As both buyers and sellers of logistics services, third—party logistics providers (3PLs) have always been an uneasy fit with exis ting trade groups and professional associations. Truth be told, they haven't even been a natural fit with what's nominally their own group—the International Warehouse Logistics Association (IWLA )—whose members are all too often dismissed as warehouse operators. IWLA's head, Joel Hoiland , aims to change all that. He's come up with a plan to open up the group to a broader membership, effectively repositioning it to provide a home for the lost boys of logistics.
Though Hoiland is undoubtedly betting his future on the plan, it doesn't exactly smell of risk. Dubbed 3PLs back in the early 1990s, these companies have enjoyed a steady increase in both buying power and influence over the past 10 years. Third party providers today account for over 15 percent of the $970 billion logistics market—up from less than 1 percent in 1990. That's a market segment that's hard to ignore, and Hoiland is determined not to let it happen.
Q: What made you decide that it was time to reposition IWLA and open its membership to other providers?
A: Though our members represent nearly 400 million square feet of outsourced warehouse space and provide timely and cost-effective global logistics solutions for their customers, we've seen a downward trend in membership over the past four to five years.Although we see a continued decline in the numbers of traditional warehousing distribution companies, we see an increase in companies calling themselves "third-party logistics providers."
Q: Have you seen that downward trend among companies that exist specifically and solely to provide warehousing service?
A: That's correct. Actually, we've seen an increase in the logistics dollars spent on 3PL services, particularly on third-party warehousing and distribution. So there's more money being spent by private companies, but it's being spent with fewer and fewer third-party providers.
Of the top three reasons we lose members, number one is that companies go out of business. Number two is that companies run into financial difficulty, which typically leads to number one. The third reason is that companies have been bought or sold—there's been an acquisition of some sort. Though most of our members are privately held, family-owned businesses, more investment companies and even publicly held companies have entered this space.
Q: The steps you're taking clearly reflect market conditions, but don't they also reflect your vision of where the market's going?
A: We truly believe that this market is stratifying into three basic categories, although it's not always this simple. We believe that the lion's share of the money is going to be spent on commodity-type services. These would be warehousing and transportation-related services, but they're going to be very price sensitive. The next level up will be partnership-type relationships among companies. That's where 3PLs provide a variety of valueadded services in addition to those basic commoditized services. At the top would be those companies that provide strategic solutions, serving as what are sometimes known as lead logistics providers. As such, they form a high-level relationship with a customer and assist with the supply chain process development.
Q: All of those would find value in membership with your organization?
A: Certainly, because our purpose as we go forward is to become an association of third-party logistics providers. Ours will be the only organization exclusively focused on promoting excellence in logistics outsourcing. Our objectives are number one, to define the standards of excellence in logistics outsourcing; number two, to work with member organizations to meet these standards through education and professional programs; and number three, to promote these standards and advance logistics outsourcing in the logistics community.
Q: Third-party logistics companies basically come in two varieties: asset-based and non-asset based service providers. The asset-based providers have traditionally brought either transportation-related assets or distribution center/warehousing assets to the table. It's no surprise, given the organization's history, that your members come largely from the ranks of warehouse-asset-based 3PLs. Are they expanding their service menus to go beyond just third-party warehousing?
A: Most certainly. In early 2002, I took a comprehensive industry marketing initiative to our board of directors. It was a very aggressive plan that called for a significant amount of money to be spent on promoting the industry. At the top of the list was the development of a branding strategy. The board decided to tackle that piece first. So in March 2002, we launched an effort to assess our current name in the marketplace and our brand equity and then develop a strategy based on what we found.
We then went out and hired a branding consultant. We tested IWLA as a name, what it meant internally, externally, the whole nine yards. The consultant brought findings and recommendations to our board in November. It was at that time that we learned that although the majority of our members have come from the third-party warehousing and distribution business and continue to provide those services, 98 percent also provide transportation services.
Q: That's 98 percent of your existing members?
