Third-party logistics providers have their work cut out for them in 2012. Volatile global markets are driving demand for collaborative, end-to end solutions and highly flexible supply chains, which 3PLs are being asked to provide while keeping costs to a minimum and offering a broader range of value-added services.
Providers are investing heavily in technology and extending their global reach as customers chase growth in emerging markets.
Volatility in global markets poses the greatest challenge for 3PLs and shippers going into 2012, said Rolf Habben-Jansen, Damco CEO.
Flexibility is a top priority these days: With shippers maintaining lean inventories, many are looking to 3PLs to help them postpone decisions on positioning and delivering goods in the supply chain while maintaining low transportation costs. That means optimizing transportation decisions as much as possible and shifting between modes to speed up the flow of goods or slow them down depending on demand.
Modal shifting is a little more difficult than it sounds, especially while maintaining service levels across multiple geographies. 3PLs that have been focused on building up their end-to-end capabilities, rather than on short-term profits or market share will likely come out ahead of the pack in 2012.
“With volatile demand, shippers want partners that can serve them across the globe with multiple modes,” Habben-Jansen said.
As 2011 ended, forwarders including CEVA Logistics, Panalpina and DHL Global Forwarding announced new less-than-containerload services aimed at bringing cost-effective but predictable goods transport to shippers.
Demand is growing for 3PLs to provide integrated, end-to-end service programs to drive velocity and reduce inventory. For shippers, it’s a better value proposition than working with multiple specialized providers, said Kim Wertheimer, executive vice president of the global industrial sector at CEVA Logistics.
“An integrated approach allows them to better manage their premium freight spend and make better decisions on transportation,” he said.
Those decisions are more critical than ever because inventories are at historic lows, leaving little margin for error on routing decisions and putting a greater premium on forecasting. At the 2011 TPM Asia event in Shenzhen, several shippers said they were providing carriers rolling forecasts close to intended ship dates to ensure the right space at the right time.
For 3PLs, that has meant shifting interaction with shippers from a transactional to collaborative basis.
CEVA said it is taking a more consultative approach with customers, driving more tailored solutions and establishing longer-term relationships. It’s a hybrid of the 4PL model, with CEVA bundling a broad array of services and holding accountability for supply chain performance. CEVA’s end-to-end services typically deliver savings of 5 to 15 percent, Wertheimer said.
The asset-light business model has enabled many 3PLs to thrive in an era when many asset-based providers are struggling.
While ocean container lines were falling into the red in the third quarter, Expeditors International of Washington reported record net profit of $106.6 million in the quarter. Damco’s operating profit in the first nine months of 2011 grew 8 percent year-over-year, and CEVA reported a $125.8 million profit in the third quarter that not only was 5.8 percent better than the same quarter a year ago, but also showed far greater growth than the 1.2 percent gain in gross revenue.
With established global networks of facilities and infrastructure, the companies are demonstrating how they quickly leverage up or down based on demand with relatively little long-term investment.
Performance expectations have steadily risen for 3PLs, with shippers now expecting thought leadership and proactive management, said Joe Dagnese, vice president, automotive and industrial for Menlo Worldwide Logistics, the global logistics subsidiary of Con-way.
After the bleak years of 2008-2010, there was a nice uptick in business in 2012 for Menlo. “Customers moved off the dime and moved forward with 3PL services,” Dagnese said.
Menlo’s key competitive differentiator is its 4PL service offering, which involves global supply chain realignment using lean tools and methodologies; value stream mapping; collaborative, value-added services such as reducing production cycle times; and eliminating waste and overlap. “That’s where the big savings are, not by browbeating carriers for the best price,” Dagnese said.
Menlo client teams, ranging in size from 15 to 40 people, often act as diplomats to get company departments to buy into new perspectives on how to drive supply chain value. “There are often significant organizational alignment issues that have to be addressed,” Dagnese said.
The scale and economic strength of the major 3PLs give them an advantage over smaller competitors in terms of providing stability and balance to customers amid global market turbulence, said Valerie Bonebrake, senior vice president with supply chain consultants Tompkins Associates. “Scale really counts in building flexible networks,” she said.
3PLs will focus on cementing relationships with key customers in 2012 as those shippers look for their growth in emerging markets such as Mexico, Brazil, India and China. As companies seek multiple sources of supply and increasingly compete in domestic markets, 3PLs have to be right there with them with the requisite in-country experience and industry know-how.
For global shippers looking to increase visibility and reduce complexity, working with fewer providers is an obvious component of any solution. “They want 3PLs to take on a bigger role so they can focus on their business,” Bonebrake said.
She expects to see more consolidation among 3PLs and continued private equity investment in the industry.
