Companies today face a myriad of demands from shareholders, customers, suppliers, and partners. With a constant focus on improving margins and increasing revenue, businesses have focused on running lean by eliminating waste from all functions, particularly the supply chain. Not an easy task when goods often traverse the globe several times before they reach the hands of the consumer.

In order to maintain a focus on core competencies and ensure the strongest, fastest and most efficient supply chain many companies have turned to third party logistics providers (3PLs) to handle some or all of their logistics needs. In many cases, 3PLs are now operating as an extension of their customers’ business, taking part in supply chain planning and management. For these businesses, choosing the right 3PL partner has never been more important.

What are companies looking for?

A study recently released by the Georgia Institute of Technology, Capgemini, DHL and SAP, has taken an in-depth look at the state of the 3PL industry from the perspective of the users of 3PL services-what customers are looking for and what they are finding available to them from 3PL providers. The study has been conducted annually, tracking the trends of 3PL users for eleven years and providing a comprehensive snapshot of the industry from year to year.

John Langley, Professor of Supply Chain Management, Georgia Institute of Technology, and a lead researcher of the study, says that the decision to use a 3PL comes down to the question of what a company’s core competencies are: “Do we have the expertise? Is there a strategic fit-does focusing on building our own logistics business fit with our strategic direction; and finally, what is the return on investment? Is a proprietary solution better financially than outsourcing?”

Obviously, logistics needs vary from company to company, with some customers looking for a single service and other requiring complete supply chain solutions. Generally, says Langley, larger companies are more likely to outsource due to the greater scale of their logistics needs, while smaller companies are far more likely to outsource functional services, such as transportation.

According to the study, the most commonly outsourced tactical services are transportation, warehousing and customs clearance and brokerage, with some of the key deciding factors being cost, quality, global reach and improved service levels.

Mike Noone, Vice President Logistics Americas, APL, sees many of the same demands, but says that customers are asking for even more. “Because of the constantly changing sourcing patterns, customers want a partner with global scope and a global network.” Coupled with this, says Noone, is the desire for providers that have experience in the international supply chain. “They want partners that are entrenched in locations around the world,” he says.

Customers are also looking for a company with a wide range of services and strong information technology capabilities, an element that is becoming increasingly more critical as supply chains become longer and more complex. “Customers are constantly focused on where the information technology is going. We have a development group that works with customers to develop better systems because the business is always changing,” says Noone. This is a fact that was clearly apparent in the 3PL study. According to Langley, of the companies that were surveyed, 92% saw capability in information technology as a key element of 3PL expertise, yet only 35% were satisfied with the capabilities of their provider. He credits the gap to the constantly rising expectations and technology needs of clients.

It’s an extremely complex and demanding issue, says Jake Holzscheiter, President and CEO, A.N. Deringer. “It’s not as simple as having the right technology,” he says. “You need to have the right skills and vision on how to use it to benefit customers.” This vision, says Valerie Bonebrake, Executive Vice President and Chief Logistics Officer, Meridian IQ, comes from keeping your focus on the client’s needs. “We focus on that discontent and stick to what we do well and the tools we have that we can customize for our clients.”

In deciding which 3PL to go with, most companies have a fairly detailed RFP or RFQ process that asks providers numerous questions and scores competitors on their responses. That was the approach Rolls-Royce Corporation took when deciding on CEVA Logistics (formerly TNT Logistics) as their transportation management supplier. Rolls-Royce is an aerospace and defense manufacturer of gas turbine engines used in the energy, commercial and military sectors.

The company had an established relationship with CEVA Logistics in the UK and Indianapolis, but was looking for a 3PL supplier to work with their operations in North America. “We came up with questions looking at different areas such as quality, cost, delivery and responsiveness. That gave us a well-rounded base of metrics to score suppliers on,” explains Sean Casey, Purchasing and Procurement Manager, Rolls-Royce Corporation.

In keeping with the findings of the 3PL study, some of the critical supplier capabilities identified by Rolls-Royce were customer satisfaction, global presence and technology; added to that was the history CEVA already had with the company’s UK parent. “From a total solution perspective, CEVA was our number one pick,” says Casey.

