Service on a global scale

As the third-party logistics provider (3PL) industry continues to grow and expand, there is a natural evolution toward globalization, according to Gary Allen, North American distribution leader with consulting firm Capgemini Ernst & Young.

"Yet no one company is truly global in execution," Allen points out. "While freight forwarding and transportation are commonly outsourced worldwide, truly integrated logistics business distribution and value-added services are still segmented by regions of the world."

Even where manufacturers claim to operate globally, Reinhard Rank, general manager with global 3PL DHL Solutions, often finds decisions are still made locally. "Service providers have to adjust to the structure of the customer. If they make decisions locally, we deal with them locally," Rank explains.

Even if there were a 3PL with truly global strength, shippers are reluctant to outsource to just one company, claims Allen. However, he notes a shift in that trend. "In the last two years, shippers increasingly want to minimize the number of 3PLs used. There is a mismatch between this desire and the ability of 3PLs to execute."

Shippers are not outsourcing the full functionality of the supply chain because they don't have the necessary comfort level and they fear the lack of organizational control, according to Allen.

"Some 3PLs are more global than others," observes David Closs, professor of business with Michigan State University's department of marketing and supply chain management. " Increasingly, 3PLs are trying to fill holes where they don't have service or improve where service is shaky," he adds.

Yet there remain major regions of the world without strong 3PL capability. "China, Africa and Latin America are still weak," observes Closs. Specifically, he sees a lack of 3PL expertise in much of China.

"Once you get out of the major cities, China's infrastructure is limited. There's not a lot of expertise in working with the government or political system, nor in integrating myriad little pieces," states Closs. "In China, you must have a relationship with someone who has the needed skills — someone who knows how to work in that environment."

Africa and Latin America have similar problems, according to Closs. 3PLs are not moving into Africa as fast as other areas. In Latin America, 3PLs are trying to build infrastructure in spite of outofcontrol interest rates and difficulty in interfacing with governments to secure licenses and approvals. There is also a problem with corruption, Closs adds.

Whether a shipper operates in a thirdworld country or the major markets of Europe, 3PLs are challenged to ensure consistency and standardization around the globe. 3PLs tend to be segmented by region and deliver unique client solutions. They can benefit considerably if they standardize technology and processes, Allen notes.

DHL achieves a degree of standardization by organizing around vertical industries. "We develop solutions for industry groups," explains Rank. "Customer solution designs are specific but based on our portfolio of standard products or basic services. Each solution is unique even though it is made up of standard modules.

"If we set up an operation in China, the basis is standard operating procedures, the same as in Europe or North America," continues Rank. "How it is put in place and the level of automation may differ by region. For example, we use more automation in Europe because of the higher labor costs," he elaborates.

3PLs are adopting such strategies to ease the burden of developing unique technology solutions per customer. For several years, Robert Lieb, professor of supply chain management, College of Business Administration, at Northeastern University, has advised 3PLs to sell their services up and down the supply chain. Now he's seeing an increase in 3PLs specializing in a limited number of industries.

"Many don't even respond to requests for quotes from outside those vertical markets." explains Lieb. If 3PLs build increased business along a client's supply chain, it's more likely they can produce common platforms and integrate information systems.

In fact, some 3PLs are becoming increasingly customer selective. "The most important characteristic of the desired customer is a profile of high quality and willingness to work in a collaborative relationship with the 3PL," Lieb says.

3PLs are focusing more attention on the quality of existing accounts, using key performance indicators and doing a more thorough financial analysis of prospective customers. In fact, they're developing products they want to sell and seeking customers looking for those solutions.

"The challenge for providers is to continue to improve their capabilities on a global scale while remaining profitable. They need to make healthy margins as they expand globally," says Allen.

While shippers may be looking to outsource a truly global supply chain, the reality is a market segmented by regions and pockets of service. "You need to outsource to local providers with local expertise," says Allen.

He sees the use of a fourth-party logistics provider (4PL) or lead logistics provider (LLP) as an increasingly popular solution. The expectation is that a 4PL or LLP will have the technology and processes to operate globally and integrate partners on a global scale.

In its role as LLP, DHL Solutions offers day-to-day management of the supply chain and support in strategic decision making. "We are involved in design changes on a consulting basis. Strategic decision making, execution and selection of players in the supply chain remain with the customer," says Rank.

From Lieb's perspective, companies in 4PL relationships give mixed messages about its effectiveness. "Using a 4PL or LLP adds a level of management and puts clients one more step away from their customers," he adds.

Perhaps the need for a fourth party will decrease over time. "In the 3PL market, we'll see increasing competition and fewer, bigger players," observes Closs. "We'll see increased consolidation with a few niche players and fewer than ten major players. To be in that league, 3PLs will have to operate essentially globally."

