2013 Third-Party Logistics Study

The success of the third-party logistics industry is evident in the generally high marks given to 3PLs by respondents to a survey as part of the 2013 17th Annual Third Party Logistics Study, which identifies trends and explores how both 3PLs and shippers are using these relationships to improve and enhance their businesses and supply chains. A substantial 2,342 industry executives provided usable responses to the survey, including users and nonusers of 3PL services as well as 3PL providers.

Despite challenging business conditions, aggregate global revenues for the 3PL sector continue to rise, and far more shippers (65%) are increasing their use of 3PL services than returning to insourcing (22%) some 3PL  services. Nearly three in five (58%) shippers are reducing or consolidating the number of 3PLs they use. Shippers report spending an average 12% of revenues on logistics, and an average 39% of that figure is spent on outsourced logistics services. Outsourcing accounts for 54% of shippers’ transportation spend and 39% of warehouse operations spend. As found in past Annual 3PL Study surveys, transactional, operational, and repetitive activities such as transportation, warehousing, and freight forwarding tend to be the most frequently outsourced.

Both shippers (86%) and 3PL providers (94%) largely view their relationships as successful, with shippers posting some impressive results from outsourcing: just over half (56%) say their use of 3PLs has led to year-overyear incremental benefits. They also report significant savings from logistics cost reductions (15%), inventory cost reductions (8%) and logistics fixed asset reductions (26%). Shippers are more satisfied than 3PLs (71% to 63%) with the openness, transparency and good communication in their relationships, and 67% of shipper respondents judge their 3PLs as sufficiently agile and flexible.

Shippers’ openness to more strategic 3PL-shipper arrangements, including gainsharing and collaboration with other companies, appears to be declining somewhat. The IT Gap appears to have stabilized over the last few years, with 94% agreeing that IT is a necessary element of 3PL capability but just 53% indicating they are currently satisfied with 3PL IT capabilities. Contributors and potential solutions to this disparity are explored in the IT Gap section.

Supply Chain Innovation

Innovation is a critical driver of growth, differentiation, and profitability, but as the logistics industry matures and markets become more global, innovation in this industry is becoming more challenging. The solution lies in evolving toward fundamental changes in 3PL-shipper relationships.

Until recently, 3PLs could demonstrate innovation by introducing process improvements, adding technology, improving execution, or offering new services. But shippers no longer see these as truly innovative, instead seeking disruptive innovation: a new product or service idea that when implemented significantly disrupts a market and/or value chain by simplifying, automating, generating value, or reducing costs.

Many 3PL-shipper relationships are not set up to support innovation. They are tactical rather than strategic, offer insufficient visibility and are limited by metrics, contract terms, and risk mitigation strategies. Most 3PL respondents (89%) believe they are ready to innovate, but just 53% of shippers agree. 3PLs and shippers each see themselves as the largest sources of innovation within their relationships.

Shippers and 3PLs largely agree on the top requirements for innovation, including trusting relationships, talent/right people, and operational excellence. The unifying theme of the results is that it takes truly collaborative and strategic relationships among all partners to develop the types of disruptive innovations needed to solve the vexing challenges facing today’s supply chains. Current industry consensus is that 3PLs and shippers can facilitate supply chain innovation by leveraging organizational and technology-focused capabilities. Organizational drivers include fostering collaboration through structure, relationship governance, and embedding innovation into the organization. Technology drivers include advanced IT and mobile solutions, big data and analytics, and social media.

Shippers assert that they are willing to pay 3PLs for investments required to drive innovation. Despite its limited use, gainsharing is the most favored method to fund this investment.

The IT Gap

The long-standing gap between the importance shippers assign to 3PLs’ IT capabilities and their satisfaction with 3PLs’ current IT capabilities – which we call the IT Gap – has stabilized at roughly a 40-point delta. The reason may be an ongoing disconnect between how the two groups view 3PL IT investments: 3PLs are more likely to describe their IT investments as aggressive compared to shippers, while shippers are much less likely to call 3PL investments aggressive (12% vs. 23% for 3PLs), and 35% say they’re conservative. Shippers’ relationships with 3PLs’ IT organizations are also less than ideal: 46% call these relationships project-focused, 29% tactical, and 14% are contentious.

Shippers want 3PLs to offer comprehensive and easily integrated solutions. And the good news is that just over half of 3PLs anticipate making large investments in modernizing applications. But 3PLs cannot make the right IT choices until they have a clear picture of their customers’ supply chains, how they function, and the challenges they face. A collaborativeapproach between partners, featuring a relationship governance structure that includes IT, will further improve shipper satisfaction with 3PLs’ IT capabilities, drive increased innovation, and improve 3PL-shipper relationships.

Supply Chain Disruption

Extended supply chains, reduced inventories, and shortened product lifecycles are just some of the factors making disruption of supply chain operations more likely and more costly than ever. Economic losses from supply chain disruptions increased 465% between 2009 and 2011. Shippers report adverse weather as the biggest source of supply chain disruption, followed by extreme volatility in commodity, labor, or energy prices/supply.

Many 3PL and shipper respondents say their organizations are placing a greater focus on supply chain risk and mitigation, with partnerships, business continuity planning, supply chain visibility tools, and employee training/talent management as their top strategies. All are valuable contributors to a comprehensive risk mitigation strategy. Equally notable are the approaches not highly ranked, such as supplier scorecarding and supply chain mapping, essential first steps to identifying and monitoring risk. The top reason many shippers and 3PLs fall short on their supply chain disruption risk mitigation efforts is a lack of understanding of available mitigation tools. Other common reasons include lack of capital and a belief that current risk mitigation capability is not a problem. Other missteps include: actively monitoring only direct suppliers and not subsuppliers,and failing to follow through on plans crafted hastily after a disruption.

Companies that have successfully implemented effective supply chain mitigation plans often apply new thinking to traditional mitigation strategies, such as diversifying rather than consolidating suppliers. Cleareyed assessment of the current state of the network is the first step to understanding the risk, followed by a well-considered plan of attack to both alleviate the biggest sources of vulnerability and respond when disruptions do occur. A sound mitigation strategy can both avoid costs and help create a competitive advantage.

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