3PLs set their sights on small, mid-sized players

After expanding their penetration of the nation's top 500 companies in 2008, third-party logistics service providers are now setting their sights on the more fragmented small to mid-sized enterprise market, according to a recently released study by Stoughton, Wis.-based consulting firm Armstrong & Associates Inc.

The study, which canvassed Armstrong's database of 3PLs, found that 77 percent of the Fortune 500 outsourced some or all of their logistics and supply chain functions to outside providers in 2008, up from 64 percent in 2005. The global Fortune 500—which includes U.S.-based multinationals—spent nearly $200 billion on 3PL services in 2008, up about $10 billion from 2007 totals, the survey said. (Of the vertical industries that Armstrong studied, technology had the largest 3PL spend in 2008 at $45 billion.)

Third-party providers captured 16 percent of total U.S. logistics spending in 2008, up from 10 percent in 2002, according to the study. Given their strong position among larger concerns, the 3PLs' relatively small share of the total logistics market means there is a broad swath of business—notably, in the small to midmarket range—up for grabs, according to Evan Armstrong, the consulting firm's president.

Armstrong says many smaller companies that previously kept their logistics functions in house will increasingly look to outsource the business to reduce costs. He says these companies are more apt to farm out most, if not all, of their logistics services to one provider because their operations don't require the input of multiple 3PLs. This bodes well for outside providers, Armstrong says. Not only will they have opportunities to win more business, but they'll also stand to gain economies of scale—and achieve better margins—by managing integrated components of a customer's supply chain, instead of just one or two functions.

Still in control
Most businesses predominantly use outside providers for executing specific services rather than for fully managing their supply chains, according to the survey, Trends in 3PL/Customer Relationships -2009. Of the 4,000 shipper-3PL relationships analyzed by Armstrong, nearly 82 percent are "tactical" in nature, meaning 3PLs are used for specific tasks such as inbound transportation or warehousing. Only 18 percent of the relationships are classified as "strategic," where a 3PL essentially takes over a customer's entire logistics and supply chain operation, says Armstrong. Many shippers are just too large for one company to manage on its own. In fact, the survey found that Wal-Mart Stores, Procter & Gamble, General Motors Corp., and Ford Motor Co. each use 30 or more logistics partners.

Armstrong says that "80-20" ratio has remained constant for several years, and reflects shippers' reluctance to give up full control of their logistics operations, especially in the area of customer service. However, the weak economy and the economic benefits of logistics outsourcing may convince businesses to cast aside those concerns, he adds.