- THE MAGAZINE
The recent Council of Supply Chain Management Professionals annual global conference was the venue for discussion of two long-standing studies of the logistics outsourcing industry. Both the 2014 Third Party Logistics Study — The State of Logistics Outsourcing, and the 2013 3PL CEO Survey are sponsored by Penske Logistics.
The CEO survey began in 1994 and the State of Logistics Outsourcing study is in its 18th year, so both have provided their authors with a deep perspective on the evolution of logistics outsourcing. During that time, the focus has shifted as the industry and its users have matured. Having said that, much of what is a core part of outsourced logistics has remained consistent — though the complexity has certainly grown with extended supply chains.
One term that has not kept pace with the change is the way we refer to users of third party or outsourced logistics services. It may be for consistency, or it may be a nod to the fact that the top categories of logistics outsourced are transportation, but the term “shipper” is most often used when referring to the user of 3PL services. This does present problems when the driver of the outsourcing is actually the consignee.
Since much of the discussion of outsourcing contained in these studies (and others) focuses on sourcing and the latest trends are looking at omni-channel challenges, the enterprise driving the outsourcing decision is somewhere on a continuum from origin source to final customer. Add returns, recycling, and reverse logistics, and though there is a lot of transportation involved, the principal party calling the shots is not always in the classic role of “shipper.” So, borrowing from a common transportation concept, WT100 refers to the enterprise in the role of driving the supply chain and, therefore, the outsourcing decisions, as the beneficial owner of the supply chain.
Information and information technology continue to play significant roles in supply chain management and outsourcing decisions. While some are still trying to define “big data,” others are struggling with how to define a role for big data in their supply chain. Less than one third of beneficial owners of a supply chain say they are in the midst of a big data initiative and just 27 percent of 3PL executives report they have an active initiative. Both the service providers and the users of those logistics services strongly agree that data-driven decision making is essential to the future success of their supply chains.
Responsiveness and agility of the supply chain are cited as the main benefits of using big data, followed by better supply chain visibility. Internal hurdles center on IT infrastructure and the disconnect between the supply chain and IT operations. The State of Logistics Outsourcing describes the space between the outsourcing enterprise’s expectations of what is “necessary” and their satisfaction with 3PL capabilities as the IT gap. That gap has continued to loom large. Responses that IT capabilities are a necessary element of the 3PL’s expertise have spent most of the last 12 years in the 90 percent range. Satisfaction reached 54 percent in 2010 and has hovered there since. They do not necessarily imply the 3PLs aren’t working hard to develop IT capabilities. It could mean they are not losing ground as the complexity of the needs grows.
The volume of cross-border trade has increased considerably. Lead time, risk and continuity, sourcing (portfolio) differentiation are all rising in importance, says the State of Logistics Outsourcing. Trade agreements are also affecting where companies choose to source or the markets they serve. There are more variables and more complexity in supply chain management — beyond the standard issues of production and goods movement. In many cases, global trade management falls to the logistics function (23 percent) and about half as often to compliance (13 percent) or procurement (12 percent).
Companies are selecting 3PLs on the basis of their ability to provide continuous improvement (55 percent) and direct industry experience (49 percent). They also tend to favor 3PLs with which they have an ongoing relationship (42 percent).
Relationships have also become more collaborative over the last three years, according to both 3PLs and the enterprises employing them.
Adding to the argument that there is a widening skills gap, as companies reduce the number of 3PLs in favor of building deeper relationships, the role of a supply chain manager also shifts from a pure functional management role to one of relationship management. This is further tested when those relationships start to move outside the supply chain and involve new partners — including competitors.
Inventory management is critical to moving forward in an omni-channel strategy. Retailers have to know where inventory is, regardless of channel, in order to meet the consumer need, and that involves not only inventory accuracy but flexibility in the distribution network. Inventory management is an area which the survey shows companies are reluctant to shift to 3PLs.
GDP growth in developed nations was affected by the recession and will continue to feel those effects as growth in those markets remains very low. The skills to address the “new normal” in supply chain management are in short supply, and this is exacerbated by the fact the industry is already reporting a talent shortage. There will need to be more effort in skill development and recruitment to address these needs. The skills needed in logistics are also shifting, as the sourcing discussion highlights, because more responsibilities are falling to the logistics function.
Logistics outsourcing has continued strong growth in 2012, albeit at a slower pace than the prior year. Overall, global 3PL revenues grew to $676.9 billion in 2012 vs. $616.1 billion in 2011. While that’s a respectable 9.9 percent, the rate of growth from 2010 to 2011 was 13.7 percent.
The strongest regional growth in 3PL revenues was the Asia Pacific at 23.6 percent. Latin America followed at roughly half the pace (12.4 percent). North America exhibited 6.7 percent growth in 3PL revenues while Europe actually declined by 2.6 percent.
There are some striking differences when the prior period (2010 to 2011) is compared. Latin America grew in terms of 3PL revenues by 43.6 percent — more than three times the rate between 2011 and 2012. The “other regions” category also exhibited an impressive 54 percent growth in the period vs. 6.4 percent from 2011 to 2012.
The spending numbers help to put these growth rates into perspective. In the 2011 study period, Latin America represented $39.5 billion in 3PL revenues, just 6.4 percent of the total. By way of contrast, Asia Pacific 3PL revenues were $191.1 billion in 2011 and $236.2 billion in 2012. At 31 percent of the market in 2011 and 34.8 percent in 2012, both the spending and the rise are significant.
