THIRDPARTY LOGISTICS Results and Findings of the 2004 Ninth Annual Study Third-Party Logistics Study Results and Findings of the 2004 Ninth Annual Study Participants: C. John Langley Jr., Ph.D., Georgia Institute of Technology Gary R. Allen, Capgemini U.S. LLC Thomas A. Dale, FedEx Supply Chain Services, Inc Table of Contents Introduction...........................................................................................1 Study Objectives and Methodology .....................................................1 Summary of Key Findings ....................................................................5 Logistics Outsourcing Practices in Profile ..........................................8 3PL Service Offerings and Technology..............................................13 Management and Relationship Issues ..............................................19 Customer Value Framework...............................................................26 Strategic Assessment.........................................................................30 Appendix: 3PL User Focus Group Sessions.......................................34 About the Participants........................................................................35 Contact Information............................................................................37 Supporting Organization 3PL: Results and Findings of the 2004 Ninth Annual Study Introduction This report presents the findings from the Ninth Annual Third-Party Logistics Study. This study identifies and tracks key trends and views of the third-party logistics (3PL) industry from the perspectives of customers who purchase and use 3PL services. Over the years, this study has grown in terms of the regions and industries examined. Also, each annual study addresses key issues that have emerged from time to time relevant to the logistics and 3PL industries. Study Objectives and Methodology During the spring and summer of 2004, C. John Langley Jr., Ph.D., of the Georgia Institute of Technology, with Capgemini and FedEx, conducted an extensive study about using 3PL services in North America, Western Europe, Latin America1, and Asia-Pacific.2 This is now the ninth annual research study to examine critical trends and issues among key markets and key customers in the 3PL industry. North America Study Objectives ❑ Measure the development and growth of the 3PL industry across major industry segments and across several diverse regions of the world. ❑ Identify customer needs and how well 3PL providers are responding to those needs. ❑ Understand how customers select and manage 3PL providers. ❑ Examine why customers outsource or elect not to outsource to 3PL providers. ❑ Summarize the current use of 3PL services. ❑ Investigate leading topics, including 3PL service offerings and technology, how to structure and manage effective 3PL relationships, and how customers view success and value from 3PL relationships. ❑ Provide a strategic assessment of the future of the 3PL industry. An important goal of each year’s 3PL study is to improve upon the previous years’ studies. The following are ways in which the 2004 3PL study was modified to enhance the scope of earlier studies: ❑ Continued to expand the 3PL study to meaningfully include Asia-Pacific, Latin America, North America, and Western Europe (see Exhibit 1).3 ❑ Revised content and terminology to be current and to respond to recent advances in the logistics, supply chain, and 3PL/4PL industries. ❑ Continued using the Internet to conduct the study. The 2004 3PL study used a webbased commercial firm to administer and manage all survey activities in a global setting, including survey e-mailing, tabulation, and preparing reports for analysis. ❑ Expanded the approach to getting feedback and perspectives about this year’s study results and about using 3PL services in general from leading logistics executives. This year, the study team conducted four telephonic user focus group sessions.4 Further information about these focus groups is included in the appendix of this report. Western Europe Asia-Pacific Latin America Exhibit 1 © 2004, C. John Langley Jr., Ph.D., Capgemini U.S. LLC, and FedEx Corp. 1 The authors of the study would like to thank the Latin America Logistics Center (LALC) as a Supporting Organization and particularly Maria F. Rey, Executive Director, for their helpful involvement with the Latin American portion of the 2004 Third-Party Logistics Study. In addition to providing contact information for Latin American logistics executives, Ms. Rey and the LALC graciously translated the entire 3PL survey into both Spanish and Portuguese. Also, the study team would like to thank Christopher J. Mehl of Capgemini for his diligent and helpful work as a member of the project team. 2 It was anticipated that South Africa would be included in this year’s study, but survey contacts were not available at the time the study was conducted. We hope the next annual study will include this important region. 3 North American companies are mostly concentrated in the United States, although a number of firms operating in Canada and Mexico were included. Western Europe includes Belgium, Denmark, France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, and the United Kingdom. Asian-Pacific responses were from Australia, China, Hong Kong, Japan, Malaysia, Philippines, Singapore, Taiwan, and Thailand. Latin American responses were from Brazil, Colombia, Costa Rica, Guatemala, Mexico, Nicaragua, Panama, Peru, and Venezuela. 4 Among the organizations represented in the 2004 Third-Party Logistics focus group sessions were All-American, Dade Behring, Eaton Corporation, Foamex, Intel, Medela, Northrop Grumman, Philips Consumer Electronics Corporation, ProCorp, Sharp Electronics, and Sysmex. 1 Exhibit 2 Survey Response Rates Regions North America Western Europe AsiaPacific Latin America Totals Companies Contacted 2,384 3,698 393 2,930 9,405 Usable Responses 222 263 43 128 656 Response Rate 9% 7 11 4 7 The study methodology included addressing e-mails to logistics and supply chain executives across North America, Western Europe, Latin America, and Asia-Pacific, asking for their participation in the study. (In this study, an “executive” holds the title of manager, director, or vice president of logistics or supply chain management.) In the email, executives were asked to “click on” a web address that would access the 2004 3PL survey. Once the survey was completed, a final click on “end survey” entered the responses into the study’s database.5 Industries Studied The industries predominantly represented by the survey respondents included: 6 ❑ ❑ ❑ ❑ ❑ ❑ Automotive Consumer Products Food and Beverage High-Tech and Electronics Life Sciences (Pharmaceutical) and Medical Retail and Apparel These industries were selected because they view logistics as strategically important and because they are viewed as purposefully moving toward integrated supply chain management. Survey recipients were asked to think of a “3PL or third-party logistics provider” as one that provides multiple logistics services for its clients and customers. Following several examples of firms that would be typical of such a definition,7 recipients were asked to think of a “4PL or fourth-party provider” of logistics services as one that primarily manages subcontractors that perform 3PL operations.8 Exhibit 2 shows by region the total number of companies surveys were sent to, the number of usable returns received, and the response rates. Even though multiple waves of e-mails were sent to those on the regional contact lists, the response rates in 2004 were somewhat less than those from preceding years of the study. This year’s study was the first to include Latin America; we hope the response rate for this region will increase in future years.9 The following list identifies a number of key characteristics about the firms participating in the 2004 3PL study: ❑ Although a broad range of company types were included in this study,10 the percent of respondents representing the manufacturing sector were 64% in North America, 74% in Western Europe, 70% in Asia-Pacific, and 58% in Latin America. The wholesale/distribution/retail sectors were represented by 28% of the respondents in North America, 21% in Western Europe,15% in Asia-Pacific, and 17% in Latin America. 5 To facilitate completion, surveys were translated into French, Portuguese, and Spanish for executives in various parts of the world. 6 In addition to the industries cited, the study also included a few respondents in the aerospace, chemical, government, telecommunications, and utility industries. 7 The firms cited as examples in the survey included Deutsche Post, Exel, FedEx, Menlo Logistics, Ryder, Schneider Logistics, Tibbett & Britten, UTi Worldwide, and UPS. 8 As explained later in this report, the industry executives participating in the focus group sessions provided valuable insights to help distinguish between the terms 3PL and 4PL, as well as more advanced services that may be available from integrated logistics services providers. 