A: Of our existing members. Nearly all of our existing members provide value-added services.
Q: Did that come as a surprise?
A: Yes, although it's hard at times to convince all of our members that it's true. We also found that nearly everyone provided IT solutions for their customers. We found that one in five of our members was providing consulting services on a fee basis, which was much higher than we expected. So our consultant said, 'You call yourselves a warehouse/logistics association when, in fact, that's not really the case. Your people are third-party providers.' Most of them started in the warehousing business. Some of them started in the transportation business and expanded into warehousing, but today they call themselves third-party providers or in some cases, lead providers. So our traditional members are changing fast. We also discovered, not surprisingly, that most people outside the organization thought of us as a warehouse association.
Q: So you found that essentially the membership itself had changed to a point where a major repositioning would better reflect what the members did?
A: That's right. That was part of the reason we commissioned Dale Rogers of the University of Nevada to conduct a 3PL trends and practices study. He presented the findings at our convention in March. One of the things he discovered was that only 20 percent of our members today use "warehouse" in their name—a dramatic change from 10, 20, 50 or 100 years ago.
Q: That's a powerful finding considering that not too many years ago, your organization was called the American Warehouse Association.
A: Yes. Even the use of the term "warehousing" is declining rapidly.
Q: Third-party logistics service providers occupy a unique position in the market. On the one hand, they provide logistics services. But on the other, they're also heavy consumers of logistics services—they frequently have to contract for additional space or hire a trucker or other freight carrier to serve their customers.
A: Definitely. I think very few people have come to that realization. Third parties represent tremendous buying power in the market as well as being service providers themselves.
Q: That goes a long way toward debunking the old notion that asset-based 3PLs exist merely to channel revenue to their core business, whether warehousing or transportation. Have the buyers of 3PL services gotten past that concern yet?
A: I think they have, but there are different types of buyers. Some are highly sophisticated; others are still new to the outsourcing of logistics services. One of the challenges and perhaps opportunities for our members and third-party providers is identifying the type of customer they're dealing with and then adjusting their service offerings to that customer's needs. Frankly, I think that's why there's so much opportunity in this industry. Not only for people who have been in this business for a while, but also for those who are just starting out. There are so many different niches available. It's a vast industry and it's going to expand exponentially in the next five to 10 years.Many people report that it's growing at a 15- to 20-percent rate. That's significantly faster than most other industries.
Q: Significantly faster than most other industries, and considerably faster than the traditional function-based logistics services.
A: Without a doubt. You know, many different sectors are feeling the squeeze. I know that the wholesaler- distributor industry, if that's a proper term, is looking at 3PLs with great concern.They have a right to be concerned because that whole middle market between the manufacturer and the end user is being squeezed. The 3PLs are in an enviable position: Their core competency is managing inventory-moving, storing and strategically positioning that inventory near particular manufacturing operations or consumer markets. Manufacturers and major retailers have recognized it already.
The industry today is much like the old Wild West, because there are a lot of unknowns as to where it's going and how it's going to mature. The outsourcing business is picking up. It is only going to snowball further as we develop best practices. I believe our association can play a key role in defining standards of excellence so that customers will know what they should be looking for and how to identify companies that can meet those standards.
Q: Part of your repositioning strategy included a name change, which your members voted down. What was the name you proposed?
A: The Association of Logistics Outsourcing. The proposal was rejected by a very small margin—fewer than 20 votes out of over 250. But, even without a name change,the board is still moving forward in a new direction.
Q: I know part of your repositioning task has been to develop a document that addresses the group's future. What will your organization look like three or four years from now? What will tell you that you did the right thing?
A: We want to be recognized as the world's leading association for logistics outsourcing. That's number one. Number two, we want to be the source for logistics outsourcing information. Number three, we want to be known as the organization that's defining the standards of excellence in logistics outsourcing.When we're acknowledged as such by members, by non-members, by customers and by the general public we'll know we've succeeded.