Logistics providers adapt to tough sales environment by developing creative solutions, collaborating with shippers.
By Eric Kulisch
U.S. third-party logistics providers fared well last year with revenue increasing 5.1 percent to $133.8 billion, but that represented a big slowdown from the 18.7 percent growth in 2010.
Logistics industry research and consulting firm Armstrong & Associates estimates the U.S. market will rise 6.3 percent to $142.2 billion in 2012 due to the drag from cooling economies in Asia and the recessionary situation in Europe.
Both figures are down from the industry’s 15-year compound annual growth rate of 10.3 percent.
The global 3PL market grew 4.9 percent to $616 billion year-over-year in 2011, but the growth rate also decelerated as demand for international transportation eased in line with the downturn in trade.
Revenues for 3PLs in North America have recovered and surpassed the pre-recession level in 2008, reaching $160 billion last year. The European 3PL market, at $160.4 billion, still has not caught up to where it was four years ago. Asia is the largest market for logistics services at $191 billion and South America is the fastest growing at 30.6 percent, albeit much less mature than other regions, according to Stoughton, Wis.-based Armstrong & Associates.
In the current economic environment, supply chain management firms have had to become more creative selling outsourced logistics services because shippers are more frugal and skeptical that vendors can consistently meet marketing claims of improving speed to market while reducing costs. Interest in outsourcing is growing, logistics experts say, but potential customers are more diligent at assessing potential benefits before engaging a 3PL.
After years of mergers and acquisitions, the promise of one-stop-shop logistics powerhouses that can seamlessly meet any shipper’s needs – from international freight forwarding, to multi-modal domestic transportation management, inbound delivery, warehousing, light assembly, packaging, distribution, and returns logistics – still falls short of expectations, but 3PLs are getting better at delivering uniform service levels across their entire portfolio and geographic footprint, industry executives and analysts say.
Only 68 percent of shippers surveyed in the 2012 Third Party Logistics Study, conducted by Penn State University and CapGemini Consulting, rated their logistics vendors as sufficiently agile and flexible, down from 72 percent the previous year.
Acquisitions have come with growing pains because it can be difficult to integrate the cultures, processes and information technology of companies, especially when they are located in different countries.
“I will tell you just from observation that nobody does a very good job today at integrating all these activities. They can say they provide all these services, but they’re still, to a large extent, managed as functional silos” because they don’t have the systems to meld marketing, operations and customer support from different parts of the organization, Joel Sutherland, managing director of the Supply Chain Management Institute at the University of San Diego, said in an interview.
Lead logistics providers that manage subcontractors for specific tasks typically position themselves as capable of analyzing a customer’s problems, identifying operational bottlenecks and acting as a control tower rather than simply trying to sell a service.
But moving from a transactional-based world to one that is analytical and network-focused requires a change in mindset.
“Sales people knew how to quote rates on transportation or throughput for a distribution center, but you didn’t have the strength in terms of how do you sell a solution, how do you price a solution? People come from these functional areas and that’s how they know to sell, to price and to talk to the customer,” said Sutherland, a veteran logistics executive with experience working for manufacturers, wholesalers and third-party logistics providers, and who helped create non-asset based logistics provider Transplace a dozen years ago.
And 3PLs that expand from their home base where they excelled often aren’t as good as the local providers in far-away cities, he added. They may not understand local business or political constraints or have established relationships with service providers or government officials.
“Those companies that can establish and retain strong local preferences throughout the country and throughout the world are going to be the best ones,” Southerland said.
Sea-Land Services, the ocean carrier now owned by Maersk Line, entered into a joint venture with pan-European trucking and logistics group Frans Maas (since acquired by DSV A/S) in 1990 to move finished automobiles for Ford from Germany to Finland, but the rail-barge service they conceived didn’t work out because the gauge of the rail tracks in Finland was different, Southerland recalled.
“We didn’t know what was going on in this country,” said Southerland, who worked on the project for Sea-Land. “We didn’t have enough experience. We thought we came up with a great solution. We priced it, got the contract and then failed. It was one of those eye openers.
“So, if I’m going to manage that (overseas) operation I better have people who know what’s going on in these areas,” he said.
In reality, there are few 3PLs that can handle the entire supply chain needs of large multinationals. They often partner with other logistics companies in certain regions or take a general contractor role and manage the operations of multiple 3PLs.
DHL Supply Chain and Global Forwarding’s network is so extensive that shippers can potentially use it as a single source of logistics services. The Deutsche Post subsidiary has 31 ocean carrier partners and the ability to ship through 45,000 weekly origin-destination pairs on the forwarding side, and is the largest warehousing provider in the world with 248 million square feet of space under its wing, Evan Armstrong, president of Armstrong & Associates, said during an Aug. 10 phone briefing for clients of investment banking firm Stifel Nicolaus.
