Global Logistics: 2008 3PL Utilization Survey reveals a new twist

Our recent research paints a clearer picture of current 3PL usage and validates the subtle emergence of “hemispheric supply markets.”

By Brooks Bentz, Partner, Accenture -- Logistics Management, 3/1/2008

General third-party logistics (3PL) Usage
Thinking Hemispherically
What to Expect?

We certainly won’t be stopping any presses by reporting that the use of third-party logistics (third-party logistics (3PL)) providers continues to grow as a business practice, spurred by growing capabilities and the emergence of new hubs of business in emerging markets that are challenging the dominance of developed economies—what Accenture refers to as the “multi-polar world.” And I won’t be breaking any new ground by advising that as multinational companies work to tap new material sources and markets, their best recourse is often to work with third-party logistics (3PL)s that know the terrain and already have the local infrastructure that most of their clients lack.

However, we’re happy to report that there is, in fact, an interesting twist to the current third-party logistics (3PL) discussion: More companies are beginning to re-revaluate their offshore commitments, a move that could change how shippers will manage their third-party logistics (3PL) relationships in the future. The driving issue here is risk—volatile labor rates, political uncertainty, raw materials costs—combined with the clear disadvantages associated with moving goods several thousand miles. As a result, an increasing numbers of companies and third-party logistics (3PL)s are starting to think in terms of “hemispheric supply markets.”

Guided by this thinking, companies are placing a greater premium on shorter transport distances, and thus are choosing more on-shore or near-shore locations for sourcing and manufacturing. Pat Byrne covered this very topic in his column “Low cost labor: Think hemispherically”.

Recognizing that even important change is often subtle, Logistics Management and Accenture recently launched a survey to get a better handle on current third-party logistics (3PL) usage and to see if we could somehow validate the emergence of “hemispheric supply markets.” Working with the responses of just under 200 Logistics Management readers who buy/specify third-party logistics (3PL) services, we were able to paint a pretty clear picture of how many third-party logistics (3PL)s shippers are using; which specific services they’re relying on more today; whether or not they’re bringing any services back in house; and if they’ve recently changed their offshoring plans and why. Here’s what we found.

General third-party logistics (3PL) Usage

One key finding in this year’s third-party logistics (3PL) utilization survey is that shippers are diversifying. In an era of consolidation that finds shippers looking to streamline and simplify supply chains, the quantity of third-party logistics (3PL)s used by our respondents is actually trending upward. As shown in Figure 1, this is occurring domestically and internationally.

Figure 1: How many different 3PL providers do you currently have domestically and globally compared to three years ago?

Across all the service areas typically provided by third-party logistics (3PL)s, not one showed a decline in interest or use (Figure 2).

When you consider network design and network strategy, getting these capabilities etched in stone is more critical to supply chain performance today than ever before. Yet the vast majority of companies report that they don’t have the skills or technology to do the network design work on their own—nor should they. After all, network strategy and design are not repetitive, transaction-based activities like freight bill audit/payment or DC operations. They are occasional must-do’s that are often managed better by outside resources.

Figure 2: Which of the following services do your 3PL providers currently provide to you?

Moreover, the daunting complexity of today’s supply chains (combined with rapid globalization and rampant mergers and acquisitions) makes the network strategy/design picture even thornier. Expert, outside involvement is frequently the key to identifying and realizing the greatest synergies, cost-savings, and new-business opportunities.

There will always be ebb and flow in demand for third-party logistics (3PL) services. However it is interesting to see which functions are current targets for in-sourcing—taking back services previously outsourced (Figure 3).

Figure 3: Which of the following functions have you had to move back in-house as a result of insufficient capabilities from your 3PL providers?

Some of these, of course, are “natural reclamations” where in-house organizations are building needed skills or adding decision support technology that enables a “self-service” model.

Transportation planning, carrier management, and carrier procurement are common examples of this trend. However, carrier procurement can be a bit misleading because many buyers use third party technology and consulting services even though an in-house team is responsible for the results. And while only 8 percent said they recaptured network design, even this figure is surprising given the infrequent and specialized nature of the work.

Thinking Hemispherically

Third party logistics management challenges are often associated with “off-shoring.” This is certainly not a new phenomenon. However, the scale—a gigantic leap in the number of players sourcing raw material and finished product overseas—is relatively new. Still, the risk-related concerns mentioned earlier are increasingly top of mind: Almost a third of respondents said they’ve either deferred going off-shore or have recently retrieved operations from overseas due to rising transportation costs (Figure 4).

Figure 4: If you have recently made or are considering changing one of your current sourcing or manufacturing areas of origin, what is the reason?

In a related question, survey recipients were asked the reason for changing their sourcing venues (Figure 5). Cited factors such as logistics costs, cost of goods sold, transit times, service consistency, and visibility are a virtual laundry list of support for the “hemispheric supply market” trend noted earlier.

Figure 5: Have transportation costs caused you to shift off-shore activities over the past two years?

The issue of transportation costs is noteworthy. Most respondents reported increased costs, but a significant number reported the opposite. One reason could be a divide between companies that strategically source transportation (on their own or with the help of a third-party logistics (3PL)) and those that do not. Our experience has been that the former group consistently enjoys lower transportation costs, better service, and greater stability—even in markets with tight capacity.

What to Expect?

Looking ahead, there seems to be a prevalent “wait-and-see” perspective. Transportation modes, fuel costs, and capacities are not expected to change dramatically this year.

A lurching economy does not portend large spikes in business activity, even though fundamentals are more-or-less sound and consumer confidence could be kick-started by a few positive messages. The “hope factor” associated with upcoming elections could provide a spark; however, global events, such as political and environmental turmoil, are (as always) unpredictable.

Of course, calm or unclear expectations are a terrible excuse for complacency, vigilance, and poor planning. In fact, uncertain times are often good times for reflection, analysis, reassessment, and re-engineering, like fine-tuning an existing network or portfolio of services. Uncertain times also represent opportunities to reexamine roles and responsibilities:

What should be outsourced?
What should remain (or be brought back) in-house?
What is the best organizational structure for managing external and internal logistics operations?

Buyers of third-party logistics (3PL) services can also be working on ways to continually derive greater value from the relationship—without undermining the win-win context. Third-party logistics providers, on the other hand, can be exploring ways to continuously improve margins in an environment of downward pricing pressures and rising costs to serve. The only clear answer to both concerns is real collaboration.

Still, frank dialogue about goals, objectives, and performance won’t be enough. It’s also necessary to understand the nature of both sides of the business, and even more importantly, each side’s cost to operate and serve. Without this picture, it is virtually impossible to know which expectations are reasonable and which ones are not. Unfortunately, a complete understanding even of one’s own costs is comparatively rare—particularly among third-party logistics (3PL)s. But lacking these insights, a complete infrastructure could end up being built on a weak, impermanent or inappropriate foundation.