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.
Contributing Editor Toby Gooley is a writer and editor specializing in supply chain, logistics, and material handling, and a lecturer at MIT's Center for Transportation & Logistics. 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.
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."
Robotic technology has been sweeping through warehouses nationwide as companies seek to automate repetitive tasks in a bid to speed operations and free up human labor for other activities. Many of those implementations have been focused on picking tasks, a trend driven largely by the need to fill accelerating e-commerce orders. But as the robotic-picking market matures and e-commerce growth levels off, the robotic revolution is shifting behind the picking lines, with many companies investing in pallet-handling robots as a way to keep efficiency gains coming.
“Earlier in this decade and the previous decade, we [saw] a lot of [material handling] transformation around e-commerce and the handling of goods to order,” explains Josh Kivenko, chief marketing officer and senior vice president at Vecna Robotics, which provides autonomous mobile robots (AMRs) for pallet handling and logistics operations. “Now we’re talking about pallets—moving material in bulk behind that line.”
Kivenko explains that whether items are being packaged and shipped directly to a customer’s home address or moved as finished goods to a shipping bay for store delivery, those items are first moved in bulk in some way, often by human hands and with human-operated equipment. He describes warehouses as chaotic environments in which humans move pallets and cartons in multiple ways—up and down, side to side, from receiving to storage, from storage to shipping, or via cross-docking. Automation can help bring order to that chaos.
“What we’re trying to do is relieve some of the pressure [on the] humans [doing] this work,” Kivenko says of companies that develop pallet-handling robotic technologies. “At the end of the day, we’re trying to automate some of those flows, relieve labor pressure, save costs, and keep the goods flowing.”
But automated pallet handling isn’t right for every situation, so it’s important to understand the warehouse conditions required and the protocols and best practices needed to make it a win. Here are some guidelines for applying pallet-handling robots and gaining the most from your investment.
FIRST, UNDERSTAND THE TECHNOLOGY
Pallet-handling robots fall into four general categories, explains Rich O’Connor, vice president of storage and automation for Raymond West Group, a business unit of lift truck manufacturer The Raymond Corp. They include:
Palletizing/depalletizing robots, which are used to load or unload items onto and off of pallets, usually with the use of a robotic arm for picking and placing. Today, these systems are being increasingly integrated with automated storage and retrieval systems (AS/RS) to further streamline pallet handling in the warehouse, O’Connor explains.
Autonomous guided vehicles (AGVs) and autonomous mobile robots (AMRs), which are used to transport pallets within the warehouse. Often outfitted with lift decks or conveyors, or designed to tug or tow items, these robots move pallets from point A to B within a facility. AGVs, which often follow a marked guide-path or wire in the floor, have been around for many years, but the advent of high-performance guidance and vision systems is allowing them more flexibility today, O’Connor says. AMRs are self-guided vehicles that use software and sensors to navigate their way through the warehouse.
Forklift AGVs and AMRs, which can move products both horizontally, from place to place, and vertically, into and out of storage racks. They come in various styles—including stackers, counterbalanced trucks, reach trucks, and even very narrow aisle (VNA) vehicles for use in densely packed warehouses. These vehicles are more complex than those used only for horizontal transport, O’Connor explains. They must be “highly integrated” into the facility’s warehouse management system (WMS) or warehouse execution system (WES) so that they know precisely where to retrieve and deliver pallets within the facility.
Robotic pallet shuttles, which move pallets into, out of, and within dense storage racking. The Raymond Corp. describes such a system as “a standalone, automated deep-lane pallet storage system that utilizes self-powered shuttle carriages to move pallets toward the back or front in a racking channel. Shuttles are motor driven and travel along rails within a storage lane.”
O’Connor and others say that no matter which of these technologies you’re investing in, it’s important to remember that they are all part of a larger system designed to optimize operations throughout the warehouse.
“The expanding role of all these different styles working together is what’s amazing today,” O’Connor says.
SECOND, ENSURE THE TECHNOLOGY IS A FIT
Kivenko, of Vecna, also emphasizes the importance of pallet-handling robots working in concert, particularly AMRs and AGVs.
“The magic isn’t just that the robots are autonomous and driving by themselves. The magic is multiple robots—when you have a [whole integrated] system [in place],” he says. “[It’s] how the fleet operates autonomously and optimizes itself for continuous improvement. That’s where the exponential gains are. [It’s] not just about automating what a worker does; it’s about automating a system.”
But you can’t install these systems in just any warehouse and expect magic. Kivenko and others point to certain conditions that enable the best robotic pallet-handling outcomes, especially when it comes to transportation-based and forklift-type AMRs and AGVs.
