Logistics Quarterly Magazine - Volume 16, Issue 1, 2010

Shippers Increasingly Rely on Freight Forwarders

The most popular functions to outsource are the conventional services for transport, warehousing and distribution, but more companies are now starting to outsource value-added and customer-facing services like reverse logistics and customer support as well.

By George Kuhn

IT WAS RECENTLY REPORTED by IFW Online that shippers increasingly place greater value on forwarding services as supply chains become more complex. They cite the fact that carriers demonstrate little understanding and flexibility when it comes to solving day-to-day transport problems. This is certainly understandable inasmuch as carriers are primarily in the terminal-to-terminal (or port-to-port) ocean freight business or airport-to-airport air business and are not sensitized - nor trained - to thinking in alternatives to their own services.

Based on an in-depth analysis of the global freight forwarding sector by Drewry Supply Chain Advisors, forwarders have more than doubled their share of the container market in the last 20 years. Forwarders' share of the sea freight sector increased to around 35 percent in 2009, compared with approximately 15 percent in the 1980s and continues to grow. In comparison, the market share for air freight is around 95 percent, a rise of five percentage points since the 1980s.

Drewry's report, Using International Freight Forwarders - Costs, Contracts and Best Practices,says the range of services and requirements of shippers from freight forwarders are becoming more complex. It says many larger shippers are turning to forwarders to find smarter ways of handling and moving products more cost-effectively. Also, fixed-capacity logistics assets such as warehouses and trucks can turn into a strategic disadvantage in these uncertain economic times.

Balancing supply and demand across the value chain will prompt strategic redesign of the supply network and drive demand for alternative and flexible products in the transport market. Hence, the forwarder's role and demand will be further enhanced.

In many ways this is an almost logical consequence of a confluence of factors supply chain managers are faced with. Most industry experts agree that today's supply chains will be confronted with a "permanent volatility" in an unstable marketplace that is largely driven by risk management and uncertainty that entails such factors as supplier solvency, cost fluctuation, demand volatility, fluctuating foreign exchange rates, security threats, labor strikes, systems failures and, last but not least, a volatile regulatory environment that promotes conformance with hefty fines and other punishments.

Hence, "compliance outsourcing" is becoming an ever more attractive alternative that can well suit the buyer and/or vendor. Whilst ultimately still accountable to the regulatory authorities, the consequences for non-conformance can be conveniently shifted to the intermediary. Forty-five percent of supply chain professionals recently surveyed by Centrx Consulting say they are supporting their internal regulatory compliance department with external resources, especially those doing business in emerging markets. Growing global concern over environmental and safety issues is spinning a global web of trade and security programs that impact both importers and exporters, as well as products and movement. Compliance with new regulations such as the EU REACH and the US 10+2 filing system programs can be complex and costly.

Global sourcing is buffeted between business imperatives and a changing playing field and is in for a big change. The economic downturn and increased government involvement have added a level of complexity to sourcing decisions that is leading to disparate sourcing objectives. Reconciling them to achieve short-term results and long-term objectives is a conundrum that companies will continue to grapple with.

This, all the more, brings back the old adage of "do what you do best and outsource the rest." Outsourcing is being driven by a myriad of forces and a recent survey of American shippers by eyefortransport revealed that 69 percent currently outsource their logistics operations to 3PLs. The most popular functions to outsource are the conventional services for transport, warehousing and distribution, but companies are now starting to outsource value-added and customer-facing services like reverse logistics and customer support as well. Logistics is not core business to most manufacturers and distributors and contracting out to freight forwarders, 3PL and 4PL providers, can mean cost advantages and the flexibility of a wider carrier base, alternative routings and varied combinations of transport modes to meet the supply chain's ultimate goal of JIT - just-in-time delivery.

Global sourcing is a barometer for the world economy: a rise in indicators associated with a healthy and vibrant global sourcing sector will also correlate with a reviving global economy and companies' financial health. And whilst we can see such healthy indicators in the intra-Asia region and, interestingly, parts of South America, they are patently absent in the mature economies of Europe and North America. With the two most mature and richest markets still struggling to shed the effects of a devastating recession, good supply chain management will remain an imperative for successful enterprises and outsourcing may be just one of the answers for the challenges ahead.