9 Although there is room for improvement in the Latin American response rate, executives in that region tend to be more reluctant to participate in surveys. Notable, however, is that the Latin American portion of the study did yield a total of 128 usable responses. 10 Respondents were asked to classify their firms in one of the following categories: raw materials supplier, manufacturer (components/ingredients, contract manufacturer), manufacturer (finished product), wholesale/distribution, and retail. 2 3PL: Results and Findings of the 2004 Ninth Annual Study ❑ The 3PL users indicated a broad regional scope for their logistics operations. As shown in Exhibit 3, respondents from each of the regions listed significant responsibilities for logistics in their respective areas. For example, 98% of the respondents in North America, 99% in Western Europe, 100% in Asia-Pacific, and 96% in Latin America indicated the scope of their logistics responsibilities included at least their own immediate region. In general, the responding executives also had broad responsibilities for logistics operations in other major areas of the world. For example, North American respondents indicated responsibilities that included Western Europe (45%), Asia-Pacific (46%), Latin America (43%), Middle East (22%), and Africa (17%). These percentages are remarkably close to those reported in the 2003 study, so the composition of regional responsibilities has tended to be somewhat the same from 2003 to 2004. North American 3PL users tend to have somewhat broader regional responsibility than non-users of 3PL services; non-users more often have strictly local responsibility.11 Exhibit 3 Regional Scope of Users’ Logistics Responsibilities Regional Scope North America Western Europe AsiaPacific Latin America Middle East Africa North America 98% 45 46 43 22 17 * Location of 3PL Users Western European Asia-Pacific Latin America 16% 12 8 96 12 4 22% 99 28 26 32 30 19% 24 100 14 10 5 ❑ Respondent firms have a relatively broad range of anticipated sales revenues for 2004.12 Of the North American respondents, approximately 58% of the firms have revenues between US$1 billion and US$25 billion; another 12% project revenues over US$25 billion. Generally, 3PL user firms in Western Europe tend to be somewhat smaller (57% expect 2004 sales revenues to exceed US$1 billion, or 44% in terms of 1 billion euros or more), as do 3PL users in Asia-Pacific (33%), and Latin America (11%). *Percentages in each “home” region may not quite equal 100% because a small number of survey respondents may have responsibilities that exclusively extend beyond their “home” region. For example, 98% of the North American respondents have regional responsibility for only North America logistics, suggesting that some of them have responsibilities that do not include North America. ❑ North American 3PL users expect that logistics expenditures will represent approximately 7% of their organizations’ anticipated total sales for 2004. Comparable figures are 10% for Western Europe, 10% for Asia-Pacific, and 11% for Latin America. Interestingly, these figures are somewhat different from those of the 2003 study. Last year, the North American ratio of logistics expenditures to an organization’s anticipated sales exceeded the comparable ratios in the other regions. This phenomenon is due to two factors: a decline in the North American ratio of logistics expenditures to anticipated sales, and an increase in this ratio in the other regions studied. Generally, this suggests that logistics costs as a percent of sales is declining in North America while it is increasing in the other regions.13 11 For comparison, the percentages of North American users versus non-users indicating responsibilities in other areas of the world were as follow: Europe (45% versus 41%), Asia-Pacific (46% versus 41%), Latin America (43% versus 38%), Middle East (22% versus 24%), and Africa (17% versus 17%). 12 Respondents were given the option of responding to financial questions in customary monetary units (e.g., US$, euro, and RMB). Results were then converted to US$. 13 This observation is consistent with the findings of the 15th Annual State of Logistics Report published by Robert V. Delaney (Oak Brook, IL: Council of Logistics Management, 2004). According to this study, U.S. business logistics systems costs totaled US$936 billion in 2003 (or 8.5% of nominal U.S. Gross Domestic Product). Although the US$936 billion represented an increase of US$26 billion over the year before, logistics costs as a percent of GDP declined for the third year in a row. 3 ❑ Exhibit 4 shows some of the general business pressures facing professionals with logistics responsibilities. The percentages show how many 3PL users indicated that various factors are “having a significant impact on the industry in which your organization competes.” Looking across the regions, the dominant factors are: “significant pressures to reduce cost,” “emphasis on improved supply chain management,” and “significant pressures to enhance customer service.” Of somewhat lesser affect, but still significant, are: “globalization,” “rapidly accelerating new product introductions,” “consolidations, mergers, acquisitions, etc.,” “implementation of new information technologies,” and “new markets.” As may have been expected, security issues are most prominent among 3PL user firms in North America and Latin America (69% and 78%, respectively). These percentages have increased from 2003 to 2004. ❑ Respondents also attach great importance to logistics and supply chain issues. For example, 85% of the North American respondents, 87% from Western Europe, 82% from Asia-Pacific, and 100% from Latin America agree that “logistics represents a strategic, competitive advantage for our company.” Also, the percent of respondents agreeing with “our customers are placing greater emphasis on logistics customer service” was 85% in North America, 82% in Western Europe and Asia-Pacific, and 92% in Latin America. Approximately a third of the respondents across the regions studied felt that “our customers are more interested in price than service.” Overall, the percent of customers agreeing with “using 3PLs is a key to satisfying their company’s customers” was 50% in North America, 59% in Western Europe, 59% in Asia-Pacific, and 48% in Latin America. Of these figures, the North American percentage represents a decrease from the 73% who were in agreement in 2003. Organization of This Report Following a summary of key findings, the 2004 3PL study results are discussed in four sections. The first is “Logistics Outsourcing Practices in Profile,” where you will find a Exhibit 4 high-level discussion of overall Factors Affecting 3PL User Firms trends among users and nonFactor North Western AsiaLatin users of 3PL services. The next America Europe Pacific America three sections deal with areas Significant pressures to reduce cost 95% 99% 95% 96% of strategic interest to 3PL Emphasis on improved supply chain management 90 98 100 94 use: “3PL Service Offerings Significant pressures to enhance customer service 83 98 83 90 and Technology,” Globalization 78 91 84 91 “Management and Rapidly accelerating new product introductions 77 88 68 89 Implementation of new information technologies 76 76 75 80 Relationship Issues,” and Consolidations, mergers, acquisitions, etc. 75 83 93 79 “Customer Value Framework.” New markets 75 78 69 88 The discussions will Security issues 69 55 46 78 encompass results from this Intensifying government and regulatory policies 64 75 57 85 year’s study and will provide a Pan-European changes 43 82 8 18 perspective on the study’s Health/Disease concerns 28 45 29 27 findings over its nine-year history. The last section provides a “Strategic Assessment” of the future of the 3PL industry, including an explanation of the value readers should derive from this year’s 3PL study. 4 3PL: Results and Findings of the 2004 Ninth Annual Study Summary of Key Findings This study helps provide a better understanding of the marketplace for 3PL services and the ways providers of such services continue to develop and grow. Considering that the total annual revenues of U.S.