Leggett & Platt Global Services, a diversified manufacturer of a variety of engineered components and products, has formed a very different kind of partnership with its provider, A.N. Deringer. Leggett & Platt has contracted Deringer solely on the basis of its strength as a customs broker. “We’re a little different from a typical customer in that we tell our customs broker everything they need to do. They get very detailed instructions from us,” says John Wainwright, Customs Compliance Manager, Leggett & Platt Global Services.

Wainwright says that Deringer was selected for a number of reasons, but asserts that the most important factors were “service, service, service.” Wainwright says he was looking for a provider that could take direction and meet demands promptly. Leggett & Platt, like Rolls-Royce, had a long established relationship with Deringer. The success of that relationship, according to Wainwright, “was recently reaffirmed through an evaluation of competitors.”

Finding a true partner

In choosing to outsource, Rolls-Royce made the commitment to truly partner with their 3PLs (the company has other 3PL partners although only CEVA handles the transportation part of the equation). “All our 3PLs are key to our success. There are some things that are not core, but regardless are critical to our success,” says Mark Linville, Director, Production Planning and Control, Rolls-Royce Corp.

CEVA believes this decision has been critical to the success of the partnership. “We have an open relationship. We let them know up front what the costs are, and what changes we feel they need to make in order to facilitate our solution,” says Dave Kulik, CEO, CEVA Logistics.

Although the scope of service is extremely focused, the partnership between Deringer and Leggett & Platt is equally valuable. Deringer handles all of Leggett & Platt’s customs entries and according to Wainwright, “is an extension of Leggett & Platt and are how we touch U.S. Customs.” Deringer also plays a proactive role in advising the manufacturer of potential issues, and receives the same consideration in return.

The issues of innovation and proactive service transformation were highlighted in the 3PL study as an area where customers would like to see improvements from their providers. “We should be more transformational,” agrees Kulik. “We should be giving our customers ideas on how they can change internal processes all along the supply chain to keep inventory moving and reduce the cost of owning inventory,” he says. This sentiment is echoed by Holzscheiter, who says that seeing the changes that are coming and helping customers to be prepared is the most demanding task faced by Deringer.

Ideally, most 3PLs would prefer to have this kind of relationship with their clients. While not commonplace, there is definitely a shift occurring. “Historically, the trend has been for customers to come to us looking for one service. More recently though, customers are looking for multiple services, for more value-added services,” says Bob Spieth, President, Contract Logistics, Ozburn Hessey. The single service customers can present a tremendous opportunity to a logistics provider. “Often these are first time outsourcers and there is an education process that needs to take place at the same time as taking on new business but there is lots of opportunity to add value,” says Spieth. He says that Ozburn Hessey likes taking on these kinds of clients, and as most of their relationships are longer term, first-time customers obviously see the value of developing a long-term partnership.

It’s a long, drawn out process, according to Kulik. “Most supplier/customer relationships are financially oriented. We need to move the focus from what we charge to what we can save,” he says. Kulik believes that only established long term relationships will see this kind of openness and honesty. “When we’ve renewed the contract once or twice we can move toward this kind of relationship,” he says.

That kind of ongoing relationship often signals the move from a tactical service provider relationship to that of a strategic partner. “Logistics is a relatively immature industry,” comments Kulik. “Smart companies have learned that they should scope out their needs up front and then listen to their providers who can tell them ‘here’s what we can do for you if you do these things.’” Bonebrake agrees. “Usually we begin by working on a global trade management issue, then we crossover into helping with trade strategies,” she says. Bonebrake believes that an increasing number of customers are looking to extend their 3PL relationships globally and that the demand now is to improve the entire supply chain from source to end consumer.

The increasing complexity of global business on all levels means that a long term relationship with a deeper understanding of a client’s business results in a better outcome for all parties involved. “As a provider, you much evaluate opportunities properly,” says APL’s Noone. “You must ensure that you can perform the service efficiently and that the customer will work with you and not push you into gray areas.”

This issue of mutually beneficial relationships will grow in importance says Langley, as companies become more upfront about both their short term needs and their long term strategies. “Customers will be asking providers their strategic reasons for wanting to pursue the partnership and providers will be asking customers how using their services will further their own business strategies.” It is this spirit of openness that will allow for customer and providers to more accurately align themselves with partners that mirror their own corporate culture and strategy. Linville concurs, “It’s important when partnering with a 3PL to have a tactical face and a strategic look to the future.”

