Logistics Outsourcing "in Transition"

Still growing globally, but challenges remain for third-party providers, study shows

Chicago September 24, 2003 A majority of companies in key regions are using third-party logistics (3PL) services, but enhancing customer relationships while expanding service offerings remains a challenge for 3PL providers, according to a new survey released today.

Cap Gemini Ernst & Young, Georgia Institute of Technology (Georgia Tech) and FedEx Supply Chain Services released the results of their eighth annual report on third-party logistics trends and issues at the Council of Logistics Management's annual conference here. The study involved 400 logistics and supply chain executives from the United States, Canada, Mexico, United Kingdom, France, Belgium, Netherlands, Germany, Italy, China, Japan and South Africa.

More than three-quarters of North American and Western European (78 percent and 79 percent respectively) and more than half (58 percent) of Asia-Pacific respondents indicated they use 3PL services. In addition, operating performance, cost management and service delivery are the three biggest ongoing concerns to 3PL customers in each of the key regions studied.

In North America and Asia-Pacific, the four biggest reasons why non-users did not use 3PL services were that logistics is a core competency for the company (44 percent), logistics is considered too important to outsource (40 percent), costs would not be reduced (32 percent) and control would diminish (32 percent).

In North America, the use of the Internet and independent electronic markets is up significantly from previous studies. The 2003 study shows that 26 percent of companies surveyed currently use industry vertical procurement markets and 40 percent plan to use them in the future. This is a drastic shift from the 2001 findings of 11 percent and 17 percent respectively. In addition, 28 percent currently use transportation/logistics electronic markets and 63 percent plan to use them in the future, compared to the 2001 findings of 13 percent and 37 percent respectively.

"This year's study suggests that the 3PL industry is in transition as both buyers and sellers of 3PL services gain experience in their respective roles," said C. John Langley Jr., professor of supply chain management and 3PL study leader at Georgia Tech.

The 2003 study indicated that Western European respondents spend a larger portion of their logistics dollar or euro (65 percent) on 3PL services than do those in North America (49 percent) and Asia-Pacific (50 percent). Globally, the four most frequently outsourced activities to 3PL providers are warehousing, outbound transportation, customs brokerage and inbound transportation.

In terms of the top three technology-based services currently provided by 3PLs for each region, North American respondents cited warehouse management (70 percent), event management (66 percent) and freight forwarding (66 percent); Western European respondents answered warehouse management (75 percent), freight forwarding (71 percent) and transportation management (68 percent); while Asia-Pacific respondents named transportation management (71 percent), freight forwarding (47 percent) and warehouse management (33 percent).

The primary sources of technology solutions included the 3PLs themselves (used by 32 percent of Asia-Pacific respondents, compared to 29 percent of Western Europeans and only 16 percent of North Americans); technology providers (used by 35 percent of North American participants, compared to only 15 percent in Asia-Pacific and 6 percent in Western Europe); and internal resources (used by 59 percent of Western European respondents, compared to 56 percent in Asia-Pacific and 46 percent in North America).

While more than 70 percent of all respondents view their 3PL as a "resource provider," only 24 percent of Western European respondents view them as a "resource manager," compared to 43 percent in North America.

When asked about quantifiable measures of 3PL success, North America and Western European respondents cited logistics cost reduction (9 percent and 7 percent, respectively); fixed logistics asset reduction (16 percent and 5 percent); average order-cycle length change (from 9.8 to 7.9 days versus from 4.7 to 2.0 days); overall inventory reduction (8 percent and 13 percent); and cash-to-cash cycle reduction (from 25.6 to 18.3 days for North American respondents only).

Additionally, Cap Gemini Ernst & Young launched a facilitated learning and research group through its Accelerated Solutions Environment (ASE) center in Atlanta, Ga., in July, with 30 executives from various industries and geographies coming together for the first time to analyze and clarify the research findings from this year's study. The key message derived from that session was that proper definition of the scope of work with enough flexibility built into the contracting process with 3PLs is the key to maintaining a long-term healthy relationship.

"Companies in all industries must see the 3PL option as one that can provide value creation for the user firm, its customers and suppliers and the supply chain in general," said Mark Colombo, vice president of strategic marketing and corporate strategy and 3PL study leader for FedEx Corporate Services. "The study showed that 3PL providers will increasingly be at the focal points of strategy formulation, operational excellence and information technology to make the maximum contribution in value creation for their customers."

Respondents by region included 221 from North America, 53 from Western Europe, 118 from Asia-Pacific and 8 from South Africa. More than two-thirds of respondents globally came from the manufacturing sector, representing the aerospace, automotive, chemical, computers and peripherals, consumer products, electronics, government, industrial management, life sciences, medical, retail and telecommunications industries.

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