-based 3PL providers in 2003 are approximately US$76.9 billion,14 the services offered by 3PL providers continue to consume a significant portion of overall logistics and supply chain budgets.15 The following points capture the major findings of this year’s 3PL study: ❑ SCOPE OF STUDY. The year 2004 was significant for this year’s study as the regions surveyed expanded from North America, Western Europe, and Asia-Pacific to include Latin America. The study’s findings confirm that the use of 3PL services is prevalent throughout these major regions. Although 3PL use is similar around the world, the study highlights a number of key differences. Continuing studies will be able to provide increasingly useful comparisons of the 3PL industry in the major regions of the world, as well as to monitor key metrics over time. ❑ MARKET TRENDS. Similarities and differences exist in users’ perceptions about the 3PL marketplace. For each of the regions, clearly the markets for 3PL services continue to change, and the expectations both buyers and sellers of 3PL services have for each other continue to rise. 3PL customers throughout the world seek competency in areas such as operating efficiency and effectiveness, cost management, service delivery, information technology (IT), and globalization. Also, today’s marketplace is seeing more productive and meaningful 3PL-customer relationships evolving. And yet, customers are still able to identify areas for 3PL providers to improve. Consequently, 3PL providers should focus on a number of key objectives, including implementing capable IT, instituting effective management and relationship processes, integrating services and technologies globally, and delivering comprehensive solutions that create value for 3PL users and their supply chains. Considering that customer demands for performance and sophistication are accelerating, improving in areas such as these is imperative for 3PL providers. ❑ 3PL USER CHARACTERISTICS. The 2004 3PL study provided new key metrics about 3PL use across the regions studied. • 3PL use is significant in the regions studied. The percentages of respondents using 3PL services are: 79% in North America, 76% in Western Europe, 84% in Asia-Pacific, and 67% in Latin America.16 Again in 2004, the finding that Western European 3PL use is about that of North America is consistent with the long-term use of commercially available integrated logistics by organizations in that region. • Western European respondents spend a larger proportion of their logistics dollar or euro (61%) on 3PL services than do those in North America (44%). Also, Asian-Pacific users indicate an average of 63% of their logistics budget goes for outsourced logistics services, as does 49% for those in Latin America. All groups project increases in these percentages over the next three to five years. 14 Source: Armstrong & Associates, Inc., Estimated total contract logistics market revenues were US$56.4 billion for 2000, US$60.8 billion for 2001, and US$65.0 billion for 2002. 15 Robert V. Delaney, 15th Annual State of Logistics Report (Oak Brook, IL: Council of Logistics Management, June, 2004). The reported US$936 billion of logistics costs in 2003 was 8.5% of the U.S. GDP in that year. 16 As shown in Exhibit 5, although these percentages are comparable from year to year, and even though respondents are asked to identify themselves as users or non-users of 3PL services, there may be a greater likelihood for 3PL users to respond and participate in the study. 5 • According to the 2004 study, the activities most frequently outsourced in North America to 3PL providers are: warehousing, outbound transportation, customs brokerage, customs clearance, cross-docking/shipment consolidation, inbound transportation, freight bill auditing/payment, and freight forwarding. These activities are comparable with those of Western Europe, except the latter region tends to use customs brokerage and customs clearance to a somewhat lesser extent and freight bill auditing/payment services to a much lesser extent than in North America. Interestingly, responses from 3PL users in Asia-Pacific and Latin America suggest approximately the same level of outsourcing as in North America and Western Europe for many of these activities, and in some cases a greater or lesser level of outsourcing (e.g., greater use of outsourced warehousing, transportation, and freight forwarding services in Asia-Pacific, and a lesser use in Latin America of warehousing, but a greater use of outbound transportation services). This year's results also suggest a greater frequency of outsourcing inventory management, fleet management, and 4PL services among the respondents from Asia-Pacific than from the other regions. ❑ 3PL SERVICE OFFERINGS AND TECHNOLOGY. Users of 3PL services continue to have high expectations from their 3PL providers in terms of service offerings and IT capabilities. An overwhelming majority of survey respondents from all regions (88%) indicated that 3PL providers should supply a broad, comprehensive set of service offerings. Some focus group participants, however, feel that 3PL providers sometimes struggle to keep up with customer demands for new capabilities. This year’s survey supports this; all the regions saw the need for 3PL providers to enhance their process of continual improvements and achievements in their service offerings. The study also indicated that over the past several years the top service offerings most commonly used by customers has not changed (outbound transportation, warehousing, inbound transportation, customs clearance, and customs brokerage). While these services are considered “core” or expected, respondents indicated that they selected a 3PL provider based more on the valueadded services they provided. Once again, the study shows that IT capabilities are a necessity for 3PL providers; however, a majority of respondents continue to rely on their internal capabilities as the primary source of IT (rather than their 3PL provider). When looking toward what future IT-based capabilities users are going to expect from their 3PL provider, the overwhelming response was RFID (radio frequency identification and asset tracking). Assisting customers with the rollout of this complex technology represents a good opportunity for 3PL providers to improve their status with users in terms of IT. ❑ MANAGEMENT AND RELATIONSHIP ISSUES. This year’s study continued to highlight the importance of continual improvement and ongoing investment in managing client relationships. Consistent with previous years, a primary challenge for 3PL providers is to continually enhance their relationships with customers, while meaningfully expanding their services. Core or basic services continue to become 6 3PL: Results and Findings of the 2004 Ninth Annual Study commoditized, while value-added services and relationship management skills are becoming points of differentiation. While 3PL users expect their 3PL providers to offer these advanced services, they also continue to view their providers as “tactical logistics providers.” This must change. First, 3PL users need to think of their 3PL providers more as a “strategist” or “integrator” of logistics activities. Second, users must be willing to participate in innovative and productive deal structures that motivate both parties to do what is desired. Third, 3PL providers must develop their resources or acquire the appropriate skill sets to offer advanced services and improve client relationships. This issue is not easy to address because the cost to serve clients is difficult to calculate; developing or hiring the needed skill set is a daunting task and continual pressure on profitability restricts quick expansion of services. This year’s study confirmed that sustainable relationships require equitable and creative deal structures, continual improvements, and mutual investments. Additional priorities include the continual development of the 4PL model and the need for 3PL providers to have truly global reach. ❑ CUSTOMER VALUE FRAMEWORK. As reported consistently across the regions studied, 3PL users generally feel that their relationships with 3PL providers are successful (North America, 89%; Western Europe, 85%; Asia-Pacific, 78%; Latin America, 72%). However, the respondents also indicated a number of areas in which improvement from their 3PL providers was needed. Users were also asked about the extent to which they agreed with several statements relating to “accomplishments” of 3PL providers. Overall, they felt that 3PL providers were particularly strong in terms of facilitating supply chain improvement, providing needed IT (although further improvement is desired), and providing means for regional expansion. Alternatively, the areas in which improvement was most needed were in providing global supply chain solutions, supply chain integration solutions, and advanced supply chain services. Last, when asked about quantifiable measures of success with 3PL providers, the study respondents indicated impressive results in areas such as logistics cost reduction, fixed logistics asset reduction, reduction in length of order cycle, overall inventory reduction, and reduction in cash-to-cash cycles. At the same time, a clear majority of those surveyed indicated that their logistics service levels have improved as a result of using 3PL services. ❑ STRATEGIC DIRECTIONS FOR THE FUTURE. Not only are 3PL providers and their capabilities changing, but the expectations that user firms have of their 3PL providers and their services are also changing. In fact, the 3PL industry is finding itself moving forward and beginning to show signs of progress toward maturity. To better understand these dynamics and to identify likely strategic directions for the future, our user focus group sessions focused on key issues that were apparent from the study’s results. The issues that received the most attention included highlevel disappointment with the 3PL provider’s ability to develop and offer valueadded services, the need for relationship re-invention and continual improvement, the increasing value of information, the emerging role of supply chain integration, and the need for 3PL providers to expand their global capabilities and reach. 