January 25, 2012
strategic insight | Outsourcing

A tale of two 3PL studies

A tale of two 3PL studies

The results of two longstanding research projects on third-party logistics hold some practical lessons for shippers and service providers. Here are a few highlights from the latest studies.

By Toby Gooley

Third-party logistics may not be a typical subject for academic research, but it's one that has garnered a lot of attention over the years—so much so that presentations on two longstanding research projects on logistics outsourcing routinely play to a packed house at the Council of Supply Chain Management Professionals' (CSCMP) Annual Global Conference.

These annual studies, led by Dr. Robert C. Lieb of Northeastern University and Dr. John Langley of Penn State, track current practices and emerging trends in third-party logistics. Both offer insights into the health of this global industry and into the complex relationship between shippers and third-party logistics service providers (3PLs).

What follows is a look at just some of these in-depth studies' findings, with an emphasis on practical takeaways for both shippers and service providers.

Financial picture improves
The older of the two studies is the "18th Annual Survey of Third-Party Logistics Providers," conducted by Dr. Robert C. Lieb, professor of supply chain management at Northeastern University's College of Business Administration, and Dr. Kristin Lieb, assistant professor, marketing at Emerson College, with support from Penske Logistics. In mid-2011, the researchers surveyed CEOs of 3PLs in North America, Europe, and Asia; this article will consider only the North American results, which included responses from CEOs of 17 of the largest 3PLs operating in this region.

Economic conditions for third-party service providers in North America have dramatically improved, according to the survey. In 2010, 88 percent of the companies surveyed met or exceeded their revenue projections, up from 50 percent in 2009. All 17 companies were profitable in 2010, and on average they expected to achieve 10.8 percent revenue growth in 2011.

That suggests that 3PLs may have fresh funds to reinvest in operations and personnel. It could also explain why 10 of the companies were able to launch new offerings during the previous 12 months; these included reverse logistics, transportation, consulting, and purchase-order management services.

Still, the CEOs found plenty to worry about. They identified pricing pressure and employee recruitment and retention as their top challenges. These were followed by fuel price volatility, difficulties meeting customer expectations, economic uncertainty, and rising costs. The executives said they are trying to mitigate the impact of pricing pressures through more collaborative relationships with customers, gain-sharing agreements, and "unbundling" of service offerings.

Natural disasters prompt change
This year's study also considered the impact of Japan's March 2011 earthquakes and tsunami on 3PLs. Although many of their customers were affected by that disaster, only half of the CEOs said it had affected their own operations in North America, mostly due to disruptions of customers' supply chains and declining freight volumes into and out of Japan.

The 3PLs seemed to be well prepared to deal with such an event. Fifteen of the 17 companies already had business continuity and disaster response plans in place before the tsunami/earthquakes hit. Several later modified those plans to incorporate lessons learned as a result of the disaster.

Many of the 3PLs' customers, though, were unprepared, and they will have to change their supply chain strategies to help prevent future disruptions, said Dr. Robert Lieb in an interview. "The tsunami's impact led many 3PL customers to reassess their stocking levels," he explained. "Some of those companies have told their 3PLs that the money they lost due to related shutdowns of plants around the world dwarfed the inventory cost savings they had generated through just-in-time and lean practices."

The 3PLs, Lieb added, can help their clients develop new strategies and may have to modify their service offerings to reflect those changing requirements.

The sustainability push
Despite economic uncertainty, North American 3PLs did not reduce their commitment to environmental sustainability. According to the survey, 10 of the 17 CEOs reported that their companies had expanded their sustainability projects. Examples of those efforts included providing more resources for existing programs, expanding the use of alternative fuels, increasing involvement in the U.S. Environmental Protection Agency's SmartWay program, and developing better tools for measuring carbon emissions.

Half of the 3PLs said they had launched new environmental initiatives during the previous year, including using solar and/or wind energy at company facilities, using more energy-efficient lighting in warehouses, and instituting a "no idling" policy at logistics centers.

The 3PLs' environmental efforts appear to be driven more by internal considerations than by customers' demands, the researchers said. Respondents said that only 8 percent of their customers had asked for an analysis of their supply chains' environmental impact.

Furthermore, when asked how often their company's "green" capabilities were a major factor in determining whether they won either new business or contract extensions, 15 of the CEOs said "infrequently," and only two said "frequently."

"Questions about 3PLs' green practices will typically be part of a request for proposal, but it's of low importance [to shippers] compared to economics," said Joe Gallick, senior vice president of sales for Penske Logistics, in an interview.

Focus on talent management
The second research report, the "2012 16th Annual Third-Party Logistics (3PL) Study," was led by Dr. C. John Langley Jr., clinical professor of supply chain management at Penn State University, and the consulting firm CapGemini, with support from Panalpina, Heidrick & Struggles, and eyefortransport.

