Market Trends

Jan. 1, 2003
Two Studies Reveal Trends in 3PL Services

Cap Gemini Ernst & Young, Georgia Institute of Technology and Ryder System Inc. announced the results of the 7th Annual Report on Third-Party Logistics in which they claim users of logistics services are still warming up to the concept of third-party lead logistics managers.

In another survey, this by Accenture and Northeastern University, the effects of a slow economy have finally caught up with 3PL providers.

According to the 7th Annual Report on Third-Party Logistics study, involving 260 logistics and supply chain executives from the U.S., Canada, Mexico, United Kingdom, France, Belgium, Netherlands, Spain, Germany, China and Japan, more than three-quarters of all companies, including 90 percent in Europe and Asia, currently outsource a portion of their logistics needs to logistics service providers. The top five outsourced logistics services and IT support functions in 2002 were: warehouse/distribution center management (77 percent); Web-enabled communications (64 percent); transportation management (64 percent); shipment tracking/tracing/event management (62 percent); and export/import/freight-forwarding/customs clearance (61 percent). This year's findings also support the contention that IT-based services and capabilities are among the key expectations with customers of logistics service providers.

"This year's study highlights more demanding customer expectations of 3PL services and increasingly sophisticated requirements for technology-based and strategic supply chain services," says C. John Langley Jr., professor of supply chain management and 3PL study leader at Georgia Tech. "In addition, respondents point to ongoing shifts in relationship models and deal structure in an effort to provide advanced services structured around mutual incentives."

The 2002 study had a number of interesting key indicators and metrics, including:

• Western Europe currently spends 51 percent on outsourced logistics services compared with 43 percent of those in North America. Both groups project increases in these percentages over the next three to five years.

• 89 percent of respondents in North America, 81 percent in Western Europe, and 89 percent in Asia-Pacific view their relationships with their logistics service providers as successful.

• This year, North American respondents witnessed an apparent shift to internally developed IT from 11 percent in 2001 to 46 percent and a decreased reliance on IT vendors from 69 percent to 33 percent this year.

• Based on North America responses over the last three years, the current availability of industry vertical procurement markets rebounded this year to 21 percent after dropping to 11 percent last year. Respondents anticipate increased demand going forward.

• Lower logistics costs, reduced average order cycle time, lower inventory levels and improved service were the quantifiable measures of success used when utilizing the services of a logistics service provider

• Nearly 60 percent of respondents use alternative cost-sharing programs with their logistics service providers.

Further study

Additionally, Cap Gemini Ernst & Young launched a facilitated learning and research group through its Accelerated Solutions Environment (ASE) center in Atlanta. The group consisted of 20 key executives from Agilent Technologies, Arris, Cisco, GlaxoSmithKline, Home Depot, Honda Motor Alabama and Interface Americas Inc., brought together for the first time to analyze and clarify the research findings from this year's study. Key messages derived from that session were concerns among logistics users in defining the role of "lead logistics management" (LLM), the ownership and control of IT functions, and blurred expectations of having to give up some control and having to share sensitive and confidential information.

"While sometimes the use of a logistics service provider is interpreted simply as 'turning over all logistics activities' to the outsourced provider," says Gene Tyndall, executive vice president of global supply chain solutions and 3PL study leader for Ryder System Inc., "respondents to this year's survey, as well as last year's, suggest that if you give up some control of your supply chain through a joint client-and-provider management structure, you'll actually gain more control of your business."

Essentially, respondents are expressing their desire, as customers, to share operations management, at least until a track record of performance, or trust factor, is built, says Tyndall.

"A key finding revealed that 3PL users expect a partnering approach built around collaboration and world-class technology and service offerings, marked by flawless execution from top people that leads to financially acceptable results," says Gary Allen, senior manager and 3PL study leader for Cap Gemini Ernst & Young. "The overall sophistication of the buyer-seller relationship in the 3PL business is improving, and measurable value is being created around the world by 3PL outsourcing."