The next horizon

Langley’s study predicts that the 3PL industry will continue to grow as companies return to their core competencies and outsource those functions that are not core. “We try to make it as simple as possible and that’s why shippers look to 3PLs,” says Meridian’s Bonebrake. “Some companies are fighting internally for resources so we try to meet the client where they are. If they don’t have IT resources, for example, we can provide them.”

Overall, says Langley, customers view their 3PLs as having built up good capabilities but have high expectations for continued improvement. The issue now, according to Langley, is that 3PLs “face challenges in terms of managing their own growth.” The recent spate of consolidations throughout the industry lends credence to this belief. The feeling on the part of many customers and providers is that these mega-3PLs are not always as customer-focused as they should be. “The big problem is the fact that growth through acquisition is not organic and there is no real cohesion among the organization. Larger organizations that have grown organically have offer better service,” say Wainwright. Customers are placing a strong emphasis on ‘right-sized’ companies, ones that are big enough to provide a high level of service, but small enough to stay focused on their customers’ needs.

“In the future, customers will become far more pertinent to their providers strategic plans,” says Langley who believes that providers will need to communicate to their customers what their plan for the future is and that customers may even help to determine what geography to cover, what services to provide, and in what industries their providers should specialize.

Specialization is another trend that is emerging in the 3PL sector. As the industry has become more sophisticated, customers have come to expect a certain degree of service and capability from any provider. Yet as they’ve become more sophisticated, so have their demands and for specialized services they may choose to deal with a 3PL that has strength in a specific sector. “I can already see it happening throughout our own corporation in terms of what my own company is clamoring for,” says Wainwright. Certain sectors demand a more extensive background understanding in order to efficiently manage the supply chain. “Textile or chemicals can be a nightmare,” says Wainwright. “Companies will pay fees for brokerages that have the ability to provide a certain level of service and specialization that will avoid customs hold ups.”

The logistics industry is undergoing tremendous change, mirroring the lightening pace of change within global trade. It’s an exciting time to be involved in the industry as both clients and providers rise to the challenges they are facing by developing innovative solutions and forming solid, long-lasting and mutually beneficial partnerships. And in the end, that’s what it comes down to-people. “After all,” says Holzscheiter, “logistics is still a people business.”

Sidebar: Putting Your Finger On Landed Cost

Finally, you’ve found the perfect low-cost source for your product or part-it may be overseas, but the labor rates are so low, even with an increase in transportation costs it’s still cheaper than sourcing the part closer to home. Think again.

Because of constantly changing sourcing patterns, landed cost has become a hot topic for most businesses. It used to be that companies made purchasing decision independently but now, once the initial euphoria over low rates has subsided, businesses are taking a long, hard look at the total cost of the goods. That is, what it costs for the product, plus duty and tax rates, plus transportation and warehousing, plus, plus, plus. It’s a long list.

The 3PLs interviewed for this article also gave us their take on landed cost-what it entails and how their customers are addressing the issue. Here’s what they told us:


What are the elements of landed cost?

“There are a number of variables-cost of goods, duty, tax, transportation, inventory holding costs. It is really very specific to the individual company.”

-Valerie Bonebrake, Executive Vice President and Chief Logistics Officer, Meridian IQ

“The components of landed cost do vary from customer to customer.”

-Jake Holzscheiter, President and CEO, A.N. Deringer



“When considering the option, it’s not only the lowest landed cost that should be considered, but reliability as well.”

-Mike Noone, Vice President Logistics, Americas, APL


Is there a landed cost factor that tends to be more expensive than the rest?

“The most expensive factor is inventory carrying costs. When product doesn’t move, it gets expensive very quickly.”

-A.N. Deringer executive

“Inventory carrying costs are the highest cost element. When material sits and waits to be shipped, or is procured and then waits to sell, those costs add up.”

-Dave Kulik, CEO, CEVA Logistics

“Inventory carrying costs are the most expensive element of landed cost. It is the responsibility of the supply chain to keep these costs to a minimum.”