“The robots that I sell are large-load machines with very expensive technology,” Kivenko explains. “They move material, generally, in larger facilities. And in order for them to produce a return [on investment]—because that’s the name of the game here—they have to be higher-velocity facilities.”
He says pallet-handling robots work best in large facilities running multiple shifts, usually more than five days a week. Wider aisles allow the equipment to move more freely through the facility and at higher speeds, to optimize efficiency and productivity. Strong Wi-Fi networks and clean, dry environments also help keep equipment running at top performance.
O’Connor agrees that pallet-handling robots are best suited to facilities with multishift operations, where they can ease labor constraints and boost productivity. And he says many customers are willing to extend the typical two- to three-year ROI period to five years in order to achieve those gains. But there is even more to it than that. O’Connor’s colleague John Rosenberger says customers must first step back and analyze their processes to ensure that, even if they have the right facility for pallet-handling AMRs or AGVs, they are moving material in the most efficient way to begin with.
“Many times, we find that the processes in place [are inefficient],” says Rosenberger, who is director of iWarehouse Gateway and global telematics for The Raymond Corp. He emphasizes the importance of analyzing existing data—from an equipment telematics system or similar—to determine the best path toward automation.
“Do you have congestion zones now?” he asks. “They’ll still exist if you automate [those processes exactly].”
THIRD, MAKE SIMPLICITY A PRIORITY
Another basic rule of thumb when implementing pallet-handling robotics: Keep it simple.
Andy Lockhart, director of strategic engagement for global warehouse and logistics process automation company Vanderlande, says that when designing a pallet-handling robotics system, “you want to minimize the processes you [automate]. When you can create [an automated system] that focuses on one task—for example, AMRs delivering pallets from a high-bay [storage rack] directly to the palletizing cell—you can do that efficiently and effectively. When you ask the AMR to do this and this and this … you are adding risk of failure.”
Lockhart’s colleague Jake Heldenberg advises customers to first test their target processes via pilot programs within the warehouse or DC. Heldenberg is Vanderlande’s head of solution design, warehousing, North America.
“If AGVs or AMRs for pallet handling are interesting [to a customer], the best thing to do is pilot one or two in an existing DC,” he says, explaining that the process can help companies troubleshoot, understand integration timelines, and gauge ROI. But pilot programs can add expense to a project, making it unaffordable for some.
“If that’s the case, then the best advice is work with a vendor who has experience integrating [the technology],” Heldenberg says. “Use their experience to benefit your business. You won’t have the same hiccups and challenges you would with a less-experienced vendor.”
Jeremy Van Puffelen grew up in a family-owned contract warehousing business and is now president of that firm, Prism Logistics. As a third-party logistics service provider (3PL), Prism operates a network of more than 2 million square feet of warehouse space in Northern California, serving clients in the consumer packaged goods (CPG), food and beverage, retail, and manufacturing sectors.
During his 21 years working at the family firm, Van Puffelen has taken on many of the jobs that are part of running a warehousing business, including custodial functions, operations, facilities management, business development, customer service, executive leadership, and team building. Since 2021, he has also served on the board of directors of the International Warehouse Logistics Association (IWLA), a trade organization for contract warehousing and logistics service providers.
Q: How would you describe the current state of the contract warehouse industry?
A: I think the current state of the industry is strong. For those that have been focused on building good client relationships over the years, I think it’s a really exciting time. Coming out of all the challenges of the past few years, I think there’s a lot of opportunity for growth and deeper partnerships. It’s fun to see the automation and AI (artificial intelligence) integration starting to evolve [in a way that’s] similar to what we saw with WMS (warehouse management systems) in the early 2000s.
Q: You are now president of your family firm. Is it an advantage having grown up in the business as opposed to working elsewhere?
A: I definitely believe it was an advantage growing up in the business. Whether it’s working with family or someone else in the industry, there’s always an advantage when you have mentors[to guide] you. I’ve been blessed to have several mentors, some in the industry, others just in life, and I’m thankful that they were willing to mentor me and that I was willing to listen to them.
Q: What are the biggest challenges currently facing 3PLs, and how are you addressing them?
A: Labor and legislation are both tough right now. The two seem to have a lot to do with each other, and it can make it tough to find and retain people. So I think we’ll see more and more automation of processes industrywide.
Q: Third-party service providers often must handle a wide variety of products for a lot of different clients. Does this variety make it difficult to invest in automation and other new technologies?
A: It can make things more difficult when looking at certain automation, but it’s in the “difficult” that a lot of opportunities lie. It would be tough to find a single solution that fits every client’s needs, but there are always opportunities to improve in certain areas. It just takes a bit of vision and commitment, and a willingness to invest in your own long-term success.
