3PLs Riding High

It’s hardly new to say third-party logistics as an industry has been on a great run. As Western companies have outsourced manufacturing to China and other faraway locations over the last couple decades, the resulting complexities from an extended supply chain have provided a wealth of opportunity for 3PLs. It’s been the 3PLs, and not the asset-based carriers such as ocean or air carriers, who have reaped the lion’s share of the profits from outsourcing and globalization.

What’s interesting, however, is how inaccurate it would be to say the 3PL opportunity has run its course. To the contrary, the 3PL outlook remains as positive as it ever has. Whether through innovation, acknowledgement by shippers that logistics isn’t a core competency or shippers’ increasing emphasis on cost-cutting, it looks like demand for 3PL services will grow at healthy rates for the foreseeable future.

That was a clear message from the 2013 Third Party Logistics Study, an extensive annual survey based on responses from some 1,500 shippers in North America, Europe, Asia-Pacific and Latin America, as well as 800 logistics service providers. The results were presented in a recent conference call hosted by investment bank Stifel Nicolaus.

The survey revealed, for example, a widespread expectation by shippers that their use of 3PLs will grow: 65 percent indicated they would increase their use of 3PL services, whereas just 22 percent indicated the opposite — that is, a likelihood of taking more outsourced logistics services in-house.

That 3-to-1 ratio in favor of greater outsourcing is interpreted in part as a reaction to the challenging economic conditions of recent years in which companies are scouring their supply chains in search of lower costs — a development seen within the transportation world in migration of cargo from air to ocean and truck to intermodal. 

“The figures would suggest that the impact of the economy, at least over the past few years, was such that more firms were more aggressive in involving 3PLs than those that returned to in-sourcing,” said John Langley, clinical professor of supply chain management at Penn State University and an author of the study.

For shipper organizations looking to cut costs, 3PLs apparently are delivering the goods: Shippers surveyed reported overall logistics costs fell 18 percent, inventory costs dropped 8 percent and fixed asset costs declined 26 percent, with shippers reporting higher rates of savings through their 3PL relationships.

Perhaps most revealing in terms of the positive outlook for 3PLs, and one of the factors behind several current “buy” recommendations on 3PLs’ shares by Stifel Nicolaus (including Truckload Services, Ryder System, UTi Worldwide, Hub Group and Echo Global Logistics), is that shippers seem to be acknowledging their own limitations.

The survey, conducted for 17 years, reveals a significant drop in the number of shippers who consider logistics to be a core competency. In the 2006, 2007 and 2008 surveys, 38 percent, 37 percent and 45 percent of shippers responded affirmatively to the statement, “Logistics is a core competency at our firm.” This year the number was just 15 percent.

Expanding on that theme, respondents are able to check any of eight boxes indicating reasons for not using a 3PL, including, “Cost reductions would not be experienced,” “Service level commitments would not be realized,” and “We have more logistics expertise than most 3PL providers.” But over time, Langley said, the number of boxes checked has “seriously declined.” As time passes, he said, “shippers express fewer reasons why they choose not to outsource.”

This development coincides with another trend identified by the survey: a huge increase in costs associated with natural disasters and other forms of disruption such as systems outages, cyber attacks, energy scarcity and civil unrest. The economic cost of disruptions soared from $62 billion in 2009 to $350 billion in 2011. There would seem to be a connection between growing disruption and the need for 3PL relationships to help manage through them.

At the same time, the survey revealed that shippers choose to outsource certain functions much more frequently than others. The more operational and repetitive function — such as international transportation, domestic transportation, warehousing, forwarding and customs brokerage — are those that are more frequently outsourced. But, Langley said, “Shippers tend to be less likely to outsource activities that they consider to be strategic in nature, regard IT, and — maybe most important of all — those activities that directly impact or relate to the customers.” Such strategic functions less likely to be outsourced include order management and fulfillment, information technology, inventory management and service parts logistics.

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at ptirschwell@joc.com and follow him at twitter.com/PeterTirschwell.

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