66 percent in 2007. This figure may indicate that when shippers prioritize customer service, cost is irrelevant.
Liability exposure and customer service are also important to shippers with product that requires specialized handling. 3PLs that can deliver products with unique transportation and installation needs are expanding their value proposition—which is critical with high fuel and transport costs and fierce competition to fill capacity.
Final mile and direct-to-home services continue to saturate the market, with 44 percent and 47 percent of survey respondents catering to these demands.
3PLs also face the heat of increased transportation and equipment costs, manifested in the fact that only 12 percent identified themselves as asset-based this year, down two percent from 2007. Conversely, non-asset-based service providers climbed two percent, while those operating as both remained equal to last year.
The drop in asset-based 3PLs may be a short-term blip on the radar, but amid speculation about the loss of carrier capacity in the United States, this trend may reflect a similar development among service providers that favor intellectual resources over “working” capital.
Elsewhere on the transportation side, ocean and air cargo services continue to be a source of revenue for global-minded logistics service providers. The forwarding community has proven to be a ripe breeding ground for outsourcing business as traditional forwarders develop value-added logistics capabilities.
The prosperity of other global markets, in light of the U.S. economic slump, has provided welcome opportunities for growth while domestic operations remain sluggish. The number of 3PLs providing air cargo services climbed to 68 percent while 63 percent of service providers report ocean- specific solutions, up seven percent from 2007.
Breaking Down Distribution
The challenge of properly aligning supply to demand impacts how businesses strategically operate distribution and warehousing networks globally and at home.
More than in years past, warehousing and distribution strategies are all the rage, especially with global sourcing and selling dynamics rapidly changing and fuel prices at an all-time high. While transportation-related costs are largely a whim of the global oil market, businesses leverage much greater control over where they position inventory and how they distribute product to market.
Matching last year’s data, 80 percent of 3PLs offer DC management services. Over the past four years, however, the mean average is 68 percent, suggesting that warehouse outsourcing is on a steady upward track.
Operating out of a third-party warehouse gives businesses flexibility in taking non-core assets off the balance sheet, as well as adding and removing capacity as demand dictates.
Faced with swiftly changing global sourcing/selling patterns, equally flux consumer dynamics, and institutionalized transportation costs, U.S. shippers and consignees are realigning their distribution networks to more efficiently and economically pull product to market.
There has been a robust shift in distribution strategy in the United States as businesses move away from centralized big-box DCs to smaller facilities in target markets to streamline increasing transport costs. Where transportation costs are seemingly immutable, 3PLs otherwise see themselves as agents of change on the distribution side.
One service provider reports helping customers “locate additional DCs to reduce local trucking costs; ship full truckload or railcars to these DCs; and increase inventory in the supply chain due to low cost of currency—a strategic design with nuts and bolts results.
Accordingly, demand for 3PLs that can provide objective site selection and location services continues to grow, with 61 percent of survey respondents reporting such capabilities, compared to 59 percent in 2007.
The short-term retail slump has similarly precipitated a few interesting distribution trends. Dropping sales and rising service demands, the opposing risks of running too lean and carrying too much inventory, are compromising retailers and wholesalers alike.
To offset some of these concerns, many are pushing stock farther back in the supply line, or relying on vendor and 3PL partners to assume greater responsibility and cost for static inventory. Consequently, 71 percent of 3PLs provide vendor managed inventory services—compared to a 58 percent mean average over the past four years.
The sputtering economy has also triggered a wave of retail store closings. While some companies are simply eliminating underperforming facilities and focusing on stronger markets, others are completely shifting their focus from retail to e-commerce.
In these circumstances, retailers are likely to consolidate DC facilities as they eliminate direct-to-store shipments. This type of strategic shift places greater emphasis on DC fulfillment capabilities. Perhaps reflecting this swing, 83 percent of surveyed 3PLs provide fulfillment services, up 10 percent from last year.
The changing face of the distribution and warehousing environment is manifest in adaptations within the four walls as well. Stateside businesses transitioning to more decentralized networks, therefore closer and more responsive to demand, have greater need for speed and throughput efficiency.
For Web fulfillment, this may require a more sophisticated internal warehousing setup that can handle greater frequencies of single picks and plug into other areas of the enterprise. Accordingly, 46 percent of service providers say they are investing in warehouse management systems, and 82 percent provide pick/pack and subassembly activities.
3PL facilities bringing in bulk shipments for reconsolidation and distribution to retail stores also require efficient processes, which generally assume a more strategic design—beginning with the facility itself.
Third-party orchestrated cross-dock facilities continue to grow in force, especially as businesses become more experienced capturing demand signals, appropriating pull strategies to scale and expedite inventory moves, as well as reduce inventory-carrying costs.
The number of 3PLs providing crossdocking services climbed considerably, with 93 percent reporting such capabilities—a 21-percent increase over 2007 data.
Distilling the Top 100 3PLs
Inbound Logistics’ Top 100 3PL Providers list provides an appropriate conclusion to our 3PL Perspectives section. Our annual directory serves as a qualitative assessment of service providers IL editors consider best equipped to meet and surpass your evolving outsourcing needs.
Distilling the Top 100 3PLs is never an easy task, and the process becomes increasingly difficult as more 3PLs enter the market and service providers from other functional areas develop value-added logistics capabilities.
IL editors selected this year’s class of Top 100 3PLs from a pool of more than 300 companies through a diligent process of collecting and evaluating surveys, personal interviews, and online research. The service providers we selected are companies that offer the diverse operational capabilities and experience to meet readers’ unique needs.
After you thumb through this section, we would like to know what you think. How much do you value the 3PL issue? Does the information we provide serve as a resource for your business? Does this information support trends you see in your own day-to-day operations?—Email us: [email protected]