7 Logistics Outsourcing Practices in Profile Overall Trends Exhibit 5 North America Western Europe Asia-Pacific Latin America 3PL use is significant in the regions of the world included in this study. Exhibit 5 provides a nine-year view of the firms using 3PL services. From 1996 through 2001, the percentage of 3PL users remained relatively constant among North American respondents, between 68% and 73%; however, this percentage increased to 78% in 2002 and 2003, and to 79% in 2004. 3PL User Percentages, 1996 - 2004* 100% 80% 60% 40% Percent of Respondents 20% 0% While we have only three years of 3PL usage information for 94 Western Europe, usage 84 appears to be closer to 79 79 78 78 76 73 73 80%, particularly in the 71 71 71 68 67 last two years. While 58 the Asian-Pacific percentage jumped significantly from 2003 to 2004, this increase is more likely because of the sampling methodology (e.g., far heavier representation from China in 2003 1996 1997 1998 1999 2000 2001 2002 2003 2004 than in 2004) than *Although these percentages are comparable from year to year, and respondents are asked to identify themselves as users or non-users of 3PL services, 3PL users may be more likely to respond to this study. This may be particularly true in Asia-Pacific. from substantive differences in usage. The single year of data for Latin America suggests that outsourcing logistics services (e.g., 3PL usage of 67% in 2004) may be somewhat less prevalent than in the other regions. Although the number of companies using 3PL providers is generally stable from year to year, the survey confirms that 3PL use varies by industry. For example, the computers and peripherals, and consumer products industries tend to have greater use of 3PL services. Among those industries that tend to use fewer 3PL services are automotive, chemical, and retail. Future studies will continue to strive for a better understanding of 3PL use in various industries. Respondents were asked what percent of total logistics expenditures, defined as transportation, distribution, or value-added services, are directed to outsourcing. Exhibit 6 shows the current (2004) versus projected (2007-2009) percentages directed to outsourcing by North American, Western European, Asian-Pacific, and Latin American 3PL users. The 3PL users in Western Europe and Asia-Pacific17 tend to spend greater portions of their logistics budgets on outsourcing than do their counterparts in North 17 The differences for Asia-Pacific in the 2003 and 2004 studies are most likely because of a change in the regional composition of respondents, as evidenced by fewer Chinese respondents in 2004 than in 2003. 8 3PL: Results and Findings of the 2004 Ninth Annual Study America and Latin America. Compared to the 2003 survey, North American and Western European respondents in the 2004 study appear to be spending a smaller percentage of their logistics budgets on outsourcing. Also, the 3PL users in 2004 projected smaller increases in the percentage of how much their logistics budgets will be spent on outsourcing than the 3PL users in 2003. This may be partly because of the composition of the respondents in each of these years, as well as 100% a lessening of the growth expectations of 3PL services as a total of the logistics budgets. Overall, there appears to be consistency among the percentage growth 80% expectations of North America (+11.3%); Western Europe (+11.5%), and Latin America (+10.2%), except in Asia-Pacific, where the growth expectation is much higher (+20.6%). 60% It is interesting to analyze over a three-year period the percentage expected growth in outsourcing as a percentage of total logistics costs in North America. The increase projected was 40% in 2002, 14% in 2003, and now 11% in 2004. This may signal an intention by North American 3PL customers to take a cautious look at future involvement with 3PL providers. Or it could mean that the growth rate for the extent that individual customers use 3PL services has stabilized. Exhibit 6 2004 2007 - 2009 Current vs. Projected Logistics Expenditures Directed to Outsourcing 76 68 61 49 44 63 54 49 40% Percent of Respondents 20% North Western AsiaLatin America Europe Pacific America When asked for details concerning total logistics expenditures, North American 3PL users responded that, on average, 55% of their expenditures were related Exhibit 7 to transportation, 32% to distribution, Outsourced Logistics Services and 13% to value-added services. Logistics Activity North Western AsiaLatin Although 3PL users in Western Europe, America Europe Pacific America Asia-Pacific, and Latin America tend to Warehousing 72% 70% 88% 51% spend a smaller percentage of their Outbound Transportation 66 89 100 89 logistics budgets on transportation (52%, Customs Brokerage 60 34 88 57 51%, and 52%, respectively) than North Customs Clearance 57 48 68 68 American 3PL users, they spend a larger Cross-Docking/Shipment Consolidation 55 49 40 22 proportion on distribution and valueInbound Transportation 54 82 84 68 added services. Conversely, 3PL Freight Bill Auditing/Payment 53 19 8 11 Freight Forwarding 47 40 84 35 customers in Latin America tend to Order Fulfillment and Distribution 35 22 52 14 spend the greatest percentage of their Return/Reverse Logistics 27 32 32 24 logistics budget on value-added services Product Marking/Labeling/Packaging 25 29 20 11 (20%) than 3PL customers in the other Product Returns and Repair 22 30 36 11 regions studied. Consulting Services 21 12 28 22 Information Technology 19 24 16 27 Logistics Activities Outsourced Product Assembly/Installation/Manufacturing 16 16 12 5 Procurement of Logistics 16 33 24 35 Exhibit 7 summarizes the specific logistics Inventory Management 16 27 40 22 services outsourced by 3PL customers in Rate Negotiation 14 12 0 16 2004. Differences among the results from Carrier Selection 13 25 8 19 the four regions will be discussed in the 4PL Services 10 19 24 16 various sections of this report. Fleet Management 9 18 40 16 Order Entry/Processing/Customer Service 8 7 16 14 Inventory Ownership 6 9 4 8 Factoring (Trade Financing) 2 7 0 8 0% 9 According to the 2004 study, the activities most frequently outsourced to 3PL providers are: warehousing (North America, 72%; Western Europe, 70%; Asia-Pacific, 88%; Latin America, 51%), outbound transportation (North America, 66%; Western Europe, 89%; Asia-Pacific, 100%; Latin America, 89%), customs brokerage, customs clearance, crossdocking/shipment consolidation, inbound transportation, and freight bill auditing/payment. Among the generalizations that may be made from these data are that crossdocking/shipment consolidation is more prevalent in North America and Western Europe than in Asia-Pacific and Latin America. Moreover, as reported in previous years, the use of freight bill auditing/payment services is far more prevalent in North America (53%) than in Western Europe (19%), Asia-Pacific (8%), and Latin America (11%). Another interesting observation from Exhibit 7 is that 3PL users in Western Europe tend to use outsourcing more for activities such as outbound and inbound transportation, carrier selection, 4PL services, and fleet management than do users in North America. As suggested in last year’s report, Western European business firms may have always been more involved historically in the use of outsourced logistics services than their counterparts in North America. Also, the finding that Western European 3PL customers exhibit significantly less use of freight bill auditing/payment services suggests again this year that the use of financially related logistics services is less well developed in Western Europe than in North America. Overall, there continues to be evidence that the activities most frequently outsourced are those that are operational in nature, while there is less of a propensity to outsource activities that are directly customer-related (e.g., order entry/order processing/customer service), that involve the use of IT, and that are strategic in nature (e.g., order fulfillment and distribution, rate negotiation, inventory ownership, and 4PL services). We also notice greater outsourcing