Rick Blasgen is a confident man. The president and CEO of the Council of Supply Chain Management Professionals sees the same dark clouds of uncertainty that others up and down the freight shipping world see — global economic uncertainty that is stifling trade, employment growth, and investment in innovation.
But he also sees a third-party logistics industry that is showing strength and resilience in the face of that uncertainty, navigating a complex, highly regulated trade environment with new technologies and collaborative strategies that are bringing greater efficiency to a turbulent supply chain.
That resilience is built on the backs of reinvention, as 3PLs evolve from providers of fixed services to single parties to purveyors of information-based supply chain management services across global networks of interconnected partners.
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Blasgen is upbeat about the U.S. 3PL market for the rest of the year as the industry grows through mergers, acquisitions and organically, and as new customers turn to outsourcing so they can focus on core competencies.
“The industry is doing a much better job of reaching out to companies,” Blasgen said in an interview leading up to the CSCMP’s Annual Global Conference in Philadelphia Oct. 2-5. “Most warehousing is still done privately, so there are good growth opportunities.”
Logistics providers improve the value equation for shippers by bundling value-added services such as light manufacturing and bar-coding to reduce supply chain costs. They are embracing sustainable logistics to reduce waste. Shippers and 3PLs, seeking to mitigate high fuel prices, costly regulation and driver shortages, are broadening and deepening collaborative relationships to optimize routes and networks.
And, although 3PLs certainly share some of the uncertainty enveloping shippers and transportation providers, there is also an upside for intermediaries: As companies focus on their core competencies to navigate a troubling market, they are increasingly turning to logistics outsourcing to streamline operations and lower costs.
“Companies are focused on doing what they are already doing, but doing it better,” Blasgen said.
It’s been a good year for 3PLs, and the industry should continue to see growth for the remainder of 2011, said Evan Armstrong, president of Armstrong & Associates, a Stoughton, Wis., research and consulting company specializing in third-party logistics.
Armstrong estimates revenue generated by the U.S. 3PL industry will reach $142 billion in 2011, up 10.9 percent over 2010. That’s only slightly below the 12.7 percent compound annual average growth rate of the industry since 1995, when Armstrong first began tracking the U.S. and global 3PL markets.
The industry also is thriving because of its stability in an era of instability: The long-term structural underpinnings of 3PL markets, outsourcing and global trade are strong enough to compensate for recessionary periods and economic uncertainty. Eighty-two percent of domestic Fortune 500 companies use 3PLs, up from 54 percent in 2004. Top users of 3PL services include Johnson & Johnson, Wal-Mart, General Motors, General Electric, BMW, Daimler, Philips, Pepsico, Unilever and Procter & Gamble.
“Companies will continue to turn to 3PLs in order to focus on their own core competencies,” Armstrong said.
Advances in technology also have greatly simplified logistics and global trade management. New capabilities in automated data handling, managing business intelligence and Web and mobile connectivity are making possible deeper levels of collaboration between shippers and 3PLs and enabling redesigned processes for increased supply chain efficiency.
Last year was an anomaly in the U.S. 3PL market as industry revenue jumped 18.9 percent over 2009, when recession-battered companies slashed inventories and spending. 2009 marked the first annual decline for the domestic 3PL market since Armstrong & Associates began tracking results in 1995.
Net revenue is projected to rise in 2011 in all four 3PL market segments: non-asset-based domestic transportation management, 11 percent; non-asset-based international transportation management, 13 percent; asset-based dedicated contract carriage, 11 percent; and asset-based value-added warehousing and distribution, 8 percent.
The retail industry spent the most on 3PL services in 2010, $25 billion, followed by technology, $20 billion; automotive, $11 billion; food and groceries, $10 billion; elements, $9.4 billion; and health care, $7.7 billion.
Key trends this year in the 3PL sector include collaboration, bundling of services and a strong focus on transportation rates and the factors that affect them, including fuel costs, driver shortages and regulations, said Dan Singer, vice president of operations for supply chain service at Averitt. The Cookeville, Tenn-based provider of freight transportation and supply chain management is the nation’s 16th-largest provider of dedicated contract carriage.