DHL’s operations around the world exhibit “tremendous consistency” with systems, procedures and even logos that are the same, according to an Armstrong & Associates presentation at the Council of Supply Chain Management Professional’s annual conference last fall.
Southerland said lead logistics providers are going through a necessary evolution and are closer to synchronizing their operations.
In fact, the 3PL community is now downplaying the notion that a 100-percent vertically integrated provider can provide turnkey solutions for manufacturers and retailers because customers realize a one-size-fits-all approach isn’t suited for the complexity of modern supply chains, said Carl Fowler, senior director of business development for Menlo Worldwide Logistics.
Shippers are looking for “an orchestrator” who can collaborate with other entities and internal groups within the customer’s organization, link the different parts of the supply chain, and make adjustments to the network as supply or demand requirements change, using their own capabilities or contracting with other providers who are best-in-class within a certain niche or region, he said.
“I think we’re seeing a shift in thinking from ‘do everything for me’ to ‘help me collaborate, help me click the pieces together,’ ” Fowler said. “So if you design it, act as my general contractor and if your core competency is plumbing then go ahead and do it, and if it’s not electrical then go find me the best electrician for that application.
“Before, if you didn’t have your own transportation management system, or warehouse management system, and your brand on it, companies looked the other way. Now, they want the best available capability for each link of the supply chain,” he said.
Joe Gallick, vice president of sales for Penske Logistics, concurred that 3PLs are closer to achieving convergence of technology systems, cultures and business processes.
“There’s no question in my mind that the global 3PLs have gotten better and I think that’s going to continue,” he said.
But he too questioned whether shippers want global logistics services packaged in a single provider.
Penske offers end-to-end supply chain products, but is not an international logistics provider. It has some operations in Brazil, Europe and China to serve strategic customers like Ford Motor Co., but doesn’t manage cross-border supply chains as a general rule.
“Was that desire for one-stop shopping a perception of the provider community or a real requirement of the shipper community? I think that’s a question that remains to be answered. What we find often is that shippers, while they may ask for that capability in an RFP, for example, the way they operate is very much regional and not global.”
In fact, Armstrong said, most multinationals select their logistics providers on a regional basis, which makes it difficult to put together a coordinated, global supply chain management program.
“Usually, where you have the most success is if the shipper has some central supply chain operation and they’re willing to let a 3PL control significant pieces,” he added.
High Expectations. Shippers, in turn, are getting better at identifying requirements and what results they expect from a 3PL relationship. They want vendors to anticipate their problems and continue to make process improvements that save money, but have become more selective about engaging outside help, according to industry analysts and logistics practitioners.
Third-party providers comprise about 15 percent of overall logistics spending by companies, but the outsourcing trend is gathering steam, said Patrick Kelleher, senior vice president of business development in the Americas for Exel, the contract logistics arm of DHL.
Many potential customers, especially retailers, that have not outsourced in the past are now actively exploring that option, he said.
Cargo owners traditionally have sought out 3PLs on a transactional basis to simply execute a piece of the supply chain, such as arranging freight transportation. Today, more companies are exploring deeper partnerships in which 3PLs are involved in strategic planning and holistically analyzing the supply chain, experts say.
In a change from the past, many potential clients have a good idea of what they want to do to improve their logistics operations because they have a better understanding of their supply chain or have used a strategic consultant, and contact Menlo for a second opinion to validate their specifications for designing warehouses or other tasks, Fowler said.
At the same time, shippers are being more careful about their outsourcing decisions.
“That is really manifesting itself in more senior management engagement in that potential outsourcing decision,” Kelleher said. “We’re dealing with senior financial folks, CFOs and CEOs. That’s a dramatic change from what we’ve seen in the past. These decisions are becoming much more strategic and now these customers are looking for confirmation that the savings that have been identified can be achieved.”
Gallick said cargo owners remain interested in outsourcing logistics, “but the cycle time for evaluating the 3PL alternatives and coming to contract seems to be longer.”
The uncertain economy, the lack of good internal supply chain data for benchmarking existing system performance against outsourced options, and the extra people now involved in the process have all delayed companies from committing to logistics services, Fowler explained.
Penske has responded by making it easier for potential customers to make a decision through trial, or “try me,” solutions, Gallick said.
The company, for example, may create pop-up fleets that essentially are mini-dedicated carriage truckload operations that don’t require a customer to make a long-term commitment.
The goal is for “those relationships that are formed during these interim environments and cemented through execution will result in long-term business opportunities,” he said.
Fowler also said customers are starting with small technology implementations that they can gradually build up over time and asking Menlo to free up cash for transportation management systems and other investments through operational savings because their budgets are frozen. By figuring out how to control spending on premium freight service, for example, a company can then invest in an inbound TMS system for its truck and intermodal network.