-Bob Spieth, President, Contract Logistics, Ozburn Hessey

“The cost of goods is the highest component of logistics costs and the management associate with it. Managing the proper mode is a critical component of landed cost. It’s easy to wipe away all of your margin by having the wrong mode. The key elements are managing mode, having visibility and managing the variables that occur.”

-APL executive


Are shippers taking more of an interest in landed cost?

“More clients are asking us to provide input in to landed cost exercises.”

-Ozburn Hessey executive

“Most companies are absolutely aware of landed cost. Today, most products are being sourced similarly, so companies are now competing supply chain against supply chain. Supply chains are delivering to the bottom line and are providing value to shareholders, so companies are very conscious of the importance of total landed cost.”

-APL executive

“The purchasing of logistics is done in different parts of the organization, so the focus for one area may be to reduce transportation costs. It’s important to consider the entire supply chain and involve different departments.”

-CEVA Logistics executive

“Companies are looking at landed cost. Larger multinationals have their own resources and tools to determine sourcing strategies; other companies are looking to their providers for help.”

-Meridian IQ executive

“Customers want a deeper understanding of the price tied to individual products. When we are providing customers with options, we show the options in terms of landed cost.”

-A.N. Deringer executive


Has the North America truck driver shortage and the issue of port congestion affected landed cost?

“Port congestion was better in 2006 and most of the issues have been addressed. Truck capacity has improved due to a combination of decreased demand and increased capacity.”

-Ozburn Hessey executive

“The driver shortages and port congestion did affect landed cost, but a good logistics provider can deal with that. There are release valves [such as using alternate ports when transit time is not critical], so a logistics company can offer options to their clients.”

-CEVA Logistics executive


When are you being asked to get involved in landed cost exercises?

“Pre-9/11 it was difficult to convince clients of the importance of FAST. New security demands and congestion issues has seen good sitting in ports. As a result, there is a stronger commitment now to make the upfront investments needed to keep the goods moving…and there is now more consideration being given to all the issues of landed cost before the company commits to a global source.”

-A.N. Deringer executive

“Some clients are more strategic in their approach. We have the optimization and metric tools for customers to use to identify proper sourcing, transportation costs, transit times and reliability. On a broader scale we are being brought in early on to help make decisions.”

-APL executive

“Most companies make decisions based on the raw cost of labor and transportation of materials. Assuming all things are equal, we are being asked to consult on mode of transportation. For instance, if the customer ships 85% by ocean and 15% by air, then what is the cost and where should we land and then how should we ship domestically.”

-CEVA Logistics executive

“We are seeing more landed cost exercises prior to global decisions with existing customers.”

-Meridian IQ executive

Sidebar: What Customers Want… and Are Getting… From 3PLs

For the past decade, supply chain executive leaders have been surveyed about their use and evaluation of third-party logistics providers. From 1996 to the present, this 3PL study has helped to identify and track key trends and views of the 3PL industry from the customers who use 3PL services. The 2006 study, with 1,430 responses to the survey in addition to focus groups, was produced by C. John Langley Jr., Ph.D., of the Georgia Institute of Technology, with industry experts from Capgemini, DHL, and SAP.

The intent of the study is to measure the scope of the 3PL sector across major industry segments, understand how customers select 3PL providers and provide a strategic assessment of the future of the 3PL industry.

In this year’s results, most logistics and supply chain executives surveyed in North America, Europe, Asia-Pacific, and Latin America feel that logistics represents a strategic, competitive advantage for their companies. The response was mixed, however, as to whether 3PL providers currently offer customers new and innovative ways to improve logistics effectiveness, although most respondents agreed that 3PL providers were central to their logistics and supply chain operations. About half of 3PL user’s total logistics expenditures are spent on 3PL providers. Most users characterized their relationships with 3PL providers as “successful.”

Traditional 3PL services, such as transportation, warehousing, and customs clearance, are most often outsourced. Overall satisfaction with 3PL providers remains high in 2006, but 3PL users clearly expect continuous improvements in service levels and information technology (IT) capabilities. Among the key challenges for the 3PL industry in the future are capacity management and innovation. While 3PL users acknowledge innovations such as lead logistics providers and fourth-party logistics providers, significant room for improvement still exists in the knowledge and use of these approaches.