Q: As a 3PL, what do you look for when selecting the clients you work with?
A: Quality relationships that will last a long time. When both parties are happy and working together in the same direction, everyone wins.
Q: You’ve been a board member of the International Warehouse Logistics Association since 2021. Why is your involvement with this organization important to you?
A: I think it’s important to understand what’s happening in the industry. IWLA is a great resource for staying up to date and getting a solid education when it comes to the latest logistics trends. I also think it’s important to give back and pass along what we’ve learned to those just getting started in the business. As important as it is to have a mentor, it’s just as important to mentor and help others.
“While there have been some signs of tightening in consumer spending, September’s numbers show consumers are willing to spend where they see value,” NRF Chief Economist Jack Kleinhenz said in a release. “September sales come amid the recent trend of payroll gains and other positive economic signs. Clearly, consumers continue to carry the economy, and conditions for the retail sector remain favorable as we move into the holiday season.”
The Census Bureau said overall retail sales in September were up 0.4% seasonally adjusted month over month and up 1.7% unadjusted year over year. That compared with increases of 0.1% month over month and 2.2% year over year in August.
Likewise, September’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.7% seasonally adjusted month over month and up 2.4% unadjusted year over year. NRF is now forecasting that 2024 holiday sales will increase between 2.5% and 3.5% over the same time last year.
Despite those upward trends, consumer resilience isn’t a free pass for retailers to underinvest in their stores by overlooking labor, customer experience tech, or digital transformation, several analysts warned.
"The 2024 holiday season offers more ‘normalcy’ for retailers with inflation cooling. Still, there is no doubt that consumers continue to seek value. Promotions in general will play a larger role in the 2024 holiday season. Retailers are dealing with shrinking shopper loyalties, a larger number of competitors across more channels – and, of course, a more dynamic landscape where prices are shifting more frequently to win over consumers who are looking for great deals,” Matt Pavich, senior director of strategy & innovation at pricing optimization solutions provider Revionics, said in an email.
Nikki Baird, VP of strategy & product at retail technology company Aptos, likewise said that retailers need to keep their focus on improving their value proposition and customer experience. “Retailers aren’t just competing with other retailers when it comes to consumers’ discretionary spending. If consumers feel like the shopping experience isn’t worth their time and effort, they are going to spend their money elsewhere. A trip to Italy, a dinner out, catching the latest Blake Lively and Ryan Reynolds films — there is no shortage of ways that consumers can spend their discretionary dollars,” she said.
Editor's note:This article was revised on October 18 to correct the attribution for a quote to Matt Pavich instead of Nikki Baird.
A real-time business is one that uses trusted, real-time data to enable people and systems to make real-time decisions, Peter Weill, the chairman of MIT’s Center for Information Systems Research (CISR), said at the “IFS Unleashed” show in Orlando.
By adopting that strategy, they gain three major capabilities, he said in a session titled “Becoming a Real-Time Business: Unlocking the Transformative Power of Digital, Data, and AI.” They are:
business model agility without needing a change management program to implement it
seamless digital customer journeys via self-service, automated, or assisted multi-product, multichannel experiences
thoughtful employee experiences enabled by technology empowered teams
And according to Weill, MIT’s studies show that adopting that real-time data stance is not restricted just to digital or tech-native businesses. Rather, it can produce successful results for companies in any sector that are able to apply the approach better than their immediate competitors.
“ExxonMobil is uniquely placed to understand the biggest opportunities in improving energy supply chains, from more accurate sales and operations planning, increased agility in field operations, effective management of enormous transportation networks and adapting quickly to complex regulatory environments,” John Sicard, Kinaxis CEO, said in a release.
Specifically, Kinaxis and ExxonMobil said they will focus on a supply and demand planning solution for the complicated fuel commodities market which has no industry-wide standard and which relies heavily on spreadsheets and other manual methods. The solution will enable integrated refinery-to-customer planning with timely data for the most accurate supply/demand planning, balancing and signaling.
The benefits of that approach could include automated data visibility, improved inventory management and terminal replenishment, and enhanced supply scenario planning that are expected to enable arbitrage opportunities and decrease supply costs.
And in the chemicals and lubricants space, the companies are developing an advanced planning solution that provides manufacturing and logistics constraints management coupled with scenario modelling and evaluation.
“Last year, we brought together all ExxonMobil supply chain activities and expertise into one centralized organization, creating one of the largest supply chain operations in the world, and through this identified critical solution gaps to enable our businesses to capture additional value,” said Staale Gjervik, supply chain president, ExxonMobil Global Services Company. “Collaborating with Kinaxis, a leading supply chain technology provider, is instrumental in providing solutions for a large and complex business like ours.”