of logistics procurement among 3PL users in Western Europe and Latin America, heightened use of inventory management services by 3PL users in AsiaPacific, and a significantly higher use of freight forwarding services in Asia-Pacific. Integration of 3PL Services A topic that has been addressed in previous years of this study is the extent to which 3PL services are “integrated” or “tied together” by the 3PL service providers. This is a critical issue in that the integration of logistics services is considered by many to be a defining requirement of a 3PL service. When asked about the extent to which their 3PL services were integrated or tied together, the percentages of respondents indicating “some” or “significant” were 72% in North America, 83% in Western Europe, 76% in Asia-Pacific, and 72% in Latin America. These percentages are actually slightly higher than the finding in preceding studies, which tended to be between 60% and 70%. When asked as to what future expectations 3PL users have with regard to this issue, 3PL 10 3PL: Results and Findings of the 2004 Ninth Annual Study users in three of the regions indicated they would like to see the levels of integration in the vicinity of 95%. The exception was North America; 88% of the respondents had a future desire for their 3PL suppliers to provide integrated services. A strategic issue is how customers feel 3PL providers should position themselves in terms of the depth and breadth of their service. When asked whether “third-party suppliers should provide a broad, comprehensive set of service offerings,” most of the 3PL users in the various regions strongly agreed (North America, 84%; Western Europe, 91%; Asia-Pacific, 91%; Latin America, 92%). Of interest also is that these users generally agree “our company is moving to rationalize or reduce the number of third parties we use.” This suggests that 3PL users are thinking about how to improve and streamline their procurement practices in relation to the need for externally provided, integrated logistics services. Views of Non-Users The 2004 study asked a number of questions to help better understand why some respondents were not using 3PL provider services (see Exhibit 8). Interestingly, about 20% to 25% of the respondents from North America, Western Europe, and Latin America that do not use 3PL services say that logistics is a core competency and that logistics is too important to outsource. These “non-users” feel that costs would not be reduced, that control would diminish, that service levels would not be realized, and that customer complaints would increase. However, these perceptions appear to be more prevalent among respondents from North America than from the other regions. One interpretation of these results is that logistics executives in North America may have higher expectations of potential 3PL suppliers than do their peers in Western Europe and Latin America. Last, about 20% of respondents across the regions feel they have more expertise (than the 3PL providers ) as a reason not to outsource logistics services. Interestingly, sometimes the same reasons certain organizations offer to explain their decision not to outsource are considered by others as reasons to support outsourcing. For example, while some non-users suggest that a consequence of using a 3PL provider would be to lose control, it is not uncommon for users to indicate that engaging a 3PL provider actually helps gain or improve control over certain outsourced activities. Non-User Respondents: Rationale for Not Using 3PL Services* 50% 40% Percent of Respondents Exhibit 8 North America Western Europe Latin America 42 39 32 30 21 20 13 14 18 21 8 23 25 30% 20% 10% 0% 21 25 18 24 23 18 15 5 gis ti co cs is m a Lo pe co gis ten re tic cy st oo to im ou po tso rta ur nt ce Co sts w be ou red ld n uc ot ed Co nt ro diml wo ini uld Se sh rv ice no lev t b els e r wo ea ul liz d ed Lo *Results apply to all but Asia-Pacific responses. Asia-Pacific response was insufficient for meaningful analysis. 11 Cu sto m wo er co uld m inc plain rea ts se m or e e We xp ha ert ve ise Regarding issues relating to expertise and results, it would not make sense for a firm to outsource an activity when doing so may likely produce an inferior result. In such cases, the choice of not using a 3PL is understandable. What is important to consider in the decision to outsource, however, is whether internalizing certain logistics activities strategically fits the firm’s core competencies and whether the internal alternative will produce an acceptable financial return. Regardless of these explanations, good logistics management suggests that non-users should investigate the 3PL alternative. As a direct result, the inquiring organization may decide that using a 3PL has significant advantages over the current mode of operation, or the exercise may reinforce the commitment to conducting logistics activities in a more traditional manner, albeit with strategies for potential improvement. 12 3PL: Results and Findings of the 2004 Ninth Annual Study 3PL Service Offerings and Technology The majority of worldwide survey respondents were satisfied with their 3PL providers (85% checked “extremely successful” or “somewhat successful”). As in 2003, respondents’ satisfaction varied when asked about specific 3PL offerings and technology capabilities. As indicated in the focus groups, some users feel their needs are dynamic, but often feel the providers’ services are static. Thus, users are expecting more from their providers. In addition, users are raising expectations around the service offerings provided and the technology used to deliver the offerings. Outsourced Offerings Overall, the top five most frequently outsourced offerings across all of the regions remained the same as in 2003. Only the order changed slightly with customs brokerage dropping from third to fifth. The top five are (percentages in parenthesis are for all four regions surveyed): outbound transportation (80%), warehousing (70%), inbound transportation (67%), customs clearance (56%), and customs brokerage (53%). During the focus group sessions, the participants were asked if they considered these offerings to be core services that all 3PL providers should offer. Many participants agreed that these could be classified as “core” service offerings. However, opinions varied as to whether a 3PL provider had or should offer all of these services. Three contrasting points of view evolved from the focus groups: ❑ A 3PL provider should provide only a single core service and perform it well. ❑ A 3PL provider should be able to provide multiple core services. ❑ A 3PL provider should specialize in one to two core services in-house and be able to buy or subcontract other providers to bring additional capabilities to a customer when required. As a follow-up to the third view, several participants said they were looking for what they called a “one stop shop” from their 3PL provider. However, they realized that the ability to be an expert in all 3PL services was not reasonable. The participants liked that several of the larger 3PL providers in the marketplace had decided to acquire the expertise rather than build it from the ground up. One area of interest is the criteria that a respondent uses when selecting a 3PL provider. When asked to rank five key selection attributes, the majority of users from all regions indicated service (“value-added services received from a 3PL provider”) as the most important attribute. During the focus group meetings, several respondents said there is an expectation that 3PL providers can execute on a set of “core capabilities” and that selection criteria move to more unique, or value-added, services. The list of value-added services was debated among the participants. While various participants 13 listed the following as value-added services, other participants included several of these services and capabilities as “core” to a 3PL provider’s offering: ❑ ❑ ❑ ❑ Customer service/order entry Reporting Metrics Industry expertise ❑ ❑ ❑ ❑ Regional coverage Consulting Postponement Information management This conclusion was echoed by one focus group participant who remarked that “what we were probably seeing as value-added services from five to seven or even three to five years ago may be core services now. For example, seven years ago, you may have been talking about optimization and transportation management as value-added and three to five years ago you may have been talking about visibility being a value-add. We are getting to the point now where those are considered more ‘core’ services.” Service Offering Expectations and Perceptions When asked if 3PL providers should supply a broad, comprehensive set of service offerings, the majority of respondents from North America (84%), Western Europe (91%), Asia-Pacific (91%), and Latin America (92%) responded with a resounding “yes.” However, when asked to identify areas for service offering improvements, the responses varied somewhat by region. North American users appear to be the most satisfied with the global capabilities of their 3PL providers; only 15% identified this as an area for North America Western Europe improvement. On the other hand, almost 40% of Latin American respondents were Asia-Pacific concerned with the lack of the 3PL provider’s global capabilities. In addition, from about Latin America a third to over half of the respondents mentioned that the Areas Identified for 3PL Service Offering Improvement 3PL providers lacked strategic management skills. Finally, as seen in Exhibit 9, nearly a majority of users in all the 71 regions saw the need for 3PL providers to enhance their process of continuous, ongoing improvements and 57 achievements in their service offerings (North America, 51 50 48 46 51%; Western Europe, 50%; Asia-Pacific, 71%; Latin 41 39 39 38 America, 46%). 