Once perceived as an outsider trying to work its way in, the third-party logistics (3PL) industry is fast becoming an integral part of global supply chains. The growing need for businesses to diversify and delegate as their supply chains become broader and more complex has validated the role of 3PLs in every aspect of logistics.

For several years now, a pair of surveys have documented this change in the role of third-party providers from two points of view: that of the 3PLs themselves and of the manufacturers that hire them.

In 1991, Dr. Robert Lieb, professor of supply chain management in the College of Business Administration at Northeastern University in Boston, conducted the first comprehensive research on the 3PL industry. More than a decade later, that study, conducted with Brook A. Bentz, associate partner with consulting firm Accenture, continues to serve as a benchmark for this industry segment.

The survey covered such topics as actual and forecasted growth, revenues, cost benefits, industry issues, and effectiveness of services offered. This year, logistics executives at 66 manufacturers and CEOs of 20 third-party logistics companies participated in the project.

If there's one generalization that can be made based on the survey results, it's this: After gaining acceptance in logistics operations and growing with forceful speed over the past few years, 3PL providers are settling into their roles as integral parts of their customers' business plans.

That's clearly apparent from the number of manufacturers indicating that they use 3PLs. At 83 percent of respondents, that represents the highest usage rate in the survey's history. And the numbers are rising fast: In 2002, that figure was just 65 percent.

Shippers also are sticking with their providers longer. Of those now using 3PLs, 72 percent said they've been doing so for more than 5 years, an increase of 9 percent over last year. This, too, is the highest percentage ever noted in response to that question.

Not only are more manufacturers than ever using 3PLs, but they also have more confidence in the financial stability of that industry. Eighty percent said they considered the industry to be moderately profitable, while 16 percent called it "break-even" and 4 percent categorized it as very profitable. Only 16 percent of respondents said they had any concerns about the long-term viability of 3PLs. Last year, more than twice as many—34 percent—said they were worried about their providers' prospects.

In light of respondents' increased confidence in their providers, it's not surprising that more than half of the respondents (51 percent) said they would at least moderately increase their use of 3PL services if they had sole responsibility for making that decision. Another 13 percent said they would cut back their usage, and only 2 percent said they would eliminate the use of 3PLs altogether. The remainder, 34 percent, appear pleased with the service they've gotten and said they would leave things just as they are.

What services do manufacturers hire 3PLs to perform these days? As Figure 1 shows, freight payment tops the list, with 72 percent of respondents using that service. Shipment consolidation (66 percent), direct transportation service (62 percent), customs brokerage (62 percent), and warehouse management (60 percent) round out the top five services.

Some of those services, as well as several that were not on that list, are becoming more popular. Warehouse management leads the way, with the number of respondents using 3PLs to perform that function rising by 18 percent compared to last year. Use of shipment consolidation services increased by 17 percent; relabeling and repackaging shot up by 15 percent; freight payment rose by 9 percent; and both order processing and providing customer spare parts increased by 8 percent.

Four out of the five most frequently used services also were named as yielding the greatest cost benefits. (See Figure 2.) Oddly enough, though, only three of the top five services used by manufacturers were also ranked as yielding the greatest logistics service improvement. By that yardstick, warehouse management came out ahead, with 22 percent of respondents noting that it offered the best improvement in service. Freight payment and direct transportation were each cited by 9 percent of respondents. Other service-improving offerings that were not in the top five in terms of usage were order fulfillment, fleet management/operations, and tracking/tracing. (See Figure 3.)

The manufacturers' positive outlook was echoed somewhat by the 3PLs' responses. Despite the tough economy, average annual revenues for 3PLs over the last three years have steadily increased, rising from $1.146 billion in 2000 to $1.864 billion last year. Revenues reported by individual respondents ranged from $80 million to $7.5 billion.

Most 3PLs are depending more on internal growth than on acquisitions for new revenue. This year, CEOs forecast that 15 percent of their companies' revenue growth over the next three years would come from acquisitions. That's higher than the 9 percent in the 2002 survey, but it's still down markedly from their 23-percent prediction in 2001.

Revenue growth resulting from doing more business with existing clients has grown, while growth that's attributed to new business has tapered off. The average revenue growth from new accounts in 2002 was 41 percent, the lowest level in the past three years. Across the respondents, that figure ranged from as little as 10 percent to as much as 75 percent. Conversely, the amount of growth attributed to existing business, which has hovered in the mid-50-percent range for the last three years, hit 59 percent in the most recent survey.

When asked to forecast those percentages for the next three years, however, the CEOs said they expected new business growth to increase to an average of 52 percent. They also predicted that growth from existing business would settle in at 48 percent.

Lieb suggests that this trend stems from the 3PLs' increased focus on customer selectivity. Under pressure from the recession and falling profitability, many third-party providers have begun to focus more on the quality of their accounts than on the quantity. The majority (80 percent) of respondents said they had done just that, and more than half of them said they had intensified those efforts during the recession.

That focus on profitability, moreover, led the 3PLs to drop some unprofitable accounts, renegotiate contracts, and upgrade the quality of service delivered to their remaining customers.

One significant trend noted in both surveys was the increased presence of third-party logistics operators in China. Slightly more than half of the 3PL companies surveyed said they currently provide service in that country. Three have been doing so since the 1980s; the remainder are relatively new to the market. On average, their Chinese operations represent less than 2 percent of their revenues. That figure, however, is expected to rise to 4 percent by 2005.

Although half of the surveyed manufacturers said they make products in China and 70 percent said they sell their goods there, just 39 percent currently use 3PLs to support that business.

One reason for that disparity, Lieb suggests, is that the manufacturers' scale of operations in China may not yet justify the use of third-party services. As shipment volumes increase—and just under half of the manufacturers indicated they expect that will be the case—then the use of 3PLs is likely to increase accordingly.

Nevertheless, the CEOs believe they've been successful in establishing their brands in China, penetrating that market, generating operating profits, and attracting local business. They appear to be correct in that assessment: Less than 25 percent of the manufacturers now using 3PLs in China said they had any difficulty in finding or using 3PLs there. Less than 20 percent, moreover, said that the third-party services they wanted to use in China—specifically, contract maintenance, merge-in-transit services, rate-retrieval services, and information technology support—were not available there.

In years past, the results of these two surveys have been characterized by a notable schism between how 3PL providers viewed their place in the logistics picture and how their existing and potential customers saw them fitting in. But as time goes on and both third-party providers and their customers become more comfortable with their respective roles and relationships, it's clear that their paths are converging. As each learns how best to work with the other, both sides are coming closer together—and that will bring them both closer to supply chain success.

Editor's Note: Copies of the complete survey results for both this year and last year can be found on Dr. Lieb's Web site at http://web.cba.neu.edu/~rlieb. The report is also available from Accenture. Go to www.accenture.com, then to "Research and Insights" in the Industry/Freight and Logistics section.