3PLs will continue to grow through acquisition and to fill holes in their capabilities globally, agrees Allen. "We see the future as positive from an industry perspective. The desire to use service providers is there. The challenge for shippers is how to structure and advance the outsourcing relationships."

resources

Capgemini Ernst & Young www.cgey.com

DHL Solutions www.dhl.com

Michigan State University www.msu.edu

Northeastern University www.neu.edu

For the past decade, Robert Lieb, professor of supply chain management, College of Business Administration with Northeastern University, and Brooks Bentz, associate partner with Accenture (www.accenture.com), have studied the use of 3PL services by U.S. Fortune 500 manufacturers. In their latest study, they learned that fully 80% of shippers surveyed use 3PL services in both domestic and international operations, up from 69% in 2003. Many of those companies use 3PL services in multiple geographies.

Asia/Pacific

The 2004 survey of manufacturers reveals the most impressive growth in 3PL use in the Asia/Pacific region occurred in China (63%, compared to 46% in 2003), reflecting the rapid economic growth of the country as both a manufacturer and a consumer of American goods. None of the 3PL users in China encountered significant problems in finding or using 3PL providers.

Similarly, only four of the companies using 3PL services in India had difficulty finding or using 3PL services. Their only complaint — the scope of 3PL operations in India was too limited.

In the entire Asia/Pacific region (APAC), the most important industry dynamic for 3PL services is growth of the Chinese economy. At the same time, 3PLs must deal with continuing downward pressure on pricing, increased customer expectations with respect to IT support, increased customer interest in outsourcing a broader array of logistics services, and formation of business alliances to broaden service offerings.

Lieb and Bentz also surveyed CEOs with major 3PLs, who identified a wide range of problems facing their companies in APAC. In addition to pricing and IT issues, concerns range from coping with cultural diversity and the uncertain economic future of the region to a shortage of logistics talent and the additional costs of security.

CEOs noted major changes expected in the APAC 3PL industry during the next three years include increased foreign ownership in China, coupled with growth of strategic alliances and partnerships involving 3PL providers. Ever increasing pricing pressure will drive further consolidation of 3PL providers, squeezing out mid-sized competitors. Interest in outsourcing in the region will increase as will outbound 3PL opportunities from China and India. Japan will play a more significant role in Chinese business, and China will continue to drive growth in Japan.

Currently, the percent of APAC market business in China is 40%. Looking three years down the road, 3PLs see that percentage dropping. That trend may relate to inadequate infrastructure development in China, meaning the infrastructure may not be able to handle the volume.

Over the past three years, China has had a net manufacturing loss of 11%. Heavy manufacturing that used to be located in China was shut down. Companies moving manufacturing to China are using more automated systems and, therefore, less labor.

While few 3PL providers and users in APAC have experienced significant problems with regional transportation infrastructure to this point, that may change. As economic activity, particularly in China, continues to grow, the transportation infrastructure will become more of an issue. Trucking, rail and port capacity may effectively limit the growth of logistics services, as will the availability of management resources.

Expansion in the EU

Europe faces growth issues as well. Expansion of the European Union (EU) is likely responsible for increased use of 3PL services in Eastern Europe. In May 2004, the EU expanded its membership by admitting ten Eastern and Southern European countries.

Manufacturing companies responding to the survey indicate this expansion is important and brings implications for their 3PL providers. Manufacturers anticipate significant sales growth within the new EU countries. Several plan to establish new manufacturing operations in those countries. They expect the expansion to lead to a significant reconfiguration of their logistics operations in Europe and their 3PL providers to support their new logistics strategies.

CEOs of 3PLs operating in the region anticipate that many existing and potential customers will move supply chain elements into the lower-cost EU areas of Eastern Europe. 3PLs need to offer new network opportunities to their customers and develop sector entry strategies for the new EU member countries.

Large-scale mergers of 3PL providers and formation of business alliances to broaden service offerings will remain major factors, as will increased pressure to internationalize company service offerings and increased client CEO and CFO participation in the 3PL decision-making process.

3PLs in Europe identified cost pressure from clients in an environment in which provider costs are rising as their most significant problem. In addition, 3PLs cited weak economic growth in Europe, poor asset utilization, an oversupply of logistics services and assets in "old" Europe, and chronic labor shortages, particularly in trucking operations.

In addition to continued consolidation within the industry and specialization of niche players, European 3PLs expect a significant increase in the use of Eastern European subcontractors, substantial growth of Eastern European 3PL markets, and greater emphasis of European customers upon multi-country inbound and outbound operations support from 3PL providers. There will be greater reliance on multimodal/intermodal services within Europe due to rising fuel costs. CEO/CFO decision-making will increase as the supply chain becomes even more critical to improving profits.

The expansion of the EU provides real market opportunities for many U.S. manufacturers. China and India will continue to grow in importance to large American manufacturers as centers for global manufacturing, sourcing and sales. To date, the 3PL infrastructure in those geographies appears to be adequate. However, at much higher levels of volume, the industry infrastructure, and that of the transportation and warehousing networks of those areas will be challenged. Users and providers should focus on contingency planning before problems arise.

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