The Road ahead for 3PLs

Challenges and opportunities for third-party logistics providers — and their customers — in 2010

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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."

Price of Oil Fuels Concerns

Joe Gallick, Penske Logistics
Joe Gallick,
Penske Logistics
Sustainability may be one driver for greater efficiency, but fuel costs are a more immediate concern for transportation providers. While the price of a barrel of oil has fallen into the $70-$80 range off its peak above $140 last year, 3PLs are not counting on the price staying at that level, according to Penske Logistics' Joe Gallick, who says that the fuel spike last year was a wakeup call for everyone in the logistics industry. "Long term I believe that the horizon for the cost of energy and the cost of fuel is going to continue to go up," says Gallick. "We got a glimpse of that last year, and it's more likely than not that that cost will rise — maybe not to the same level, but certainly significantly."

As a result, Penske Logistics' customers are looking to the company to help them mitigate potential future increases in the cost of oil. That could mean initiatives to better manage fuel consumption — that is, to consume less — or projects to engineer supply chain networks that require less transportation and therefore less fuel. "Those are the activities that our customers are expecting us to do for them, because energy conservation is critical going forward," Gallick says.

Penske Logistics itself, like other companies in the industry, has undertaken a range of steps to reduce fuel consumption, whether through retraining programs for many of their 4,000 dedicated-solution drivers on fuel management techniques such as progressive shifting, managing top-end road speed, or managing RPMs to operate the vehicle in the engine's "sweet spot"; or implementing technologies to limit engine idling time.

Filling the "IT Capability Gap"

Meanwhile, a separate recent study examining the current global market for logistics outsourcing finds that a majority of shippers currently are dissatisfied with the level of IT-based logistics services that their 3PLs are providing. The annual third-party logistics study conducted by consulting firm Capgemini, together with technology company Oracle, the Georgia Institute of Technology and logistics provider Panalpina, revealed an "IT capability gap" that has left shippers wanting for the key performance indicators, alerts and supply chain visibility they believe they need to build agile supply chains.

According to the study authors, shippers and 3PLs both seek IT that is responsive, delivers valued information such as order, shipment and inventory visibility, builds on existing investments and allows for innovation. However, the widespread use of manual practices and variations in standards in the industry make it difficult for shippers and 3PLs to exchange data reliably and connect workflows. Real-time interfaces to shipper order management systems (63 percent) and timely demand forecasts (54 percent) are the most desired IT capabilities 3PLs need from shippers.

John Ferguson, Schneider National
John Ferguson
Schneider National
John Ferguson, vice president-international at Schneider National, agrees that shippers are looking to their logistics partners to help address issues like increasing visibility into inventory in motion throughout the supply chain. As an example of Schneider National's initiatives in this regard, Ferguson cites a program that the company created for a large retail customer to provide visibility into the "drayage black hole," the window of time between when a shipment hits a port and when it shows up at a domestic warehouse. "That part of the supply chain can be so significant in terms of inventory costs and visibility to the merchants that are ordering these goods," Ferguson says.

The solution tracks shipments through the various stage gates as it progresses from ship to warehouse. In this case, the retailer had enough leverage to get all the major trading partners to send EDI messages into a system that Schneider National created to enable visibility to the merchants and other groups that need to know where goods are in transit. In addition to the increased visibility, the solution also allowed the retailer to save a substantial amount on their drayage costs because they found they were no longer tied to one dray carrier and one dray carrier's import system. Instead, they are now able to take bids from different dray carriers, and Schneider National manages multiple carriers at the port on the customer's behalf.

In general, shippers increasingly are looking to their 3PL partners to provide higher levels of service and a greater variety of services, says John Miller, senior vice president for global business development with Flash Global Logistics, Inc. Flash focuses on supply chain applications for high-tech service parts and components, servicing clients out of more than 700 locations worldwide for both forward logistics for centralized inventory and mission-critical distribution (two- to four-hour deliveries) for critical parts.

Flash's customers serve technology markets that often are commoditized, so they are seeking to leverage a relationship with a 3PL to ensure higher levels of customer service and, in effect, to differentiate themselves in the marketplace. That is forcing 3PLs, in turn, to develop new solutions and new ways to partner with their clients. "It's one thing to offer a location, a delivery service and an IT service for a client. It's another thing to integrate those things into the client's world so that they can take full advantage of the services that are available to them," Miller says.

Given current insecurities about the timing and extent of an economic recovery, Joe Gallick, with Penske Logistics, adds that 3PLs are looking to craft solutions that give their customers flexibility to accommodate a slower or more rapid upturn in the economy. "It's incumbent on the 3PL community to recognize that our customers, given the uncertainty, are going to look for more flexibility in their 3PL arrangements, especially ones that require assets or capacity commitments," he says, adding, "Customers are a little bit hesitant to make long-term decisions; they want to have some maneuverability to guard against what they don't know."

That said, Gallick remains guardedly optimistic for the 3PL industry's prospects. "I'm a firm believer that things will improve, and we're doing everything that we can during this time to position ourselves so that as the economy starts to improve, our foot's on the throttle," he says. Then, in a reference to Penske's racing business, he concludes, "Under the caution flag, we want to make all the adjustments necessary so that when the flag turns green, we'll be out in front of the pack."