Outsourcing discrete tasks such as freight payment or operating a warehouse to save costs remains the norm and continues to grow slightly, but the big growth area involves strategic outsourcing, Kelleher and Fowler said.
Shippers are starting to realize that the real way to reduce cost isn’t by saving dollars in any one piece of the supply chain, but by setting up an integrated infrastructure to minimize risk, balance cost across the entire operation and focus on continuous improvement, Fowler added.
Still, strategic relationships are the exception because many shippers remain reluctant to give up control of their transportation or distribution center decisions, or to disclose proprietary information with a third party.
Some 3PLs, such as C.H. Robinson, Transplace and Menlo offer managed transportation management — software plus staff involvement to deal with exceptions such as a broken-down truck — as a hybrid option for companies that want a middle ground between outsourcing freight management and buying a transportation management system and hiring people to operate it.
Transportation management involves tasks such as identifying complimentary freight for continuous/roundtrip moves, dock scheduling, automated shipment tender, rate assignment, and track and trace.
C.H. Robinson’s TMC division, for example, manages clients’ full transportation networks between different nodes in the supply chain. But in many cases customers still hold the contracts with motor carriers and the 3PL simply executes the best routing plan with the available carriers, Armstrong noted.
“It’s somewhat of a best-of-both world’s strategy for a lot of shippers so they can take advantage of the transportation management expertise through a strategic relationship but they don’t have to give up control of that carrier base” they’ve negotiated with, he said.
There are examples of shippers co-loading truckloads, including with competitors in some cases, but most shipper collaboration still involves 3PLs managing dedicated fleets, finding backhaul freight and sharing the revenue with the original shipper, Armstrong said. Even in cases where there is a desire for cross-shipper collaboration one of the challenges is how to fairly allocate costs between the parties for shared truckload.
Pay For Performance. Executives surveyed in the annual 3PL study by Penn State expressed slightly less interest in strategically collaborating to take out costs and share revenue from any efficiency gains. But, according to a Retail Industry Leaders Association report, 22 percent of respondents use programs to share savings from network improvements, and another 50 percent plan to do so.
“I think what is happening is not that gain sharing is diminishing in importance, but that companies are becoming much better at figuring out what should become part of the relationship and when,” John Langley, a supply chain professor at Penn State and author of the 3PL study, told American Shipper.
Gain sharing is more prevalent in contracts to manage transportation than warehousing because the potential savings from productivity improvements is on the order of 20 to 30 percent versus 10 to 15 percent, Armstrong said.
Menlo’s Fowler agreed gain sharing is an effective way to structure a commercial relationship because it spreads risk and creates an incentive for the logistics provider and customer to align their business processes. It is widely accepted practice that spurs both parties to eliminate waste and improve operating efficiency, which can lead to shorter order-to-delivery cycles or other service enhancements.
But shippers are reluctant to continue paying bonuses, or a portion of the identified cost savings, if a 3PL can’t improve its service levels or find additional savings as time proceeds, industry executives said.
More customers now insist on contracts that require outsourced logistics providers to demonstrate they have continuous improvement programs and will initiate efforts to reduce costs a certain percentage each period on their own, Southerland said.
Kelleher said gain sharing is not mentioned much in Exel’s conversations with current or prospective customers, but his contrarian view dovetails with the consensus opinion that shippers are just more disciplined in defining their expectations for collaboration.
“I think it’s because of our collective ability to identify savings opportunities with certainty is much better than it used to be. In the past it was almost like a risk mitigation tactic because of this general uncertainty whether or not the savings opportunities were real. There isn’t as much need to incent the third-party provider with revenue from savings because of the way the industry has evolved. You’re better off now because you predict savings with certainty and keep the savings for yourself,” Kelleher said of shippers’ mindset.
“Gainsharing is still alive and well. The question is what will be an incentive to providers and customers to continually improve the relationship,” Langley said.
“Generally speaking, shippers are viewing 3PLs as more of a commodity than they should be,” he added.
Creative Energy. With all the tire-kicking going on, what is driving business activity for the 3PL community these days?
One problem that shippers continue to want solved is how to optimize operations within the four-walls of their existing warehouses. Gallick said there is a lot of interest in increasing the freight volume and number of activities performed in facilities through internal redesigns and better labor utilization.
Penske’s initial contact with potential new customers increasingly involves requests to do an engineering analysis of their current distribution centers to create more capacity or accelerate the flow of orders, he added. Kelleher said many shippers are better at managing their inventory and seeking ways to fully utilize vacant space within their facilities, such as allowing a 3PL to handle storage and distribution for a third party.
Logistics providers usually hope that consulting work results in them being asked to actually take over running the facility, including the workforce and warehouse management system.
