The Road ahead for 3PLs

By Andrew K. Reese

With the global economy still crawling out of recession, the third-party logistics (3PL) industry continues to feel the effects of the economic downturn. As companies in this space look forward to closing out a difficult 2009 and getting a fresh start in 2010, they are faced with a mixed bag of signals and conflicting trends that muddy the prospects for growth ahead.

The good news is that business appears to be picking up. The American Trucking Associations' advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 2.1 percent in August, matching July's increase of the same magnitude, signifying a growing economy and offering hope that the revenue picture will look up heading into next year. The rise in the ATA's index has been matched by increases in other major economic indicators, such as the Institute for Supply Management's Purchasing Managers Index (PMI), which tipped above 50 in August and September, pointing to growth in the manufacturing sector. ISM's latest index for imports also ticked up in September, and the exports index, while dipping below 50, remained relatively strong at 48.5 for September, following a level of 54.0 for August.

In short, plenty of signs that goods are moving through the system at a stronger pace than earlier in the year.

On the one hand, 3PLs continue to face challenges on a number of fronts. Pressure from customers to reduce costs continues to bite into 3PLs' margins. Fuel costs, while currently hovering in the $70 per barrel range — around half their peak levels last year — are still a long-term concern. A combination of government, customer and public attention to "sustainability" has kept the spotlight on the industry's efforts to run not just leaner but also "greener," despite the economy. Customers are also looking to their logistics service providers to provide new types of services and new technology-enabled capabilities to help better manage their supply chains. Meanwhile, all these pressures come against the backdrop of major layoffs within the industry over the past year as companies have sought to align their staffing levels with current demand for their services.

In short, plenty of challenges to keep a 3PL CEO up at night.

Survey Says...

The good news-bad news state of the 3PL industry found reflection in results of the "2009 3PL Provider CEO Perspective" survey presented at the Council of Supply Chain Management Professionals (CSCMP) annual conference by survey author Robert Lieb, professor of supply chain management at Northeastern University, and Joe Gallick, senior vice president of sales for Penske Logistics.

According to the survey of 35 CEOs, representing approximately $64 billion in 2008 revenues and covering North America, Europe and Asia-Pacific, half of the companies missed their revenue targets last year. Yet all but two of the 3PLs reported at least some level of profitability for 2008. "That was surprising," says Professor Lieb. "Apparently they were able to adjust the scale of their enterprises and reduce costs so that even though their overall revenue projections weren't met, they were still able to generate profits."

Some of the cost-cutting came through layoffs. In fact, 28 of the 35 CEOs reported layoffs during the past year, and the average percentage of the workforce let go last year amounted to 13 percent in North America, 12 percent in Europe and 9 percent in Asia for those companies that did experience layoffs. In addition, 27 of the CEOs said that their companies had reduced their recruiting efforts during the year.

Cost-cutting efforts went beyond just layoffs. Companies also undertook initiatives to rationalize their route network, better utilize their vehicle fleets and squeeze out other efficiencies. In some cases, the professor says, the 3PLs went directly to their customers to seek gain-sharing opportunities. Some service providers were able to rework contracts with their clients to move into cost savings-sharing programs, whereby the 3PL would agree to provide a service at a specified lower cost, and if the service provider met that cost target, the savings would be divided proportionately between the customer and 3PL. On the other hand, Lieb adds, "Some companies said that they just had to make due with a lower margin, which they didn't like to do, but they did."

Sustainability Still a Priority

Another surprise for Lieb and other industry sources interviewed for this article was the continued emphasis on "sustainability" or "green" issues for the 3PLs chief executives. "Literally not one of the companies said they scaled back their initiatives in that area, and probably two-thirds said that they either expanded the scope of their existing program or came up with completely new initiatives in that area during the year," Lieb says." Companies were actually more interested in talking about these issues than they had been in previous years."

The professor points to the results of past surveys that suggested the CEOs were focusing on sustainability initiatives because they were "the right thing to do." Pressure from customers, regulators and board members were a factor, too, but the survey results from past years revealed a general consensus among the companies involved that it was time to start taking sustainability issues seriously.

In many cases, companies last year said that initially they had expected the steps they were taking around sustainability to be cost generators, but they turned out in many cases to generate savings that more than offset the investments the companies were making to "go green." And in many cases the programs not only generated savings but also had a positive impact on company morale — once these programs were launched, employees seemed to take ownership in the programs and derived satisfaction out of seeing the results of the projects that the company was undertaking to get greener, Lieb says.

As a result, these two factors helped keep sustainability programs moving forward even as the economy went into the downturn. CEOs also may be looking to the future, Lieb notes, explaining, "You can bet that within the next five years, you're going to see on a global basis regulations related to sustainability, and you're better off putting programs in place and fine-tuning them now, before the regulations hit, rather than having to react after the fact to regulations."

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