US shippers leaning harder on 3PLs

US shippers leaning harder on 3PLs

The panel discussing the "State of Logistics Report" sponsored by Penske Logistics. Left to right: Joseph Ruddy, chief innovation officer, Port of Virginia; Cheryl Capps, vice presindent of global supply chain, Corning International; Joe Carlier, senior vice president of global sales with Penske Logistics; Sean Monaghan, partner with A.T. Kearney; standing up speaking is Rick Blasgen, CEO of CSCMP; Kevin Smith, CEO of Sustainable Supply Chain Consulting; Sylvia Fouhy, vice president of customer experience, Johnson and Johnson; and Erik Hansen, vice president of intermodal with Kansas City Southern. Photo credit: Ari Ashe.


The logistics industry is expected to grow 5.5 percent through 2019 as US shippers increasingly rely upon third parties for solutions to manage rising transportation costs, according to the Council of Supply Chain Management's annual "State of Logistics Report" sponsored by Penske Logistics.

Spending on third-party logistics providers (3PLs) will rise to $195 billion by the end of 2019, including nearly $99 billion in US domestic transportation management and $52 billion for international transportation management. Total expenditures have risen each year since 2010, according to Armstrong & Associates and A.T. Kearney, but the growth rate is accelerating as shippers depend upon 3PLs to temper inflation in the US domestic transportation market.

With spot market rates 20 to 30 percent higher than a year ago in dry van, flatbed, and refrigerated trucking, and up high single digits to low double digits on contract renewals, shippers turn to 3PLs to find one of the few available trucks and brainstorm long-term strategies to eliminate excess costs in their supply chains. Ultimately 3PLs thrive in this market because they can address three core needs of shippers: saving time, saving money, and optimizing operations.

Relationship dynamic

Even in this market, though, the "State of Logistics Report" finds that the relationship between shippers and 3PLs can be tenuous.

“Shipper-3PL interactions continue to focus on short-term cost cutting, while mutual mistrust prevents them from forging long-term strategic partnerships that would unlock greater growth for 3PLs,” the report states.

While shippers are interested in outsourcing logistics, many are dissatisfied with the one-stop solutions.

“There’s blame on both sides,” the report found. “Shippers often expect 3PLs to meet unrealistic implementation timelines and performance standards. 3PLs, for their part, avoid the risks of exploring truly innovative and customized solutions lest they lose a cost-sensitive shipper.”

But shippers discussing the report on a panel downplayed the idea of mistrust.

“In any relationship, there is tension. We would be deluding ourselves if we thought there wasn’t,” said Sylvia Fouhy, vice president of customer experience with Johnson & Johnson (J&J). “What we have been very focused on is making sure we’re integrating the J&J organization within 3PLs. It helps us drive the relationship, it helps us drive a deep understanding of the challenges a 3PL is facing … it’s a multifaceted relationship where we will help you grow your business if you can help us.”

Cheryl Capps, vice president of global supply chain for Corning International, said she wouldn’t characterize the relationship as mistrust, and technology is putting the industry on the cusp of solving most disagreements very quickly. She described an example of shipping glass, one of the feature products of the company.

“If you’re in a situation where eight guys handle your glass by the time it gets to your customer, all eight are pretty sure that they didn’t break the glass,” she said. But new technology can solve these problems.

“One pilot we’re doing is putting impact sensors on our glass, so I know at any given point of time that my glass incurred an impact on mile marker 57 and [at] 1 a.m., so I know who had the glass at that moment. We have one indisputable record and our partners are excited because they have data to find the root cause of the problems and claims will go down,” Capps said.

Railroads battle trucks for market share now and in the future

In a wide-ranging question-and-answer session with panelists representing shippers, 3PLs, railroads, and port authorities, the pros and cons of truckload versus intermodal were discussed.

In the short term, the electronic logging device (ELD) mandate is encouraging some shippers to convert over-the-road truckload into intermodal hauls, but inconsistent service is limiting the amount of freight leaving the highways.

Extensive delays on the rails this winter left a sour taste with some shippers. Although snowstorms were a factor, many believe that Class I railroads are so concerned with lowering operating ratios that there isn’t enough equipment or crews to provide the flexibility and nimbleness to handle peak traffic or unexpected events.

“I think the railroads are working extremely hard to get the crews in place for the peak season. You’ve no doubt seen some of the advertising for crews online, and that is one avenue. Another is planning better as far as where the peak season will hit the hardest and convince the unions that we need to deploy people in those places,” said Erik Hansen, Kansas City Southern vice president of intermodal sales and marketing.

He also agreed that the railroads need to build up their infrastructure to become more flexible and nimble to quickly recover from supply chain disruptions.

Fouhy and Capps have no plans to adjust their truck versus intermodal mix later this year based on what happened this winter. The railroad’s main drawback is the inconsistency in on-time performance that can suddenly change, they said.

“On our inbound raw materials — industrial minerals, sand, talc, resins — we use a considerable amount of rail because we have tolerance for less reliable service. But for outbound [finished] products where hours matter to our customers in terms of deliveries, we lean towards trucking because it’s more reliable. It’s no more complex than that,” Capps said.

In the long term, intermodal faces a considerable challenge from technology. The primary draw of the service is price. Intermodal is cheap, especially now as soaring truck rates are causing inflation-conscious shippers to closely manage their transportation costs. But technology is driving efficiencies into the trucking industry and closing the delta between the two modes. Automated trucks, for example, would render the ELD mandate obsolete and dramatically reduce costs since computers can theoretically drive without breaks.

“We are certainly keeping a close eye on this. There is no doubt there will be an impact overall, but how big that impact is and when it will come is more uncertain,” Hansen said.

Panelists not panicked about trade war with China

There are concerns about how intensifying rhetoric between the United States and China and tariffs could harm the economy and freight volumes through the ports, rail yards, and on the highways. Retailers, manufacturers, and builders that have their supply chains tied to China are worried about rising costs. Shoppers may see higher prices at the stores. Investors might see profits slide. Ports could see a decline in Asian imports.

But the short-term impact may not be as severe as some have stated in published reports.

“It will be disruptive, whichever way it goes, but I had meetings with a client who said they make their decision based on long-term economic fundamentals. So I don’t think there is panic, as much as planning for the long term and roll[ing] with the punches in the short term on trade,” said Sean Monahan, partner with A.T. Kearney and author of the report.

“I don’t think there is panic. Be vigilant, be aware about understanding the impact on the business, and we run models all the time. We make sure our voices are heard and we are expressing our concern. But there are things you can control and things you cannot control. So we’re staying the course because we are in it for the long haul,” Fouhy said.

From rising truck prices and rail delays to potential trade wars, shippers face a number of obstacles in their supply chains in 2018 and a 3PL might be the right choice to navigate through the turbulence.

Contact Ari Ashe at ari.ashe@ihsmarkit.com and follow him on Twitter: @ariashe_joc.