Rising fuel costs are driving more shippers to embrace dedicated contract carriage, pressuring 3PLs to provide those services without dramatically increased cost. That means they must make significant investments in technology and improved processes for better collaborative capabilities. “The 3PLs that can build a better mousetrap will bring better value to the customer,” Singer said.
Although great advances have been made in warehouse and transportation management and other supply chain technologies, not all 3PLs implement it properly or understand its full functionality. To maximize technology, 3PLs must talk to their customers to understand what they want from it and provide adequate training and resources to make sure it happens. “You have to really kick the tires and delve into what technology can do,” Singer said.
Mobile technologies are rapidly permeating supply chain management and are light years ahead of the previous generation of gadgets. Load boards accessed by mobile devices are already a huge factor in the trucking sector.
Averitt Express is an active user of onboard computers and satellite technologies, and Singer believes it’s only a matter of time before all trucks are mandated to have onboard recorders.
Given the ups and downs of a shaky global economy, flexibility has become a top priority for shippers in managing warehouses, inventories and dedicated fleets. It’s a departure from past practice when 3PL-shipper relationships were locked down in terms of square footage and human and capital assets.
“Shippers don’t want them to have a dedicated fleet that obligates them to run units,” Singer said. “They have to be able to scale up or scale down.”
That flexibility also is paying off for Damco, the logistics arm of Denmark’s A.P. Moller-Maersk. Damco’s profit climbed 9 percent to $361 million, and new business sales jumped 37 percent in the first half of the year, despite a challenging freight market.
The growth is occurring as Damco and other 3PLs find new ways to collaborate more closely with customers. Damco has essentially re-engineered its account management and sales functions on the customer-facing side of the business in a process called dynamic flow control, said Martin Thaysen, Damco’s global chief commercial officer.
Given today’s volatile demand cycles and economic uncertainty, companies need maximum flexibility to manage shipments at each stage in the supply chain. Dynamic flow control enables Damco and its customers to utilize predefined criteria for shipping and exception as well as dynamic approaches to mode selection and precision in times to market.
The process grew out of development sessions with customers about two years ago to identify key supply chain challenges. Within the past year, pilot programs have been launched with a handful of major customers in the retail, fashion and consumer electronics industries. To prepare for the programs, Damco brought new people aboard and added resources from its supply chain consulting team.
The success of flow control depends on Damco gaining deeper insights into the nature of its customers’ businesses. The process takes collaboration to levels beyond the traditional ocean freight 3PL focus on the physical transportation of goods.
“With our pilot customers, we found that we needed to change our focus from TEUs and loads to talk about sales and purchase orders and how they were evolving,” Thaysen said.
As the pilot relationships expanded, so did the savings, including substantial reductions in air freight and overall freight costs. Tighter integration, enhanced visibility and greater insight into customer inventory management practices enables Damco to shift modes more easily and efficiently.
Domestically dynamic flow control means tighter control over the vast amount of inventory that arrives at the U.S. West Coast. A key benefit is more deliveries to cross-docking facilities and customer warehouses rather than big-box import distribution centers.
“Traditionally, a lot goes to distribution centers whether the goods are there for 12 hours or two months,” Thaysen said.
Process flow control allows Damco to execute supply chain strategies based on agreed-upon decision trees and the deeper insights it has acquired into sales, purchasing and inventory management practices, leaving the customer free to focus on core competencies.
“We can continuously optimize the supply chain without shippers having to get involved,” Thaysen said.
The rollout of process flow control is in its early stages as many shippers lack the international infrastructure to make it feasible. Pilots are under way with about 200 of Damco’s largest customers.
Pervasive uncertainty has led companies to put off supply chain initiatives, especially those with long-term payoffs. Damco has suspended some its own flow control projects with customers who are waiting to proceed until a semblance of certainty returns. “Flow control is a longer-term approach to the supply chain, and some customers are reluctant to do that now even if the payback is quite large,” Thaysen said.
Flow control represents the biggest potential change to logistics in more than 20 years. It involves significant process changes, such as who within organizations makes supply chain decisions. Thaysen sees it as one of several innovations that signify the end of supply chain management as a series of fixed and planned steps subject to change by numerous parties. “In my view, that makes things more interesting than just going to bid on a low-cost TEU,” he said.
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