Third-party logistics providers told to 'get to the Net'

By Brian Milligan -- Purchasing, 11/2/2000

Third-party logistics providers have got to develop more collaborative relationships with shippers. To do this, they must become leaders in e-commerce and increasingly help shippers connect with them by using the Internet.

These are some of the results of the 2000 Third-Party Logistics Study. The study indicates that the market for third-party logistics services continues to be in a period of transition. And it suggests that shippers who turn to this industry want 3PLs to become more strategic partners.

"Customers are putting a greater emphasis on 3PLs," says John Langley, professor of logistics and transportation for the University of Tennessee. "And they are asking them to take a more active role."

"With all things held equally, [shippers] are looking for 3PLs to be good corporate partners," says Gary Allen, senior manager of the supply chain solutions team at Cap Gemini Ernst & Young. "They want to create and sustain fruitful relationships. Creating and sustaining these are important."

But while these expectations are being expressed, the study also indicates that many 3PL customers are uncertain whether the providers are able to keep up with the pace of change.

"Our priorities for third-party providers have changed," agrees Harry Annan, manager of service parts and transportation for DaimlerChrysler. Annan took the survey for DaimlerChrysler. "They've got to become global providers. They've got to develop a new standard for dealing with customers."

An important standard, the study indicates, involves B2B e-commerce.

The study was conducted during the spring and summer by the University of Tennessee's Center for Logistics Research, Exel and Cap Gemini Ernst & Young. The study observes the use of third-party logistics services throughout the United States. It was designed to measure growth in the industry, identify possible needs when it comes to 3PL-related information technology, and examine how 3PL providers are serving their customers on a global basis.

The study is the fifth of its kind, and was intended to help foster better knowledge of the services 3PL companies provide. It was also intended to provide an understanding of how customers purchase and manage 3PL services and how they structure relationships with 3PL providers.

Surveys

The study was based on surveys that were sent to chief logistics executives at prominent companies in automotive, chemical, computers, consumer products, medical supplies and devices, and retail companies. A total of 1,056 surveys were sent out, of which 163 usable responses were received.

Most of the respondents were from the manufacturing sectors. The results were discussed in the Council of Logistics Management annual conference in New Orleans in September.

The study found that the market for 3PL services continues to develop. It notes that in earlier years, 3PL providers were chosen by customers because of their cost, control and service.

But the study suggests that more meaningful relationships are now emerging-or being sought. For example, it suggests that shippers are now choosing their providers based on their emphasis on value, innovation and performance in an increasingly global context.

This presents a problem. The study indicates that customer demands for performance and sophistication are accelerating. In many ways, the providers are not keeping pace. As a result, the study points to a growing rift between what customers would like to see and what they are actually getting. The rift gets even bigger when you take a look at what customers hope 3PL providers will do for them in the near future.

"3PLs are stepping up, but there is a gap," says Allen.

The study indicates that 3PL providers should strive to:

• Focus on efficient and effective planning and implementation of services to customers,

• Offer more services on a global scale,

• Develop and deliver integrated solutions that create real supply chain savings, and above all,

• Place greater emphasis on IT-related concerns.

"Basically, customers want more, they want it better, and they want it faster," says Ron Ellifson, director of customer services and logistics for the Wisconsin-based S.C. Johnson. Johnson also took the survey.

Important considerations

The firms that conducted the study say these are important considerations for a market where demands for 3PL services are growing at a rate of 18% to 22% annually. The study indicates that 73% of respondents are users of 3PL services, while 27% do not use it. More than 80% of 3PL customer firms indicate satisfaction with their logistics outsourcing efforts.

Among the industries studied, the greatest 3PL usage is occurring in the computer and peripherals and consumer products industries. Eighty percent of the computer companies surveyed are using or considered using a third-party logistics firm.

This year's study also shows increased 3PL use among firms in the automotive and chemicals sectors. Sixty-nine percent of the automotive firms surveyed are using or considered using a third-party logistics firm, while 70% of the chemical manufacturers surveyed are doing the same thing.