The 2012 study was based on over 2,250 responses from shippers and logistics service providers worldwide, gathered through questionnaires, interviews, and workshops. The report examines the current state of the 3PL industry, emerging markets, strategic trends, outsourcing in the electronics industry, and for the first time, talent management.

Many shippers and 3PLs, the research found, are troubled by the state of talent management—recruiting, developing skills and experience, retention, performance reviewing, succession planning, and so forth—within their organizations, and they see an opportunity to improve it, Langley said in an e-mail interview.

Action is critical, as shippers and 3PLs agreed that having the right people and leadership in place would be the most important factor in their companies' success in the next five years, he added.

With supply chains growing more complex, companies require leaders who are more multifaceted, the researchers said. Operational execution was the skill most highly valued by both shippers and 3PLs. Other key qualities included talent management and development, strategic planning, relationship building and networking, technical competence, change management, and international business exposure.

Economic conditions affect the ways in which shippers and 3PLs work together, the researchers said. For example, 24 percent of shipper respondents reported "insourcing" some formerly outsourced services. Meanwhile, 58 percent said they are reducing or consolidating the number of 3PLs they use—a finding that's consistent with current trends in procurement and strategic sourcing, according to the report.

Still, nearly two-thirds (64 percent) of shipper respondents reported an increase in their use of outsourced logistics services. Regionally, 58 percent of North American shippers, 57 percent of European, 78 percent of Asia-Pacific, and 73 percent of Latin American shippers reported increased use of outsourced services.

"A logical conclusion from these figures is that greater growth opportunities seem to exist in Asia-Pacific and Latin America (read: emerging markets) than in the more well-developed economies in evidence in North America and Europe," Langley said.

Those emerging markets are important to many of the respondents: 80 percent of shippers and 77 percent of 3PLs participating in the survey said they conduct business with or within rapidly growing economies like China, India, Brazil, and Mexico.

Shippers were clear about the capabilities they want from 3PLs in emerging markets: visibility, expertise in global trade regulations, and management of shipment routing based on a knowledge of free trade agreements. Others on their list included consulting services, local insight and expertise, and integrated solutions.

Perception gap
One significant finding was that 3PLs appear to have some difficulty convincing customers that they can be strategic partners and not simply providers of transactional and operational services. Only 71 percent of shipper respondents said that 3PLs provide them with new and innovative ways to improve logistics effectiveness—yet 91 percent of the 3PL respondents said that statement accurately characterizes the services they provide.

This gap was especially evident in the electronics industry, said Shyamal Roy, a managing consultant with CapGemini Consulting, in an interview. "For example, 58 percent of electronics industry respondents said supply chain complexity was one of their top challenges, yet only a small percentage thought 3PLs could help them address that challenge." However, 42 percent of the 3PLs that work with customers in that industry said they are capable of providing such assistance.

The survey found similar disparities relative to other electronics industry challenges, such as new product launches and seasonal demand, high obsolescence rates, and service parts logistics.

This gap suggests that 3PLs must do a better job of selling their services, perhaps by building relationships at more strategic rather than tactical levels, Roy said.

At the same time, shippers may not always realize that a 3PL's experience in other industries could help solve common problems in the electronics industry, Roy said. For example, a provider with experience managing supply chain security in the pharmaceuticals industry or dealing with products with short shelf lives in the fashion industry may be able to transfer that expertise to electronics, he said. "The 3PLs know about [various] solutions, and they can share that knowledge and best practices across industries," he said.

There are other areas where the perceptions of third-party providers and their customers appear to be at odds. Langley noted that 3PLs tend to rate themselves higher on some service attributes—such as overall satisfaction, agility and flexibility, and interest in gain-sharing agreements—than do the shippers who participated in the study. "Our interpretation is that this is an understandable bias, but it does highlight the need for 3PL providers and users to develop sound processes for comparing evaluations of each other to make sure there is an accurate alignment between both parties' perspectives of each other," he said.

To close the perception gap, 3PLs and their customers may have to improve other aspects of their communication, too. This year, 69 percent of shipper respondents reported satisfaction with their 3PLs' openness, transparency, and communication, while only 62 percent of the 3PLs said the same of their customers.

Both of those percentages are disappointing, Langley said. The data indicate that "there is considerable room for improvement in the ability of 3PLs and customers to have relationships that are open, transparent, and benefit from good communication."

About the Author

Toby Gooley
Contributing Editor
Contributing Editor Toby Gooley is a freelance writer and editor specializing in supply chain, logistics, material handling, and international trade. She previously was Senior Editor at DC VELOCITY and Editor of DCV's sister publication, CSCMP's Supply Chain Quarterly. Prior to joining AGiLE Business Media in 2007, she spent 20 years at Logistics Management magazine as Managing Editor and Senior Editor covering international trade and transportation. Prior to that she was an export traffic manager for 10 years. She holds a B.A. in Asian Studies from Cornell University.

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