3PL Update: Differentiate or Die

Third-party logistics providers have had a tough ride over the past two years, but 3PLs looking to thrive in the 'New Normal' are bringing new innovations to the market


By Andrew K. Reese

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Erik Hinson has some words of advice for his fellow executives at third-party logistics providers. "If you compete on price," Hinson says, "you'll die on price."

Hinson is managing director at Logistix Worldwide, a 3PL based in Murfreesboro, Tenn., in Greater Nashville. He acknowledges that the past two years have been "interesting times" for his industry, but he says that the intensified competition brought on by the economic downturn has pushed his company and its peers in the industry to "raise the bar" by innovating to introduce new services that bring additional value for their customers.

"We want to test the envelope," Hinson says. "Because if we're not continuously looking for the next innovation or opportunity, somebody else will, and we don't want to be in a position of having to chase someone down."

Mixed Bag

The economy's slow crawl out of recession and into a period of sluggish growth has brought a mixed bag of news for third-party logistics providers. Armstrong & Associates, the industry research firm, has reported that 3PLs' US revenues fell from $127 billion in 2008 to $107 billion in 2009. But Armstrong & Associates was predicting a rebound to $121 billion for 2010, and the researchers were calling for a measured rebound as the economy settled into the "New Normal."

The economic doldrums clearly have had an impact on rates in the industry over the past 24 months. The 21st "State of Logistics Report," released in June by the Council of Supply Chain Management Professionals (CSCMP) in collaboration with Penske Logistics, documented the impact of the slowdown on the logistics industry. In announcing the release of the report, the CSCMP and Penske noted "due to abundant capacity and decreased freight to move, the industry has experienced significant pressure to reduce costs" throughout 2009. Warehouses emptied of inventory, trucking saw a 9 percent drop in tonnage carried, rail carload traffic was down, and the ocean sector lowered rates to stimulate business. Only air cargo was on stronger footing by the end of the year.

Moreover, "The State of Logistics Outsourcing" report, based on the results of the 15th Annual Third-Party Logistics (3PL) Study conducted by Capgemini Consulting in cooperation with the Georgia Institute of Technology and logistics provider Panalpina, suggested that 3PLs had borne a significant brunt of the impact of the recession on the logistics sector. The results of the study, the authors write, "may mean that on average, shippers were able to scale back their expenditures for 3PL services faster than they were able to scale back their total logistics expenditures."

On the other hand, the shaky recovery from recession could be seen as working in the 3PLs' favor, since shippers concerned about a "double dip" back into recession have been looking to 3PL partners to help increase the agility of their supply chains. For example, "The State of Logistics Outsourcing" report quotes a supply chain executive as affirming that "the ability to be changeable and adaptable is clearly a primary factor for success... The use of 3PL s can be a very useful resource to companies who are striving to keep their supply chains current, flexible and adaptable."

Smarter Services

Lorcan Sheehan, senior vice president of marketing and strategy with Waltham, Mass.-based supply chain service and software provider ModusLink Global Solutions, acknowledges that the recession has hit 3PLs hard. "It's not been an easy 18 months for 3PLs," he says. But Sheehan goes on to say that the turbulent economy also has put increased pressure on logistics services providers to look beyond the fluctuations in rates. "The challenge for the 3PL community is that, if they are to build a sustainable revenue model for the future, it has to be built on being the best-in-class at logistics services at whatever pricing is available, while being able to differentiate through smarter services or solutions to logistics problems," Sheehan says.

The key for 3PLs is to differentiate their services in a way that allows them to avoid falling into the trap of commoditization. The emphasis, Sheehan adds, is on solving customers' new and emerging logistics problems. "The days of just saying 'Here are my rates for a particular service' are gone," he continues. "The 3PLs that are putting their services in the context of the real puzzles that need to be solved are the ones that have the best chance of moving away from that commodity position."

Mike Markham, vice president of sales and marketing with Denver-based Cadre Technologies, a provider of solutions for the fulfillment and distribution industries, agrees that successful 3PLs today are offering new services that create "sticky" customer relationships by embedding themselves more deeply into their customers' processes. In particular, he says that 3PLs are looking to leverage technology that allows them to provide customers with greater visibility into inventory in the supply chain. "It used to be that people would go down the street to a competitor for a dollar less per pallet," he says. "Well, today it's so much more about getting the information that's being provided. Good information has become as important as the product that you're moving."

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