35 33 31 29 24 20 19 20 18 15 Exhibit 9 80% 70% 60% 50% 40% Percent of Respondents 30% 20% 10% 0% La c an k o d fo ac ng hie oi ve ng m im en p ts ro in vem off e eri nts ng s m Lac an k ag of em st en rate t s gi kil c ls wi N th ot ad ke va ep nc in es g u in p kn Lac IT ow k o led f c ge on -b su as lta ed ti sk ve/ ills glo ba lc L ap a ab ck ilit of ies When contrasted with last year’s results, the percentage of Asian-Pacific users identifying the need for improvements in 3PL service offerings increased in the majority of the areas identified in Exhibit 9. However, on a good note, the percentage of users in both North America and Western Europe decreased in all categories. Two of the most notable areas were “lack of strategic management skills,” which decreased from 53% to 39% in North America and from 63% to 41% in Western Europe, and “lack of consultative/knowledge-based skills,” which decreased from 14 3PL: Results and Findings of the 2004 Ninth Annual Study about one-third of the users to 20% or less in both regions. This may be an indication that 3PL users have begun to use—and will expand the use of—these 3PL provider “value-added” capabilities. Perceptions of 3PL Technology Capabilities Technology continues to be a hot topic when discussing 3PL providers’ capabilities. The majority of focus group participants indicated that information technology (IT) is a key capability for a 3PL in the delivery of a service offering. Most users in North America (91%), Western Europe (92%), Asia-Pacific (100%), and Latin America (80%) agree that IT capabilities are a necessary element of overall 3PL provider expertise. In addition, almost 80% of the respondents indicated that “having the right software” is a major competitive advantage for a 3PL. However, as seen in Exhibit 10, satisfaction with the 3PL provider’s IT capabilities is mixed by region. North America and Western Europe appear to be most satisfied with their 3PL provider’s IT capabilities. Although, when compared with 2003 results, satisfaction in this category has decreased significantly in North America (75% to 45%) and decreased slightly in Western Europe (56% to 45%). Several focus group participants mentioned that 3PL providers build IT capabilities that are not flexible to meet customer needs. Specifically, 3PL users must configure their IT systems to integrate with the 3PL providers rather than vice versa. Meanwhile, in 2004, Latin American and Asian-Pacific 3PL users seem to be the least satisfied with the IT capabilities of their 3PL providers. This low satisfaction rating in Asia-Pacific may also be the reason why only 10% of Asian-Pacific respondents indicated that they rely on 3PL providers for leadership in IT. On a positive note, when asked if 3PL providers had kept up with advances in technology over the past year, over three-quarters of the respondents from North America, Western Europe, and Latin America answered positively. Focus group participants’ perceptions of 3PL technology capabilities were similar to the survey results. Key excerpts from the focus groups include: ❑ “We expect our 3PL provider to be able to provide the right technology solution for our needs.” ❑ “3PL providers invest millions of dollars into software solutions; however, they are not willing to change or tweak the software to react to what our needs really are.” ❑ “3PL providers need to expand the capability of their technology to handle some of the functionality in other parts of my business, thus decreasing the number of systems I have to deal with.” Exhibit 10 North America Western Europe Asia-Pacific Latin America 3PL Technology Expectations and Perceptions 100% 100 91 92 80 78 78 68 88 80% 60% 45 45 40 40% Percent of Respondents 38 24 37 21 10 20% 0% IT 15 iti for es ar 3P e n L s ece up ssa pli r y Ha ers so vin ftw g t are he is “rig cri ht tic ” su al pp S lie atis r’s fie IT d w ca it pa h 3 Re bil P ly itie L on s 3P L IT sup lea plie de r f rsh or ip ca pa bil Exhibit 11 North America Western Europe Asia-Pacific Latin America ❑ “The web thing is nice; however, when you’re talking about business-to-business, people want automation.” ❑ “The 3PL providers that are going to win at the end game are those that have the ability to connect seamlessly, rapidly, and at low cost.” Sources of Information Technology, 2004 80% 61 Sources of Technology Respondents were asked to identify the sources of their IT. In particular, the study tried to determine to what extent respondents expect their 3PL providers to offer IT-based services. As in previous years, the highest percentage of respondents in each region indicated that they turn to internal resources for technology (North America, 43%; Western Europe, 41%; AsiaPacific, 61%; Latin America, 34%).The regions with the highest percentage (around 19%) of users turning to 3PL providers as their primary source for IT were North America and Latin America. In addition, over a third of the respondents from North America and Western Europe indicated that they use a combination of various sources for their IT needs (see Exhibit 11). 60% 43 41 43 34 35 25 19 12 9 2 3 19 9 3 2 1 0 22 19 40% Percent of Respondents 20% 0% Internal 3PL Provider Technology Consultant Provider All Sources Information Technology-Based Services The 2004 3PL survey identifies what IT-based services respondents were using, as well as the services those Exhibit 12 North America Western Europe Asia-Pacific Latin America Currently Used IT-Based Services 80% 70% 60% 50% 40% Percent of Respondents 78 67 68 65 66 70 77 71 62 46 61 67 61 65 80 74 59 50 51 53 33 23 26 14 24 28 18 18 20 21 19 18 14 10 16 9 10 19 7 13 30% 20% 10% 0% Fr E Cu eigh xpo sto t F rt/ m or w Im s C a po W lea rdin rt/ are ran g/ ce Ce hou se nt / er D M istr Sh an ib ipm ag ut em ion en en t t Ev Tra en cki t M ng an /Tra ag ci em ng en / t Co W m eb m -E un na ica bl tio ed ns Tra M nsp In an ort ter ag at ne em ion t-B en as t ed Tra Lo n gis sp tic or s M tat Su ark ion/ pp ets lie rM an ag Sy eme ste nt m s Cu sto Ra M me dio an r O ag r Fr em de & equ en r As en t se cy t T Id rac en kin tif g ( icat RF ion ID ) Su pp ly Pla Ch nn ain ing 16 3PL: Results and Findings of the 2004 Ninth Annual Study respondents believe they will require in the future. Exhibit 12 shows what IT-based services are currently being used, by region. The same IT-based services are in the top five in both 2004 and 2003 (percentages in parenthesis are for all regions in 2004): export/import/freight forwarding/customs clearance (68%), warehouse/distribution center management (66%), shipment tracking/tracing/event management (65%), transportation management (64%), and web-enabled communications (60%). Some notable differences among the regions include: ❑ Transportation management technology is the most used by Western European respondents (80%) and the least used by North American respondents (53%). ❑ About half of the users in Latin America and Asia-Pacific use web-enabled communications, compared with 61% and 65% of the users in North America and Western Europe, respectively. ❑ A third of the Latin American respondents indicated that they use their 3PL provider’s customer order management systems. None of the other regions are over 20% in this category. In addition to customer order management systems, supply chain planning and supplier management systems continue to receive a low percentage of usage as well. This low usage may indicate that 3PL users consider these a core, internally managed system, and they do not want to lose control of these key functions. North America Western Europe Asia-Pacific Latin America Exhibit 13 Future Requirements of IT-Based Services 80% 70% 60% 50% 40% Percent of Respondents 61 59 53 48 37 24 48 41 46 33 25 16 19 30 24 15 23 21 14 9 7 9 7 23 50 30% 20% 10% 0% 29 21 23 17 29 32 26 22 10 13 16 11 6 5 30 F & requ As en se cy t T Id rac en In kin tif ter g ( icat ne RF ion t-B ID as ) ed Lo Tran gis sp tic or s M tat ark ion/ ets Co W m ebm En un a ica ble tio d ns Su pp ly Sh ipm Pla Ch nn ain en ing tT rac Ev en kin t M g/ an Tra ag cin em g/ Su en pp t lie rM an ag Sy eme ste nt m s Cu sto M me an r O ag r em de en r t Tra n M spo Fo an rt rw ag ati ard Ex em on ing po en rt/ /C t us Im to po m rt/ s C Fr W lea eig are ran ht ho ce Ce us nt e/D er M istri an bu ag ti em on en t 17 Ra dio The Future Exhibit 13 on the previous page compares the future requirements of IT-based 3PL services in North America, Western Europe, Asia-Pacific, and Latin America. Overall, the overwhelming, number one IT-based service needed in the future by all regions is radio frequency identification and asset tracking (RFID) (North America, 53%; Western Europe, 61%; Asia-Pacific, 59%; Latin America, 48%). This response may be because of the RFID mandates suppliers are getting from the United States Department of Defense and several major retailers in North America. With the first phase of these RFID mandates scheduled to be launched in early 2005, users may be looking toward their 3PL providers to assist them with the implementation of this capability. In addition, around 40% of respondents from Western Europe, Asia-Pacific, and Latin America identified Internet-based transportation/logistics markets (transportation exchanges) as a key future requirement. Moreover, Latin American respondents are looking to expand their use of warehouse/distribution center management technologies (30%) as well as web-enabled communications (29%). Western Europe appears to be interested in supply chain planning (29%) and supplier management systems (23%). Half of the Asian-Pacific respondents indicated that they are looking to increase their use of supplier management systems. Other future requirements for Asian-Pacific respondents are web-enabled communications (46%) and customer order management (32%). 18 3PL: Results and Findings of the 2004 Ninth Annual Study Management and Relationship Issues Based on experience with previous survey results, we formulated an initial set of hypotheses related to management and relationship issues: 1. Although users are generally satisfied with their 3PL providers, the providers are being pressured to enhance their customer relationships and continually expand their 3PL services. 2. Core service offerings are becoming a commodity, with value-added services and relationship management skills becoming points of differentiation. 3. Users expect 3PL providers to offer advanced services, but the users still view the role of their provider as “tactical” rather than as “strategic.” 4. Sustainable relationships require equitable deal structures, mutual investments, continual improvements, and creative partnering. 5. Advanced service requirements, demand for broad expertise, globalization expansion pressures, and a desire for shared risk-reward arrangements continue to drive the relationships toward a 4PL solution. Since the inception of this survey, we have measured the level of customer satisfaction based on the degree of success with 3PL user-provider relationships. This year, consistent with previous years, 85% of those surveyed view their relationship as successful (54% “somewhat successful” and 31% “extremely successful”). For the last three years, the results have been almost the same in North America and AsiaPacific, and improving in Western Europe. These data indicate that 3PL providers are continually investing in client relationships. An ongoing challenge for 3PL providers is to continually enhance their relationships while expanding their service offerings. For 3PL providers to properly address this challenge, they must determine their market positioning, operating models, and approach to exceeding customer satisfaction. Pressure to “be all things to all customers,” understand the actual costs to serve clients, and maintain profitability make it difficult for 3PL providers to address this challenge. To assist with this challenge, we asked users to rate the importance of provider attributes across five categories: ❑ Price. Attributes: Fees paid for 3PL services. ❑ Product. Attributes: Performance and capability of core or basic service offerings by a 3PL (e.g., transportation and warehousing services). ❑ Service. Attributes: Performance and capability of advanced service offerings by a 3PL (e.g., supply chain planning, supplier management, strategic consulting, change management, and order management). ❑ Access. Attributes: Ease of doing business with a 3PL. ❑ Experience. Attributes: Overall satisfaction and feeling about a 3PL. 19 Exhibit 14 Most Important 5 4 3 2 Least Important 1 Se Users rated “service” as the most important attribute, followed by “price,” “product,” “access,” and “experience” (see Exhibit 14). An interesting change from last year is North America that “price” is now the second-highest attribute across all respondents; last year it was Western Europe third and “product” was second. This can be interpreted to mean that 3PL providers Asia-Pacific Latin America have been improving on core “product” offerings to the point of consistency. These All Regions core “product” offerings, or capabilities, are now expected by users. Therefore, “price” now becomes a higher priority for Ranking of Key 3PL Selection Attributes users of 3PL services. Another important difference with this year’s results is in Asia-Pacific; respondents there rate 3.5 3.5 3.6 3.4 3.5 3.4 3.2 3.2 3.1 3.2 3.0 “product” almost as high as “service.” This could be linked to 3.0 2.9 3.0 2.8 2.8 2.8 2.9 2.7 2.6 2.7 2.5 2.7 2.5 2.6 the fact that 3PL providers are still building out their core product offerings in Asia-Pacific (i.e., the industry is not as mature in that region). All of these factors confirm our initial hypothesis that core product offerings are being commoditized; to “play in the game,” 3PL providers have to focus on valueadded capabilities to differentiate themselves. Interestingly, the lowest ranked attribute in three out of the four regions (the exception being Latin America) was “experience” (“overall feeling about the 3PL provider”). We discussed overall 3PL user satisfaction in the focus group sessions. The results confirm our initial hypothesis: Users are satisfied with basic service levels, cost/savings management, and general business support, but are unsatisfied with the commitments related to continual improvement and expansion of services. Exhibit 15 provides a summary from the focus group sessions where we discussed the topic of customer satisfaction relative to 3PL value-added services. The participants agreed that 3PL providers cannot be all things to all people; they need to clearly define their customer satisfaction strategy. The attendees also agreed that this strategy differs by industry, client, and service requirements. We conclude that opportunities exist for 3PL providers to improve their capabilities to offer advanced services. This, in turn, should have a direct correlation on overall customer satisfaction. Key to a successful relationship between 3PL providers and 3PL users is whether customer expectations are properly aligned with the appropriate 3PL business model and relationship structure. Users expect the continued expansion of their 3PL provider’s capabilities and advanced services. However, as depicted in Exhibit 16, this year’s study showed that 75% of the respondents view their 3PL provider as a “tactical service provider,” 22% as a “logistics strategist,” and 26% view them as a “supply chain integrator” (multiple responses allowed). These results are consistent with the last two years. Two conclusions can be drawn from these results. First, 3PL providers are not expanding their capabilities quick enough to satisfy customer expectations. Second, 3PL users have not aligned expectations with the appropriate relationship structures. rv Exhibit 15 Service Offerings (Value-added) • Core cost and transportation factors are maturing and performance is, for the most part, satisfactory. However, 3PL users’ issues that drove them to outsourcing initially have changed. Their needs are dynamic, but often they feel 3PL providers’ services are static. • New/desired services include: – Globalization of basic 3PL services • A single global provider for all the user’s current customers • A provider that can reach the user’s new customers in emerging markets • All modes and core services – Advanced supply chain services (e.g., contract manufacturing, inventory consignment) – Industry-shared solutions – Supply chain optimization • Participants believe that any new value-added service requires the 3PL provider to know the user far better than they do today. This is the long-term satisfaction and relationship issue that carries through to learning about the needs of the users’ customers. • Most participants feel that their 3PL providers can not fulfill their commitments on value-added services. This is the primary