SCDigest editorial staff

The News: Dr. John Langley of Georgia Tech, along with several corporate sponsors, just released the annual 3PL report, based on surveys from hundreds of users and 3PLs, combined with a focus group type session at Capgemini’s “accelerated solutions environment” facility. While much of the data is similar to that found in the past few years of the study, we think it raises some issues worth considering, as well as pointing to some other areas for deeper research.

The Impact: We think the recommendation that many companies could benefit from development of a more formal 3PL strategy is a good one, and concur with suggestions from both clients and 3PL providers that the continued industry consolidation may not be good for anyone in the end.

The News: The 20006 3PL study was formally released at the recent CSCMP conference in San Antonio.

We were struck by some of the contrasts the data showed across several areas of client-3PL relationships.

• A huge percentage of respondents (e.g., 85% in North America) said “logistics represents a strategic, competitive advantage” for our company – a figure that seems high. What’s interesting then is that many of these same companies then outsource significant elements of that logistics – usually outsourcing is focused on less strategic processes.
• Both clients and 3PLs want the relationships to be based on much greater levels of collaboration and trust – but seem to be having a hard time getting there. As in previous studies, and not unexpectedly, the “price” of 3PL services remains the number one selection criteria. The real question from that finding is probably whether it means price in the sense of a “bid” for a given scope of work, or “reduced total logistics or supply chain costs.”

The reports notes that clients say they value highly the ability of a 3PL to identify areas for continuous improvement, but that few achieve the level of relationship that allows a 3PL to be such a partner when it may mean a reduction in its revenues as a result. SCDigest notes that in companies such as Toyota, with deep and long standing 3PL partnerships, this type of collaboration has been successfully achieved. Hershey, among other companies, has also realized strong benefits from continual gain sharing programs with 3PL providers.

• Companies are increasingly focused on a 3PL’s IT capabilities, but are frequently unsatisfied with what they find, or what the report calls the “IT Expectation/Performance Gap.” Satisfaction with 3PL technical capabilities was only in the 35% range across all geographic regions of the globe.
• The continuous wave of consolidation across the industry was also called into question. The report authors wonder about the financial sense of some of these mergers, given the inconsistent level of profitability across the industry. 3PL clients are finding that service and attention can degrade for 3PLs involved in M&A activities, as the internal focus of the 3PL moves to integration of strategies, management and technology rather than client service directly.

How 3PL Services Can Be Improved from the Client’s Perspective

Source: 206 3PL Study

Other findings or recommendations of note include:

• The primary factor cited by non-users of 3PL services was that “logistics is viewed as a core competency of our firm.” As noted above, the vast majority of all respondents report logistics as being strategic, and of course any company might outsource a portion of their logistics execution, but we find this data a little contradictory, and would like to see the report delve more into this issue next year. Fear of “losing logistics control” and the belief that “costs would not be reduced” were the next two highest rated factors cited by non-3PL users.
• It’s clear that that overall spending on third-party services continues to grow at a faster rate than overall economic growth. This study notes, however, that consistently over the past few years, user projections about the growth they expect in outsourcing as a percentage of their total logistics spend are significantly greater than what actually occurs in their companies over that forecasted period.
• The report says that many companies could benefit from developing a strategic plan for use of 3PL services, and “communicating this 3PL strategy to top management as part of the logistics supply chain planning, measurement and evaluation process.” Key to that effort, say the authors, is differentiating clearly between strategic and tactical 3PL initiatives and relationships.
• Despite certain signs and trends, such as complex global supply chains, that would seem to drive companies towards greater use of “Lead Logistics Providers” or “4PLs,” use of this strategy is not gaining significant momentum. The report asks whether“3PL users are sufficiently focused on the broader interorganizational and regional issues to make proper use of 4PL provider capabilities.”’ We would add to that, “Is the LLP/4PL value proposition really clear?”
• There also seems to be some conflicting data on how much shippers want truly global providers versus regional experts – or maybe just want a 3PL that can truly  offer both.
• Interestingly, the report asks whether some clients unwisely put short term cost savings over longer term benefits, for example by “insourcing” a 3PL function to capture through some largely temporary means a cost reduction.

We continue to hear 3PL relationship turnover is high…that’s also something we think this report should consider for further exploration.

What is your reaction to this highlight of the 2006 3PL report? Do you think companies should get more strategic in their 3PL thinking and relationships – or is a more tactical focus more practical and beneficial in the end? Do you think 3PL consolidation is a good or bad thing for clients? Let us know your thoughts.