This story appeared in the print edition of the Jan. 6, 2020, Journal of Commerce Annual Review and Outlook.
Heightened investment in logistics technology by software vendors and liner carriers is often seen as a threat to global third-party logistics providers (3PLs). As intermediaries, these so-called middlemen in shipment coordination worry that technology is often perceived as a way to eliminate them.
But 3PLs also can view the omnipresent nature of technology in their space as an opportunity to shift from the resale of ocean and air capacity to more meaningful services for shippers.
In software parlance, this is known as “stickiness,” where a product becomes so ingrained in its users’ business processes that it’s hard for the user to disentangle itself from use of the product.
In some sense, that stickiness has taken the form of what 3PLs consider their most defensible characteristic: customer relationships. The human element of coordinating freight movements across the globe is often what originally drives beneficial cargo owners (BCOs) to use 3PLs in the first place.
Shippers sometimes lack the resources or in-house expertise to manage all aspects of freight and so outsource some or all of that activity to a third party. A major component of that is the hand-holding 3PLs provide to shippers, especially when something goes awry. BCOs and 3PLs have regularly told The Journal of Commerce that this resolution management component of the relationship is still critical, even as software providers try to create systems to automate problem resolution.
In that environment, 3PLs are navigating a tricky period in which they have to maintain what has been sticky in the past (relationships), as well as nurture what might well be sticky in the future (technology).
“We do something our customers don’t want to do, can’t do, or can’t do as well as us,” Marc Meier, the former managing partner and CEO of forwarder Fr. Meyer’s Sohn, said in a September keynote address at the JOC Container Trade Europe Conference in Hamburg. “We get paid for our market knowledge, and our buying power with carriers. But this will change, this will not matter going forward. The big challenge is to monetize the value add.”
Meier stressed that three distinct parties — which he categorized as customers, capacity providers, and solutions providers — need to work together to add value to supply chains. That value could come in the form of technology or process improvement.
Addressing the shippers (customers) in the audience, Meier said, “technology doesn’t drive anything. Don’t focus on things like blockchain; focus on your business. Have clarity about how you’re competing in the market.”
He also said the past is often not illustrative as a guide for the future. He encouraged all three parties to “design a vision of what we think the world will be from our perspective, and don’t take the past too much into consideration because what we thought we knew isn’t valid anymore. We need to develop an understanding about what really drives our business models.”
The great leveler
The opportunity for 3PLs in a technology-obsessed world lies in their ability to provide BCOs and capacity providers peace of mind in a way that diverges a bit from the past, and that has much to do with the way business processes are changing. As Meier suggested, 3PLs need to be able to adapt to however a shipper wants their help. Sometimes that’s technology, sometimes not.
It’s important to note that 3PLs aren’t merely clinging to life. The top 50 global transportation providers grew their collective annual revenue by 9.2 percent, to $815 billion, from 2017 to 2018, The Journal of Commerce reported in October. Much of that growth was due to shippers front-loading cargo before deadlines for US tariffs on Chinese goods hit in 2018, and 3PL revenue growth rate slowed considerably in the first half of 2019 in response.
But the larger issue is that the use of 3PLs isn’t decreasing over time. Even non-vessel-operating common carriers (NVOs) have seen their share of capacity on key trade lanes rise over time, signaling that shippers often want to involve a service provider outside of the direct capacity provider upon which they rely.
It’s instructive, however, to think about size and vulnerability among global 3PLs as it relates to technology and service stickiness. As Amazon grows its logistics presence, and as container lines seek to become end-to-end service providers themselves, shippers may seek to deepen ties to 3PLs with a strong track record and a focus on customer service. In that light, small and mid-sized 3PLs would be less threatening than a retailer with bold logistics ambitions, or controllers of ocean capacity seeking to control more aspects of a BCO’s shipment.
Technology needs to be the great leveler. The single-provider approach is enticing on paper, but it can create vulnerabilities and dependencies that BCOs are generally keen to avoid. On the other hand, BCOs don’t want to manage information across a dozen websites from various small and mid-sized 3PLs to coordinate their shipments.
One interesting approach to emerge in mid-November was Chicago-based Redwood Logistics’ announcing it would become a third-party systems integrator for customers already using systems they don’t want to relinquish. Redwood is predominantly a domestic 3PL and broker, but the technology approach of being agnostic to existing systems — whether from a software provider or another 3PL — could be a roadmap for how global 3PLs turn the technology threat into an opportunity.
Minneapolis-based Navegate, a mid-sized forwarder, has taken a similar approach. “Our software is agnostic to our freight forwarding division,” Navegate CEO Nathan Dey told The Journal of Commerce. “Our whole tech stack is based on middleware. We aggregate data from anyone who touches the shipment. For us, the most important thing is to own the relationship with the importer.”
If 3PLs aren’t going to be crowded out by technology, then 3PLs should start to embrace technology’s ability to enhance their existing positions in the industry, a way to increase stickiness and amplify their already established customer relationships, not replace them.