Third party logistics grows up
The latest study of the third-party logistics industry indicates that contract distribution has left adolescence behind and entered adulthood.
By James A Cooke -- Logistics Management, 11/1/1998
The third-party logistics (3PL) industry has survived its adolescence and is entering young adulthood ... that much is clear from the fifth annual study of trends in the 3PL business. "The industry is maturing somewhat," says Dr. Robert C. Lieb, one of the study's authors. "The growth rates are slowing down, while the big guys continue to get bigger."This research was conducted this summer by Lieb, professor of supply chain management in Boston-based Northeastern University's College of Business Administration, and Hugh L. Randall, a group vice president at Mercer Management Consulting Inc. in Lexington, Mass. As with four previous studies (conducted in 1991, 1995, 1996, and 1997), Lieb and Randall surveyed both third-party providers and their customers.
For this year's study, the pair approached 500 of the largest U.S. manufacturing companies as well as chief executive officers of 25 major contract logistics companies. Top logistics managers at 94 manufacturers returned questionnaires, while 23 of the 25 CEOs contacted agreed to phone interviews.
3PL Use Hits Plateau
This year's survey confirms that the use of third-party logistics providers has leveled off. Some 65 percent of the 94 shipper respondents said their companies employed contract logistics providers. This rate is identical to the percentage reported in last year's survey. In addition, 3PL users reported using fewer outsourcing companies. Only 40 percent of users in this year's study said they employed more than one 3PL provider, compared to 54 percent last year.
Lieb believes that the decrease in vendors used reflects both continued user interest in one-stop shopping and an expansion of service offerings by providers. "A lot of companies are looking for a single provider that will do the whole thing for [them]," he notes.
The corporate decision to hire third-party services continues to be triggered by specific events, the survey found. The most frequently cited catalyst was corporate restructuring, followed by benchmarking and depressed company earnings. The study also found that managers in other departments such as finance or manufacturing continued to have a say in the decision to outsource logistics.
When it comes to contract logistics, some 66 percent of shipper respondents said that the function most frequently outsourced was transportation services. Ranked second was warehouse management, followed by shipment consolidation. (See Figure 1.)
In line with previous study results, shippers continued to turn to third-party logistics as a way to manage global distribution. Though 54 percent of respondents said they employed 3PL services strictly in the United States, 40 percent used such services for both domestic and foreign operations, and 6 percent used the services solely for international logistics. Interestingly, 87 percent of those companies engaging international 3PL services did so in Western Europe. (See Figure 2.) Companies hiring third parties to manage overseas activities most often hired a 3PL for transportation and distribution. (See Figure 3.)
The amount of money paid to 3PL companies continues to increase. During this past year, the average 3PL customer spent 22 percent of its logistics budget with a contract logistics company. In fact, the percentage of respondents spending in excess of 20 percent of their logistics budgets on 3PL services reached an all-time high with 31 percent. "The longer you use it, the larger percentage of your budget you'll give to a third-party provider," says Lieb.
The study found that outsourcing may be causing fewer organizational disruptions than in the past. Though one-third of respondents said 3PL use had a negative or very negative impact on employee morale, another 31 percent of those surveyed reported a positive or very positive effect.
At the same time, managers are changing their thinking about outsourcing's financial benefits. This year, only 59 percent of users reported that outsourcing had a positive or very positive impact on logistics costs compared to 76 percent in the 1997 survey and 87 percent in the 1996 survey.
When asked to comment on industry trends, shippers most often noted the continuing development of information systems on the part of providers. The trend mentioned second most often was the continued entry of new providers into the contract logistics market.
The Providers' Perspective
For their part, when asked about the year's most prominent developments, the 3PL CEOs surveyed cited the need to form alliances to provide the range and geographic services demanded by clients. In fact, 18 of the 23 companies that participated in this year's study said they had formed alliances--in many cases, with multiple partners. When asked to explain the benefits of an alliance, most CEOs answered that it was an effective means of broadening the company's service offerings.
Customer demand for international services has prompted many 3PLs to seek partners for overseas coverage. Twenty of the 23 3PL CEOs said their companies operated outside U.S. borders. In fact, 19 operated in Canada and 16 in Mexico. On top of that, 17 of the companies had established foreign subsidiaries. When asked which international services were the most lucrative, the CEOs ranked transportation management services in first place and warehousing second. (See Figure 4.)
Despite all the overseas expansion, most CEOs are projecting moderate growth for their companies and for the industry overall. On average, most CEOs believed that industry revenues would rise 19 percent next year and 18 percent over the next three years.
Still, the CEOs see a number of opportunities ahead for growth. The opportunities cited most often were continued globalization, expansion of integrated supply chain services, and further systems development. (See Figure 5.)
Growing Pains
The providers' optimism notwithstanding, the industry still faces some hurdles. In the provider survey, CEOs identified three specific problems: recruitment and retention of qualified employees, information-technology costs and development, and an inadequate pricing system. (See Figure 6.)
One other cloud over the industry has been the well-publicized string of divorces between 3PL providers and customers. Some 15 of the 22 CEOs surveyed reported that at least one customer had terminated a contract in the past year. As for the shipper survey, 43 percent of the respondents said they had canceled a contract.
When asked why agreements had been severed, CEOs cited several reasons. They included management change at the client organization, problems meeting service targets, client failure to recognize its own organizational problems, sale of the business unit served, and change in the client's strategic direction.
The reason most commonly cited by shippers, however, was non-performance by the third party. As for what happens when a contract is ended, some 89 percent of the shipper respondents said they had found another provider.
More Selective Alliances
Lieb, however, does not view the increase in contract cancellations as a sign that third-party logistics has lost favor in corporate America. In fact, he contends that the rapid growth in contract distribution naturally would start to yield some failures. "The more contracts you have, the more chances that they will go bad," he points out.
In an attempt to avoid costly breakups, Lieb predicts, providers in the future will seek longer contracts than the three-year pacts commonly signed today. "3PLs are getting more selective in terms of clients," he says. "The providers are going to look for clients who want longer-term relationships.
What Third-Party Providers Say...
Which International Services Are Most Lucrative?(Weighted rankings of CEOs' responses)
1) Transportation management services
2) Warehousing
3) Integrated supply chain services
4) Freight forwarding
5) Value-added services
Where Are the Growth Opportunities?(Weighted rankings of CEOs' responses)
1) Continued globalization
2) Further integration of supply chain activities
3) Further information systems development
4) Reduce customer supply chain costs
What Are the Industry's Biggest Problems?(Weighted rankings of CEOs' responses)
1) Staffing problems
2) IT system development/costs
3) Development of adequate pricing system
4) Unrealistic customer expectations
5) Expensive and complex selling process
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