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Outsourcing Logistics

Consolidation is Quickening the Evolution of the 3PL

Mike Bernos

As we enter the next phase of the industry’s evolution, a rising number of shippers are routinely demanding more services at a lower cost from 3PLs. What’s the secret to success in this market? Survival and growth will likely go to those global 3PLs and their customers that share in both the management of the risks and the benefits derived from outstanding performance.

A wave of consolidation is hitting the contract logistics marketplace as European companies seek to capitalize on the outsourcing opportunities that present themselves in both North America and Europe. In fact, an estimated 73 percent of shippers are expected to outsource by 2005 compared to the 37 percent in 2000, according to a recent study by Lazard Freres.

The lesser-known part of the consolidation equation, but equally as telling about the state of contract logistics, is its fragmentation. Core logistics sectors such as warehousing, transportation management, air and ocean freight forwarding as well as dedicated contract carriage are growing at rate of up to 25 percent annually, yet market share for small companies is between 30 to 80 percent.

This means that no single third party logistics provider (3PL) dominates the market and, while major players may stand out in their sectors, no one company is recognized as a leader in more than one sector.

But as consolidation takes hold, 3PLs will add cross-sector expertise to their portfolios as they want to gain a competitive edge in the global market by positioning themselves as lead logistics providers (LLP). Add to this the growing trend for shippers to have a single point of contact or a “single-throat-to-choke” when outsourcing a wide array of services, and 3PLs have even more reason to become prolific.

Few companies can meet the broad range of requirements demanded by these new initiatives. However, if I were to play the game of “utopia” – that is, to create the perfect scenario for success, what would be the necessary elements needed by a 3PL to execute as a LLP?

A Global footprint: In order to tie together global supply chains and the network of their suppliers, shippers are demanding 3PLs have an existing presence in those regions where they do business. They must be familiar with customs and procedures to do business in those locations. Forrester Research has reported that a successful cross-border transaction requires an average of 27 parties. Add to that the many different tariffs, duties, classification codes and restrictions that exist internationally and shipping material globally across borders becomes even more challenging. Operationally, most 3PLs that can provide economy of scope also provide substantial results as a result of leveraging their economies of scale.

Information Technology: Many SCEM tools are available, but nearly all are one dimensional or targeted to a core sector such as transportation, warehouse, order management and back-end offerings. As a result, integrating customers and suppliers can be as difficult as mastering a Rubik’s cube. However, 3PLs have emerged as the crucible for integrating supply chain applications. Charged with having to bridge sectors to provide an effective supply chain solution, 3PLs have forged an amalgam of supply chain applications from commercial and proprietary sources possessing the scope and flexibility to meet the diverse needs of customers. For too long the marketplace has overlooked these composite applications because they have not been marketed and branded competitively. But customers are quickly realizing that their logistics solutions can be found within the composite formed by these versatile applications. Recent academic research underscores this conclusion. According to Robert Lieb of Northeastern University, in Boston, many 3PL users rely on their providers for I.T. support and specific I.T. capabilities of individual providers play an important role in the provider selection process. The most important of those capabilities, Lieb says, are the ability to integrate a company’s software and systems with those of other companies in the supply chain, the ability to operate the clients’ software and systems and to implement new software and systems.

In order to have the breadth to create this crucible, 3PLs need great penetration into supply chains. The automotive industry with its tiered supplier system, and electronics with its far-flung supplier network are exemplary arenas where 3Pls have had to expand their I.T. offerings.

Financial resources: As Dave Kulik, president and CEO of TNT

Logistics North America has been quoted stating, “The probationary period for 3PLs is over.” Indeed, as shippers demand more services at lower cost, 3PLs are in the next phase of their industry’s evolution, which means success is defined by greater efficiency and cost savings, and survival goes to those companies entering into the risk-and-reward sharing contracts.

The global logistics company – the ultimate litmus test for an LLP, 4PL and any other acronym that describes the complete logistics provider – must be efficient in all sectors; It must have the scale and operating expertise in transportation management, warehousing, dedicated contract carriage, freight forwarding and the latest technology to integrate customers and suppliers all the way through the supply chain.

The primary benefit that accrues to shippers from this capability is that contracts do not start from scratch, but instead emerge from a vortex of best practices proven worldwide in such as sectors as automotive, electronics, retail, heavy machinery, fast-moving consumer goods, pharmaceuticals and aeronautics. Clearly, the results can have a significant impact throughout a company’s value chain.