Key Trends Shaping the Third-Party Logistics Industry

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A Pittsburgh native, Kristy Knichel is a second generation logistics executive and president of Knichel Logistics, a third-party logistics provider located in Gibsonia, PA. 

As an owner and CEO of a mid-sized third party logistics company (3PL), I have seen a lot of industry changes over the years. After 2013, I thought my company had navigated one of the most turbulent episodes yet in my 10 years of business. That period of crisis was due to several internal factors -- a diversion from company culture, improper executive leadership and incompatible business decisions, all of which you can read about here. During that time, I learned to stand up for myself and my position as president. After restructuring, we went on to achieve our highest profit margins in company history.

While this episode was a breakthrough for me in terms of the internal dynamics of my business, the external challenges have still loomed large. My company, Knichel Logistics, works directly with shippers to manage the transportation of their products in ways that are economically feasible and conducive to the commodity. Our modal service offerings are intermodal (truck-rail-truck), full truckload, and less than truckload. As a global market, the 3PL industry is continuing to expand, with the U.S. 3PL domestic market exceeding $150 billion. Staying on top of industry trends is crucial in this line of business because competition is fierce and change happens fast.

Despite the West Coast port labor conflicts of 2015 severely impacting the supply chain, the industry has maintained somewhat steady growth over the past two decades. However, there are some trends that will have substantial impact in 2016, leaving many 3PLs looking for new game plans in order to remain in business. The transportation industry will continue to be shaped by mergers and acquisitions, the rise of new technology, capacity issues, new entrants into the industry and the constant evolution of existing 3PLs trying to create sustainable organic growth.

Mergers and Acquisitions

Although not a recent trend, the 3PL and transportation industry has experienced several impactful mergers and acquisitions over the past year, with a few exceeding $1 billion and several over $100 million. Some of these included the acquisition of Con-way Freight by XPO Logistics ($3 billion) and Coyote Logistics by UPS ($1.8 billion).

Mergers and acquisitions stem from a variety of initiatives that include but are not limited to acquiring new services, technology, gaining new geographic footholds and essentially becoming a one-stop shop for customers.

Because of these changes, 3PLs are starting to fall into two categories, big and small, with the mid-sized companies being pressured to make strategic decisions regarding their future as a buyer or target. This decision will lead some companies to aggressive hyper-growth goals and to low-cost capital sources as the buyer; others will have to solidify their position in order to stand out to potential suitors. Although companies will not be forced to be a buyer or seller, they will need to be cognizant of their value to customers in order to stay relevant and not become a casualty to disrupters.

Technology

Technology plays a major role in the 3PL industry and will continue to shape the industry for years to come. The logistics industry is still fragmented and inefficient but has attracted a lot of investment from tech companies, in addition to Silicon Valley with venture capital and private equity funding.

Those 3PLs that provide little value to shippers, outside of providing a rate, will see themselves replaced by tech startups that will be able to do the same thing a conventional "broker" would previously do. The difference being these exchanges will do it more efficiently, provide more visibility to the shipper, and ultimately drive down costs through gained efficiencies.

This "uberizing" of logistics will play a large role in shrinking the number of 3PL companies, but the 3PLs who are more of a "one-stop shop," will not likely be affected as much. This would give them an opportunity to continue to flex their muscles by showing their value to the market.

In regards to 3PLs becoming more efficient, many companies are upgrading to advanced systems, such as business intelligence platforms (Domo, Tableau, etc.) to streamline their processes to make data more accessible, along with the ability to make quicker and better decisions. The leaders in the industry will also continue to focus on operational effectiveness to drive more efficient practices and cascade them across the organization. One of those areas consists of the transmission of shipping data. Electronic data interchange (EDI) is becoming a thing of the past while application programming interface (API) is taking over. EDI is more of a storing and forwarding of data, whereas API is real-time data broadcast via a web interface -- highly beneficial in an industry where time is money.

Additional Areas

Some final things to consider will be future capacity due to the long-term driver shortage issue and an aging and inefficient infrastructure that is still without a long-term transportation funding bill. Also, keep an eye on Amazon. They are slated to become the next giant 3PL. Amazon already has the infrastructure in their distribution facilities, the technology and the network of vendors. It's just a matter of time before they cross over into the transportation realm -- some say that they already have. Once that occurs, they will be shaping the industry going forward. A giant like Amazon could massively disrupt the 3PL environment via their expedited door-to-door shipping, worldwide network and overall sheer influence in name alone.

For those in the transportation industry, there is never time to rest on one's laurels because nearly all industry trends can become threats to strategize against or opportunities to embrace. Many 3PLs will need to brace against these changes in order to stay relevant and sustainable long-term. A mid-sized 3PL, such as mine, will need to be aggressively competitive in regards to staying on top of new technology, building new service offerings, and working to capture niche markets that a company such as Amazon wouldn't viably compete for. Otherwise, it is likely that us smaller players could go the way of being bought up, or worse yet, being shut out entirely.