Outsourcing logistics functions continues to rise, and 72 percent of companies say they are increasing their use of outsourcing. The 3PLs report seeing a similar trend, 78 percent say they see their customers increasing outsourcing. The trend within those numbers is the continued rise of strategic consolidation of 3PL providers. Over half of companies (56 percent) report reducing on consolidating the number of 3PLs they are using.
Users of outsourced logistics services report satisfaction with the relationship (90 percent). This is likely driven in part by results the 3PLs are able to deliver. Interestingly, the rate of return on results looks a little lower when comparing 2012 to 2011. Keeping in mind the different makeup of the respondents year to year, the results continue to track closely for the two periods.
Logistics fixed asset reduction continues to offer the largest return at a 23 percent reduction reported in the current study. That tracks closely to the 26 percent in the prior study. Similarly, logistics cost reduction stands at 11 percent versus 15 percent in the prior-year study.
Other measures that continued to deliver positive results include order accuracy and order fill rates.
While there are signs of the continuing maturity of outsourcing relationships, one of the interesting findings of the current survey is that nearly half of the users of 3PL services registered an interest in collaborating with other companies — including competitors. The number stood at 41 percent in the 2011 data and increased to 48 percent in the current study.
Though the study’s authors do not suggest this, one reason for the increased openness to collaboration may be in what companies are outsourcing. The top five areas for outsourcing are what the authors classify as operational and repetitive activities. These include domestic transportation (81 percent of companies outsource), international transportation (78 percent), warehousing (73 percent), freight forwarding (62 percent), and customs brokerage (57 percent).
At the lower end of the scale, it’s not surprising to find the more strategic or customer-facing functions are less often outsourced. These include customer service (13 percent), inventory management (17 percent) and order management and fulfillment (18 percent).
From the 3PL CEOs
In a survey of 33 global 3PL CEOs conducted by Dr. Robert C. Lieb, Northeastern University and Dr. Kristin Lieb, Emerson College, the number of companies that met or exceeded their revenue projections in 2012 was split almost perfectly in half. Profits were a different story — 77 percent of those responding on profit said they were profitable, 6.6 percent broke even, and 16.6 percent said they were unprofitable.
The global survey noted the majority of CEOs believed that within the region where they operated, 3PLs had been profitable.
CEOs in all three regions are generally optimistic about company and industry growth prospects over the next one and three-year periods, according to the survey results. But, the survey’s authors point out, “It is worth noting that company one- and three-year projections were both down in the Asia-Pacific region.”
Looking at the growth projections by company, 3PLs operating in the North American region projected growth at 11.5 percent. The prior-year projection was 10 percent). Europe and Asia-Pacific showed lower projections than the prior year. The 3PLs in Europe forecast 6.4 percent growth vs. 7.2 percent the previous year. The Asia-Pacific 3PLs forecast 9 percent growth vs. 11 percent the year before.
Three-year projections were higher for North America and Europe, 14.6 and 10.3 percent, respectively. These were up by 4.2 percent and 1.3 percent, respectively, over the prior three-year forecast.
The CEOs look for industry growth in the North American region to be 6.6 percent in the coming year and average 8.3 percent over the next three years. The CEOs see 4.1 and 5.9 percent growth for the European industry during similar periods. In the Asia-Pacific region, the projections are inverted, with faster industry growth on the short term (8.6 in the next year) and a slower 8 percent over the next three years.
While the CEOs generally believe that revenue growth through acquisitions will be very modest over the next three years (8.13 percent in North America, 11.6 percent in Europe, and 3.7 percent in the Asia-Pacific), they do see signs that the private equity companies are again showing interest in 3PL acquisitions.
While near-shoring has gotten a lot of attention and sparked discussion in recent years, the CEOs first-hand experience may offer a contrasting view. Two-thirds of the North American CEOs indicated that some of their key accounts were moving in that direction, with most of the movement being from the Asia-Pacific to Mexico. The industries most frequently cited as moving in that direction were automotive, high technology, and consumer goods.
In contrast, only one European CEO indicated that any of their key accounts have moved in the direction of near-shoring.
While only three of nine Asia-Pacific CEOs indicated some key accounts had moved toward near-shoring, seven of nine reported customer manufacturing shifts from China to other Asian locations, most commonly Vietnam. Those shifts have been primarily driven by rising wage costs in China.
When asked about opportunities, the CEOs had differing views by region, but some common themes included expansion of e-commerce and e-fulfillment and expanding business with existing customers.
Regulatory challenges appeared as significant factors for all regions, and most CEOs were also concerned about finding and keeping good logistics talent. For the European CEOs, the shrinking customer base was a concern, which dovetails into their answer that they are focusing on Eastern Europe and Russia as market opportunities.
Environmental sustainability is a focus for the 3PLs, and the companies responding to the survey continue to be heavily committed to environmental sustainability issues. Eleven companies began new green initiatives during the year. Nineteen expanded existing sustainability programs. Three believe their companies have been very effective in using their “greenness” to differentiate themselves from other 3PLs, twenty believe they have been effective, and eight believe they have not been effective in doing so. The most commonly used standards in selecting specific sustainability projects are ROI, payback period, and the value of marketing collateral.