“From a sales standpoint, in the past, if a customer operated their own DC we’d likely not consider it a prospect to sell warehousing to. Now, we look it as a prospect and inquire to see if we can help the customer create more efficiency in that environment. It starts as a diagnostic exercise and we believe it will lead to opportunities,” Gallick said.
Reconfiguring warehouses to handle the flow of different inventory for e-commerce is part of the warehouse optimization analysis Penske is doing, he added.
The growth of electronic commerce has increased pressure on retailers to become adept at multi-channel retailing so a customer can purchase and receive a product in a brick-and-mortar store, on the Web or through a mobile application, without any drop off in service.
In 2011, U.S. retail e-commerce spending reached a record $161.5 billion, a 13 percent jump from the previous year, according to Internet research firm comScore. A report last spring on the state of the retail logistics sector by Auburn University, and sponsored by RILA, included survey data showing that retailers with multiple sales channels derive 9 percent of revenue from e-commerce and they expect that figure to rise to 15 percent in the near future.
Direct-to-consumer sales complicate supply chain operations because retailers typically offer a wider variety of products online than in stores. It also changes inventory position, picking processes, warehouse automation and shipping patterns (parcel instead of truckload and less-than-truckload).
Most retailers still use dedicated distribution centers to fulfill store and online orders for reasons having to do with allocating and tracking inventory, ease of accounting, reducing shipping errors and compromising service levels to each channel by using an undifferentiated fulfillment process, according to the RILA study led by Brian Gibson, a professor.
Some companies process direct and store orders with the same personnel in the same facility, and then separate them for shipping. The system works best when orders are similar in type and units, and the DC has enough capacity to integrate consumer-direct orders with the current store-processing schedule. Integration enables companies to avoid new facility and systems upgrades, and improve inventory turnover and visibility.
Other companies use a hybrid approach with separate inventories for retail replenishment and e-commerce orders within a single facility. This approach sacrifices lean inventory levels and processing efficiency, but generates efficiency from using the same facility and labor force for both tasks. Another hybrid option is to serve consumer-direct orders from a common inventory pool across separate facilities, the RILA study said.
It recommended that oversight of store and e-commerce fulfillment be assigned to a single executive to simplify decision-making and ensure consistent fulfillment strategies, but less than 40 percent of survey respondents currently do so.
Rick Jackson, executive vice president of Mast Global Logistics, said it is in the best interest of retailers to keep all their online inventory in a single facility as long as possible, even if that means expanding the footprint, because trying to manage myriad stock-keeping units from different locations is difficult.
Mast is the logistics arm of Limited Brands, which has a sizable business-to-consumer online business through outlets such as Victoria’s Secret and Bath & Bodyworks.
By having inventory in a single location a retailer reduces the chances of having to mark down prices because there is a wider set of consumers pulling product from various sales channels, Jackson said during a June panel discussion on logistics trends in Washington hosted by the Council of Supply Chain Management Professionals.
Centralized online fulfillment also allows retailers to combine orders from the same customer rather than sending two different packages, which lowers shipping costs.
Kelleher and Fowler said the goal shouldn’t be to have inventory in one location but integrate it into the mainstream supply chain and aggregate inventory to serve multiple channels. Large retailers likely will have separate e-commerce fulfillment centers, but want tools that allow them to check the combined inventory and have the ability to ship from an e-commerce facility to a store or from a store or distribution center to an online customer.
“Increasingly, we are talking to customers about what we can do to enable next-day, in some cases, same-day e-commerce deliveries,” Kelleher said.
A new activity recently undertaken by Exel to attract more customers is third-party procurement, in which Exel staff essentially take over buying products in foreign or domestic markets on behalf of retailers, Kelleher said. The need to outsource arose because merchants recognized their procurement organizations may be strong buying certain lines of products or services, but not others. Exel can supplement a company’s core competency while taking into consideration the gamut of supply chain costs associated with product delivery, such as customs tariffs, that buyers might overlook. It can also leverage its shared transportation network to consolidate multi-client shipments into larger loads to move product through the supply chain more efficiently, he added.
Another recent trend in the 3PL industry is diversifying the base of business to include mid-tier customers that previously couldn’t afford transportation management contracts geared to heavy freight users.
Menlo, for example, has essentially become the lead logistics provider for small-to-midsized technology companies, such as Power Wave and Blue Coat Systems, according to Armstrong.
Fowler said large 3PLs like Menlo that previously wouldn’t consider supporting a company that spends less than $20 million per year on transportation now have the information systems and efficient processes in place to scale their service sets to mid-market needs. Technology advancements allow 3PLs to phase in freight management programs in increments, instead of all at once.
Menlo can provide the same level of transportation planning and dispatch for companies with transportation budgets of $10 million, or even as little as $6 million, Fowler said.