3PL Relationships: Surviving the trials of commoditization

Business is robust for 3PLs, but as cost-cutting becomes the priority for manufacturers and retailers, more businesses continue to look around for services at a lower price—driving down satisfaction, renewal rates, and contract length.

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By Patrick Burnson, Executive Editor
September 01, 2015

If shippers needed any more evidence that commoditization is gaining ground in the third-party logistic services marketplace, they need only glance at the annual findings contained inEyefortransport’s (EFT) recently released the 2015 3PL Contracting Report.

Between 2012 and 2014, the survey found a 4 percent jump in “less than satisfied” responses from manufacturers and retailers. Furthermore, positive reviews declined 3.5 percent over the course of the past two years. According to EFT analysts, required service levels are becoming greater, margins are squeezed, contracts are short, and shippers are demanding more than ever.

“However, the 3PL industry is coming to a crossroads,” observes Sophie Farrow, EFT’s research director. “With real innovation on the horizon, there soon may be improved partnerships, increased revenues, and more value in logistics services.”

Adding to this urgency is the fact that more than 400 logistics and supply chain executives polled—55 percent of manufacturers and retailers responding to the survey—say that they already have switched, or intend to switch 3PLs.

“Several ongoing factors are making an impact on progress toward the advanced end of the maturity model for shipper/3PL relationships,” says John Langley Jr., Ph.D., who serves as a director of development at the Center for Supply Chain Research at the Smeal College of Business at the Pennsylvania State University. “The generally less-than-exciting levels of global economic activity are driving highly variable and sometimes sluggish or neutral demand for outsourced logistics services.”

Langley cited the recently released 19th Annual Third Party Logistics Study, a research effort he initiated in 1990s, as showing that there’s been a slight decline in shippers “keeping faith” with 3PLs. “Shippers report an average of 36 percent of their total logistics expenditures are related to outsourcing compared to an average of 44 percent reported last year,” he notes.

Shipper “bipolarity”
Other industry analysts observe, however, that shippers, in particular “verticals” like pharmaceuticals, food, and beverages, have ramped up their reliance on third parties—and for good reason.

“Domestic transportation management is gaining strength in these segments,” saysDick Armstrong, chairman of the consultancy Armstrong & Associates. “The same can be said for dedicated contract carriage. These two services are driving growth and solidifying relationships between many shippers and their trusted 3PL partners.”

According to Armstrong, high-volume shippers and those with cross-border business have better relationships with a handful of the largest logistics providers, Armstrong adds. “But shippers of any size can benefit by narrowing down the number of the 3PLs they work with,” says Armstrong. “That’s the foundation of a good relationship.”

Barry Blake, vice president of research for SCM World, agrees, noting that the number of 3PLs can even be whittled down to this figure: one. “By sticking with a single provider model, some companies are getting the best bottom line results without worrying about short-term results or the annual retendering cycle,” he says.

SCM World’s recent Voice of the Customer study on third-party logistics providers also found that many senior executives see the network modeling and design expertise they have “in house” as a competitive advantage.

“They want to maintain ownership and management of the logistics information that is critical to supply chain visibility,” says Blake
Blake adds that this trend contributes to a level of “bipolarity” for shippers who can’t decide on any one single strategy to adopt. As a consequence, change is resisted. In marked contrast to EFT’s conclusions about promising low “horizons,” he sees the 3PL marketplace as still being risk-averse.

“In our findings, shippers continue to be disappointed with the degree of innovation they’re seeing,” adds Blake.

Areas of agreement
If there’s general agreement among analysts about 3PL innovation—or lack thereof—it’s in the realm of relationships. Collaboration continues to be key, maintainsFrank Lange, principal of Alder Creek Consulting, an advisory firm focusing on global growth strategies, supply chain, and compliance. He advises 3PLs to adhere to certain basics before enlarging their relationships with shippers.

“Understandably, expansion into global markets can seem daunting for many logistics providers who lack the experience, network, and resources to compete with more established overseas competitors,” Lange says. “There are, however, several ways a domestic provider can gain exposure and ultimately a gateway into these lucrative markets while mitigating risk and leveraging many of the advantages that made them successful on their home turf.”

Lange says that smaller 3PLs should partner with a key shipper’s local provider to maximize synergy, since many local providers lack an effective network in the U.S.—a key demand market for many of their customers. 

“By initiating a strategic alliance around a joint shipper, both providers have the opportunity to collaborate for improved service and cost reductions, linking two geographies and replicating that model for others,” Lange says. “Eventually, if successful, the allied partners can leverage their combined strengths in pursuit of new shippers that they couldn’t pursue previously.

At the same time, Lange encourages 3PLs to partner with customs brokers and trade compliance experts for comprehensive trade services. Often seen as a transactional or commoditized service on their own, he adds that the combination of brokerage, compliance, and other cross-border services creates a powerful value-added component to domestic transportation and warehousing services, often with improved margins.

“Through increased visibility and exposure to a shipper’s inbound supply chain, domestic providers can better position themselves for expansion in a way that’s directly relevant to a customer’s needs,” adds Lange.

Logistics providers should also explore ways that existing best practices at home can improve other parts of a target shipper’s supply chain. Not surprisingly, the quality and expertise of many local providers, particularly in emerging markets, can vary dramatically, Lange insists.

“Shippers may have crucial, on-the-ground knowledge to navigate a given environment, but may lack consistent warehousing standards, fleet management skills, or process tools to drive efficiencies across geographies,” says Lange. “The best practices of a domestic provider can often be exported to other geographies, and in collaboration with a local partner, drive significant and long-lasting value to a target account seeking the best of both worlds.”

Finally, Lange suggests that 3PLs start with a global market closer to home.  “Recently, a domestic U.S. 3PL noticed that out of the top ten origin/destination pairs by volume in their transportation network, six included Laredo, Texas,” he says. 

Upon further investigation, the logistics provider found that many of these loads were being handed off at the border to a competitor in Mexico for continuing moves as far south as Mexico City. By analyzing the volume patterns and initiating partnerships with a Mexican customs broker and local carriers, they were able to retain many of these moves within their network.

“Furthermore, by opening a gateway into Mexico, they had the ability to build a position from which to initiate discussions with key customers interested in near-shoring manufacturing out of China to Mexico, gaining exposure to their Asia-based supply chains in the process,” Lange says.

The ongoing shift in global manufacturing and demand markets will challenge many logistics providers, domestic or global, to be more agile, innovative, and collaborative to provide value to their customer base. This appears to be the consensus of today’s most astute analysts. But by taking selective, creative actions that leverage a provider’s existing strengths, domestic providers can open a gateway to lucrative markets for shippers while preserving their home field advantage.