Slow economy hurts 3PLs

According to the 2002 Annual Accenture/Northeastern 3PL Industry Study, the effects of a slow economy have finally caught up with 3PL providers. The number of American manufacturing executives that would increase their use of third-party logistics providers has dropped significantly this year, according to the survey by Accenture and Northeastern University.

The survey, which captured data from 66 executives of the largest American manufacturing companies and 18 chief executives of the top global providers of third-party logistics services, was the third such survey sponsored by Accenture and the 10th conducted by Northeastern since 1991.

Only 56 percent of the manufacturing executives in the current survey said if allowed complete autonomy in their decisions that they would increase use of third-party logistics providers at least moderately. This was significantly less than the 74 percent of respondents who said the same in both the 2000 and 2001 surveys.

Not surprisingly, the CEOs of the 3PL providers in this year's survey also projected a lower one-year growth rate for their industry - 11 percent - than the 17 percent projected by the respondents in the 2001 survey.

"The future of the third-party logistics marketplace, as in many other industries, will be a function of the economy," says Stephen Kendrick, partner, Accenture's Supply Chain Management practice. "If the economy rebounds, then the volume generated by existing third-party logistics contracts will grow, the industry's growth pattern will resume, and merger and acquisition activity will continue, although at a more moderate pace. However, if the economy doesn't rebound soon, volume from existing clients will be flat at best, price and margin pressures will intensify, and geographic expansion will decrease."

The survey findings, however, indicate that the economy isn't the only reason for lower demand for third-party logistics services. Other factors include pricing pressures, staffing issues, the increasing technology demands of customers, and the perception that the transition to a third-party logistics provider is time-consuming.

For instance, 40 percent of the manufacturing executives surveyed said the transition to a third-party provider took more time than they had expected. In addition, 61 percent of the manufacturing executives reported spending approximately the same amount of time managing logistics activities after the transition to third-party logistics providers as when the functions were managed in-house.

"Providers of third-party logistics need to work with clients to streamline the transition process, which is currently seen as very time-consuming," says Robert Lieb, professor, Northeastern University. "Also, if a client spends as much time managing an outsourced process as it had spent managing the process in-house, then that defeats one of the main reasons for outsourcing. By reducing the time spent managing logistics processes, clients will have additional time to work on more strategic initiatives." Among the survey's other findings:

• CEOs of third-party logistics providers said that IT integration, globalization and broadened service offerings posed the greatest opportunities for their industry.

• Customs brokerage and freight forwarding are among the most widely used third-party logistics services, reflecting the globalization of demand for third-party logistics and of provider service offerings.

• While a large percentage of users said third-party logistics services had a positive impact on logistics costs (70 percent), services levels (65 percent) and customer satisfaction (52 percent), these levels have respectively declined by 15 percent, 16 percent and 19 percent from 2001 levels.

• CEOs of third-party logistics providers identified continued downward pressure on prices, increased pressure to internationalize company service offerings, and increased customer interest in outsouring a range of logistics activities as the major industry dynamics.

• The top "must-have abilities" named by users when considering possible third-party logistics providers were integration of the client's software and systems with that of other supply chain partners (47 percent), operation of the client's software and systems (43 percent), and implementation of new software and systems (40 percent).

• Twelve percent of users said they believed that the third-party logistics industry was "very profitable"; 62 percent said the industry was "moderately profitable"; 24 percent labeled the industry as "break-even"; and two percent said the industry was "moderately unprofitable."

• One-third of third-party logistics users had concerns about the long-time viability of the third-party logistics business model, including increasing cost of services, growing perception of logistics as a core competency that should be managed in-house, lack of provider commitment to service-quality improvements, and lack of collaboration between providers and their customers.

Logistics Costs: Good News -- Bad News

According to the Establish Inc./Herbert W. Davis and Company annual Logistics Cost and Service Report, companies in the survey have been able to reduce 2002 logistics costs from information reported in 2001. As a percentage of sales, logistics costs have dropped 7.9 percent. This is a 22-year low in the 28 years the company has been reviewing data.

On the down side, customer service levels are not improving. Average total cycle time remains stuck at eight days, right where it's been for the past 10 years.