How to win at outsourcing

Call it the revenge of the shippers. Despite being faced by the prospects of ever-rising costs from carriers in virtually every mode, shippers have found at least one outlet for their frustrations – they're taking it out on their third-party logistics providers (3PLs).

The most significant dynamic operating in the North American 3PL marketplace is the continuing downward pressure on prices. That's the perspective, at least, of the CEOs of the major 3PLs in the U.S., according to a survey developed by Robert Lieb of Northeastern University (www.neu.edu) and Brooks Bentz of Accenture (www.accenture.com). Shippers, not surprisingly, don't see that as a problem at all. In a parallel study, Lieb and Bentz also surveyed logistics directors at Fortune 500 manufacturing companies, and from the shippers' standpoint, the major outsourcing trend that concerns them most is the continued consolidation of the 3PL industry. In recent months, we've seen Exel acquire Tibbett & Britten, TNT Logistics acquire Wilson and most recently, UPS make an offer for Menlo Worldwide Forwarding ).

Similarly, while the 3PLs themselves indicate that they're feeling squeezed to constantly lower the costs to shippers, in fact the prime consideration shippers use to determine if they'll renew a 3PL contract is service, with cost finishing a distant second in the survey.

"It's the exception to the rule that a shipper cancels their 3PL contract," Lieb notes, pointing out that the renewal rate on the contracts is over 90%. "One question that we asked the logistics directors is, ‘How long has your most significant 3PL been providing services to you?' The average is more than six years. More than two-thirds of the companies have been working with the same 3PL for more than five years."

That said, the 3PL contract renewal process is very heavily weighted with service considerations. According to the shipper survey, "3PL providers need to avoid the mistake of overselling service capabilities as new contracts are signed. Otherwise, it is unlikely that the relationship between user and provider will survive."

Table 1.
Services most frequently outsourced to a 3PL

Direct transportation services

67%

Customs brokerage

58%

Freight payment services

54%

Freight forwarding

46%

Warehouse management

46%

Shipment consolidation

42%

Source: Northeastern University/Accenture

Between the shippers and the 3PLs, "There are some distinct differences of opinion on things like pricing, as you would expect," Lieb says. "The providers think they're continuously being squeezed, and their reaction to that is to become more customer-selective as time has gone on. You're going to see 3PLs walking away from some contracts as they come up for renewal if they can't come up with a compensatory pricing structure."

Direct transportation services, customs brokerage and freight payment services are the most frequently outsourced logistics services, according to the survey (see Table 1). What's more, in the true spirit of supply chain management, the shippers indicated that their major suppliers and customers are also served by their primary 3PL. But as Lieb and Bentz discovered, almost one-third (30%) of the shippers surveyed say that the use of 3PL services has had a negative impact on supply chain integration.

By an even larger margin, 40% of shippers believe outsourcing has had a negative impact on employee morale. Even discounting the political hay some candidates have sewn over the past year decrying outsourcing trends, the survey signals problems that Lieb and Bentz suggest the 3PL community should aggressively address.

Not surprisingly, despite the adverse reaction outsourcing activity seems to have among some employees, the use of 3PLs by large manufacturers is likely to continue to grow for the next several years at least. "The average user in the manufacturing-sector gives 3PLs 40% of their logistics operating-budget right now, and that's gone up from 19% just three or four years ago," Lieb notes. "So the number has more than doubled, and is projected to reach 46% in three years."

Table 2.
Use of 3PL services outside the U.S.
Geography
% of companies using 3PLs there
China 63%
Western Europe 63%
Eastern Europe 58%
Asia (excluding China & India) 58%
Latin America 53%
Mexico 47%
Canada 42%
India 21%
Source: Northeastern University/Accenture

What's more, 80% of the U.S. companies in the Fortune 500 are currently using 3PL services overseas, with the most rapid growth in China and Europe (see Table 2). That number is up 11% from last year, a sure indication that this trend has yet to peak. China's growth as both a manufacturer and a consumer of American goods, coupled with the expansion of the European Union, point to compelling reasons for U.S. shippers to seek help from third parties located in those geographies.

The basic premise behind 3PLs, however, is still deeply rooted in cost management. "The main reason people go to third-party outsourcing is to save money on non-core competency tasks," Bentz says, and based on the survey results, shippers have been getting what they paid for. Seventy percent of shippers have seen a positive impact on their company's bottom line thanks to their use of 3PLs.

One trend to watch closely will be the relationship between shippers and 3PLs on radio frequency identification implementations. Nearly two-thirds of the shippers surveyed are either committed to using RFID or are seriously considering using it, and as seen in this month's cover story, "Generation gap," many of those shippers are a long way from compliance with the Wal-Mart/DoD initiatives.

Shippers are already looking to their 3PLs for technical support and services, but as Lieb and Bentz point out, exactly who foots the bill for capital investments has yet to be determined. Shippers need to consider how 3PLs could support RFID initiatives, while the 3PLs need to weigh the cost implications of serving RFID-enabled customers.

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