The big news for supply chain executives to know about 3PLs is that the business is in the midst of big changes. The good news is that the shipper is driving many of these changes and, to a large extent, is in an enviable position to exert considerable leverage in terms of price and services.

In 2005, revenues topped $100 billion for the first time, an apt indication of the sector's current expansionary mode. Two general areas account for the bulk of revenue growth-domestic supply chain management and international logistics. In the case of the first, 3PLs are taking on added services to supplement traditional logistics functions; in the case of the later (which is growing faster than the domestic market), they are following customers abroad as they expand global production and distribution.

The ongoing transformation of the 3PL sector reflects the impact of both these factors. While fragmentation continues to be a characteristic of the domestic 3PL market, with many smaller and niche-specific players, the growing levels of demand for 'one stop shopping' integrated supply chain services is driving a trend toward consolidation. More and more, large customers are outsourcing not just U.S. logistics functions to 3PLs but multiple supply chain responsibilities.

In doing so, customers are pushing 3PLs higher up the value chain and, correspondingly, expecting them to deliver a greater value proposition. These evolving business models look to the 3PL to provide supplemental services. That's not to suggest that conventional services-warehousing, customs clearance, order fulfillment-are no longer important, but rather, that customers are also looking to their 3PL to provide a spectrum of developing services. These can include such offerings as service parts logistics, reverse logistics, packaging, freight bill payment, consolidated procurement. Indeed, more than a few customers are looking to their 3PL to develop and provide the technology backbone to support end-to-end supply chain visibility.

The relationship between customer and 3PL may prove even more inter-linked in the future if, as per preliminary trials, supply chain functions get expanded to the point where 3PLs become responsible for physically assembling and integrating sub-component systems for clients (conversations are underway, for example, where one big 3PL may be responsible for delivering fully assembled doors to the assembly plant of its American automobile customer).

At the same time, according to a recent industry analysis produced by eyefortransport on the 3PL North American Market, “total spending on logistics has reduced and shippers are not ready to pay extra premiums for value-added services.” In this context, contracts are being written between 3PLs and their customers where risks and rewards are more directly shared as fees are tied to ability to satisfy order fulfillment at ever faster cycles (some as short as 1 hour).

The thrust of all these factors is to forge a changed relationship between customer and 3PL. “What shippers need to understand and focus on when it comes to 3PLs,” says Dick Armstrong, President of the supply chain management consultancy Armstrong & Armstrong, “is that it is important for them to carve out relationships with 3PLs that are going to have multi-year 'lives' to them.”

On the global front, 3PLs are being asked by their domestic customers to provide services in international locales, particularly China and Asia. This has prompted the creation of specialized divisions focusing on international. The growing demand for global capability has been a driving force in a wave of acquisition and consolidation over the past few years at the top strata of the sector. Additionally, they are forming special divisions to deliver on these expectations, and the majors are looking to acquisitions of international air forwarding businesses. Even smaller operations, which normally wouldn't be expected to have international capability, are being driven by customers to integrate into provider networks with global reach.

A shift in the scale of companies being provided global 3PL services is underway as smaller and mid-sized enterprises are increasingly availing themselves of the same level of global logistics expertise as multi-nationals. “It is pertinent to note that customers with global operations are reaching saturation point with their list of providers. Thus, a new strategy for the main players is to further focus on small and medium customers who have specialized requirements in a limited region,” notes the eyefortransport report. wt