Constraints on hiring and IT investment will drive growth in demand for logistics outsourcing services in 2012, said Jim Butts, senior vice president of C.H. Robinson Worldwide. The Minnesota-based 3PL, by far the largest truck freight broker in the U.S., saw its business accelerate during the year, with revenue up 11.8 percent in the first nine months of 2011 and net profit up 13.5 percent to $520.8 million.
These days, one of the most valuable services that 3PLs can provide is contingency planning as shippers focus on risks of supply chain disruptions.
“Flexibility is critical, but it has to be with a purpose, with an end in mind,” Butts said.
He said economic volatility is leading 3PLs to focus on strengthening key relationships, as companies expand in emerging markets. C.H. Robinson provides services to customers through dedicated account management teams, comprised of employees with deep in-country and vertical expertise. Team members, backed by the company’s massive global network and IT infrastructure, are empowered to make decisions on behalf of customers.
The goal is not just to solve problems but also to stop them before they arise. “We don’t want to have the fastest fire engine; we want to have the fewest fires,” Butts said.
The national truck driver shortage is a “huge critical factor” for the 3PL industry in 2012. 3PLs need to work with carriers to maximize driver productivity and to optimize every load. If the economy improves and renewed construction activity attracts drivers, the situation could get even worse.
The Japanese tsunami and the flooding in Thailand have shown how fragile global supply chains have become, said APL Logistics President Jim McAdam. To provide stability in the midst of uncertainty 3PLs will need to offer flexibility, responsiveness, risk mitigation, visibility, predictability and speed, in addition to improved inventory management and upstream product planning. “Supply chain performance will increasingly be evaluated on four dimensions: cost, customer service, sustainability and risk,” he said.
Developing markets will provide much of the growth for 3PLs in 2012. While the BRIC economies of Brazil, Russia, India and China made up just 17 percent of global GDP in 2010, they are expected to account for 40 percent of world GDP growth during 2011 and 2012, according to global advisory firm PricewaterhouseCoopers.
As companies expand their businesses in BRIC countries, Latin America, Asia-Pacific and Africa, they will increasingly rely on 3PLs to overcome regional challenges such as limited infrastructure. Providers that succeed will be those that can drive productivity improvements by optimizing transportation and assets and eliminating waste while keeping pace with clients’ expansion efforts.
Fast-growing consumer markets in developing nations will provide 3PLs with new opportunities for import-flow logistics, domestic warehousing and distribution and value-added services such as packaging, labeling, product configuration, light assembly, postponement hub management and fulfillment services. For example, over the next decade, 70 percent of growth in global automotive demand is projected to come from the BRIC countries.
In the near term, BRIC nations are expected to provide the 3PL industry with year-over-year growth rates of more than 15 percent, McAdam said.
Customers that source from Asia, notably the major retailers, are looking to take more control of the supply chain further upstream and are encouraging their 3PLs to support them with more value-added activities at origin such as first mile transportation, vendor management, product quality assurance and pre-retail services.
In North America and Europe, where economic growth is stagnant, 3PLs will need to collaborate to gain efficiencies and economies of scale.
Evan Armstrong, president of supply chain consulting firm Armstrong & Associates, estimates that gross revenue for North American 3PLs will top $150 billion in 2012, a 6.5 percent increase following an annual growth rate of 10.7 percent between 1996 and 2010.
Armstrong attributes the slower growth to weakness in the U.S. economy, air and ocean trade volumes that slowed in the second half of 2011, and widespread economic uncertainty. “The economy is only hitting on three cylinders,” he said. “We don’t expect anything spectacular.”
For 3PLs, growth will be stronger in the Asia-Pacific, India and China, where GDP growth rates are projected to be 7 to 9 percent for 2012, compared with GDP growth of 2.4 percent for the U.S., according to economists at the National Association of Business Economics, a professional association of forecasters.
Domestically, the health care industry is expanding its use of 3PL services. There also continue to be opportunities in domestic transportation management, where 3PLs currently hold an 11.3 percent share of a North American market that Armstrong estimates at $325 billion.
For 3PLs and their customers, the best hope for riding out the economic downturn is to share a mutual commitment to long-term collaboration rather than seek short-term savings. “Trying to shave costs on an old paradigm is a zero-sum game,” McAdam said.
The economic environment is one of the toughest ever in which to manage inventory, said Ralph Cox of Tompkins Associates. In addition to rampant volatility and uncertainty, inventories are at historic low levels at a time where there are more SKUs, more product promotions and longer lead times.
An important trend in retail inventory management is growing use of sales and operations planning and collaborative planning forecasting and replenishment. S&OP refers to coordinated internal reviews in which senior managers formulate a consensus operational and financial plan. CPFR is a joint process between supply chain partners to manage shipment flows. “This is the wave of the future,” Cox said. “In simple terms, it’s a way of trying to coordinate supply and demand in real time.”
Contact David Biederman at email@example.com.