But a major objective of this year's study was to gain insight into customer needs for information-technology-based services. The study also sought to evaluate how 3PLs are responding.

That's where some of the dissatisfaction with the industry began to show through.

The study indicates that shippers are getting antsy for 3PLs to hook them up to more value-added online solutions. Or, to put it another way, they are not overly impressed by their efforts thus far. To put this in context, information technology and technology-related services were suggested by study respondents to be among their highest priority for future outsourcing.

The study observed the information-technology-based services that 3PLs are providing now and what shippers hope they will provide in the future. Among the most prevalent in terms of present availability are Web site (45.2%) users, EDI (64.2%), transportation management (45.3%) and warehouse/distribution center management (55.7%).

"We are seeing a dramatic jump in Internet ordering," says Allen. "We see this as a big opportunity for 3PLs."

"This is the highest priority for future outsourcing," agrees Langley.

Future needs

But the study clearly indicates that users of 3PL services will have significant future requirements for the development and availability of a number of technologies. At present, the study indicates that 11.3% of users indicate 3PLs provide them with Internet ordering. But this ability is expected to be required by an additional 41.5% of users in the future, according to the study.

The study likewise indicates that shippers expect the 3PLs to provide Internet capabilities that can help them improve supply chain efficiency and plan out day-to-day orders. The study states that shippers report that 3PLs have been fairly good at providing traditional IT-based services. It shows that 45.2% of the respondents have Web site connections with 3PLs, 64.2% have EDI connections, and 47.2% say 3PLs provide them with the ability to track and trace shipments over the Internet.

But to customers in the transportation industry, these offerings have become old hat. Now, customers want more for the future. Allen says these requests can present definite challenges to the industry.

"It is not an easy solution," Allen says.

Ironically, most respondents indicate that B2B e-commerce at present has limited impact on their business. But they expect this to change. Approximately two-thirds of those who completed surveys say the Internet will ultimately "enhance" their company's ability to create sustainable competitive advantage through supply chain management.

But there is room for improvement when it comes to 3PL providers' efforts to meet these needs. Despite the steps the 3PLs have taken, 76% of the shippers surveyed say they still have unmet shipping needs related to B2C e-commerce and 84% have unmet needs related to B2B challenges. As evidence of the reasons behind this gap, the shippers who took part in the survey site 3PL providers' minimal involvement with independent online trading exchanges.

Online exchanges

The survey clearly indicates that 3PLs must attach a priority to becoming involved in the growing arena of online transportation exchanges. The results state that while only 10% of those surveyed now use independent trading exchanges to seek out 3PL agreements, 71% indicate they plan to use them in the future.

Also according to the survey, 90% of the shippers indicate the need for 3PLs to help facilitate the transformation of their company's existing supply chains based on the ability of the Internet to reduce total cost through collaboration. Only about 15% of the respondents say 3PLs are now assisting fully to accomplish this objective. "That means only 15% feel the 3PLs are assisting them here," Allen continues. "They see that as a gap."

The survey also looked at the different activities shippers expect 3PLs to handle. Activities that are now outsourced most frequently to 3PLs are warehousing, with 63.3% of those surveyed reporting that they are now outsourcing this activity. Also, the percent of companies using 3PLs for cross-docking activities increased slightly from 23.1% in 1999 to 25% this year.

By comparison, the activities outsourced least include order entry/order processing (2.7%), customer service (4.5%), and product assembly and installation (8.9%).

Those who report that they do not choose to outsource through 3PL firms list six primary reasons for their decisions. They report that they worry that by going the 3PL route, their control over outsourced functions would diminish and service level commitments and cost reductions would not be realized. They also report that logistics is too important to consider outsourcing, that the customer has more logistics expertise than the 3PLs and that logistics is a core competency of the customer's firm. Of those companies not using 3PL services, about 65% indicate they have no future plans to do so. In contrast, according to the study, about 25% suggest that they are studying opportunities to outsource logistics activities.