reason for servicelevel dissatisfaction and contract terminations. ice (V al rec ue-a eiv dd ed ed fro ser m vic 3P es L) Pr for ice 3P (Fe L s es er pa vic id Pr od es ) u rec ct ( eiv Co ed re fro ser m vic 3P es Ac L) ce ss bu ( sin Ea es se s w of ith doi 3P ng Ex L) pe fee ri en lin c ga e( bo Ov ut er 3P all L) 20 3PL: Results and Findings of the 2004 Ninth Annual Study Both of these conclusions were reached in our focus group sessions as well. One participant highlighted this disconnect by saying, “I feel like I’m trying to build a comprehensive supply chain solution instead of the 3PL bringing these ideas to me. It’s the kind of stuff that consulting firms do very well, try to pull the whole solution together for you.” Additional concerns, regarding the desire to shift toward a strategic role, were expressed in the focus groups sessions: ❑ Users still have to do too much coordination. ❑ Being strategic starts with understanding the customer and their customers, then aligning the appropriate capabilities or solutions. ❑ 3PL providers are experts in their field, but they do not know enough about the client’s industry. ❑ Strategic also implies that providers have broader capabilities and services. ❑ Users are beginning to question if providers can continually decrease costs while increasing value over time. As 3PL providers continue to expand their capabilities to match client expectations, users should be prepared to pay a premium for advanced services. These advanced relationship models must incorporate risk-and-reward pricing mechanisms to offset the higher cost of satisfying service level expectations. Exhibit 16 North America Western Europe Asia-Pacific Latin America All Regions 3PL Provider Roles* 90% 80% 70% 60% 50% 40% 32 Percent of Respondents 81 75 68 68 71 30% 20% 10% 0% 26 26 27 20 26 20 14 11 22 pp In ly C teg ha rat in or al Pr Ser v ov ic ide e r tic Ta c *Multiple responses allowed. Relationship Processes In a number of areas, this year’s study provides insight into the relationships between 3PL providers and their customers. When asked whether “using 3PLs is a key to satisfying our company’s customers,” 54% of the respondents said “yes.” This is a significant decrease from last year (down from 73%). Also, 70% responded similarly to the question of whether they feel they have a “collaborative” relationship with their 3PL providers. This response is down by 8% from last year. These two findings suggest that customers view the relationship with their 3PL provider as non-strategic, and that there are continued pressures on maintaining ongoing collaborative relationships with their 3PL providers. In time, we believe successful 3PL relationships will establish appropriate roles and responsibilities for both the 3PL providers and their customers. While sometimes the use of a 3PL provider is interpreted simply as “turning over all logistics activities” to the outsourced provider, respondents to this and last year’s surveys suggest that a joint client-and-provider management structure represents a highly effective way to manage 3PL relationships. One participant in our focus group session reiterated this by saying, “In fact I had this debate again last week over a particular subject, but you know somehow you have to make a point that you're outsourcing the functionality but not the management. Sure 21 Su L Str ogis ate tic gis s t Exhibit 17 North America Western Europe Asia-Pacific Latin America All Regions they manage the day-to-day functional transactional stuff, but you better have somebody in your own building, your own company, even if it's just a core group of two or three people to manage them or they will manage you.” Respondents are essentially expressing their desire, as customers, to have sufficient power over operations until a track record of performance, or “trust” factor, is built. Although most customers (appropriately) retain control over strategy formulation and direction setting for their logistics, this shared approach to managing operations continues to be an innovative response to the challenge of successfully managing 3PL providerclient relationships. 9 4 0 0 5 5 0 Types of Deal Structures 70% 60% 52 50% 40% Percent of Respondents 48 38 46 46 30% 20% 10% 0% 30 24 31 33 29 24 21 16 18 13 10 10 6 12 10 13 7 9 12 3PL “Deal Structures” In past studies, users indicated willingness to share both gains and losses from alternative relationship structures. This was again validated this year with 54%18 of the respondents using alternative deal structures with the following types of companies: 45% with 3PL providers, 15% with management consultants, 12% with software providers, 5% with financial institutions, and 4% other business entities. s 18 Survey respondents were asked to check all that apply, therefore the totals are greater than 54%. Sh Ri Total respondents using alternative deal structures are similar to last year’s results. When comparing this year’s results across the various regions, there were a few noticeable differences: ❑ Western Europe (53%) overwhelmingly had deals with 3PL providers. ❑ Asia-Pacific frequently had deals with 3PL providers (40%) and with management consultants (30%). ❑ Latin America had noticeable use of deals with software providers (22%). Exhibit 17 provides a perspective on a broader range of alternative deal structures that may be part of a 3PL relationship. The survey results show that risk/reward sharing and cost sharing clearly are the preferred approaches to contractual arrangements between 3PL users and providers. This is consistent with last year’s survey results. However, some interesting differences exist across regions: ❑ North America clearly preferred cost-sharing arrangements (48%). ❑ Western Europe participates heavily in cost sharing (52%), but stands above all other regions with risk/reward sharing programs (46%). ❑ Latin America has significantly more joint ventures (29%). ❑ Asia-Pacific indicated it did not enter into joint ventures with 3PL providers, which is in conflict with general industry trends that state otherwise. 22 Ve Joi nt nt ur e Sh Co ari st ng sk /R Sh ewar ari d ng Re Sh venu ari e ng Co are ho Va lder lue st- Plu 3PL: Results and Findings of the 2004 Ninth Annual Study The difficulties with most value-based arrangements come down to two processes: measurement and savings distribution. Most of these arrangements are complex to manage, requiring data accuracy and appropriate personnel to administer the processes and associated baseline data. Additionally, once savings are identified, declaring the savings and distributing the dollars between supply chain partners is difficult. These difficulties were echoed in one focus group session by a participant who said, “I would say that nobody really knows how to operate in a true partnership environment where everybody works for the mutual benefit of the team. We try to cut cost and try to skim everybody down. The provider tries to get the contract terms really clear so that if you ask for one thing extra they can come back and get more money. It's not a mutually beneficial triangle relationship. And until we all learn how to operate in that space, it’s not going to get any better. Everybody's trying to skim the last nickel out of somebody else.” As the industry continues to mature, 3PL providers evolve their business models to accommodate increasing customer expectations and capture additional market share. These models vary based on the scope of service offerings, regional coverage, and degree of collaboration across the supply chain. The models migrate from Logistics Service Providers to 3PL providers, to Lead Logistics Providers (LLP), and finally to 4PL providers. Exhibit 18 depicts the changes in key attributes as the 3PL relationship models evolve. Last year we added some questions to help assess this evolution in 3PL provider business models. Although there is still some general confusion, the responses show that 3PL customers are beginning to understand the definitions and relative benefits of the various relationship structures. Exhibit 18 The Change in Key Attributes as 3PL Service Offerings Migrate Relationship & Pricing Models • Partnership • Value Based Advanced Services • Contractual • Risk Sharing • Contractual • Fixed and Variable • Commodity • Transaction Lead Logistics Lead Logistics Provider (LLP) Third-Party Logistics Provider (3PL) Logistics Service Provider (LSP) Service Offerings Logistics Outsourcing Models Fourth-Party Logistics Provider (4PL) Key Attributes • Strategic relationship • Broad supply chain expertise • Knowledge- and information-based • Shared risk and reward • Advanced technology capability • Adaptive, flexible, and collaborative • Project management/contract management • Single point of contact • 3PL technology integration • Enhanced capabilities • Broader service offerings • Focused cost reduction • Niche services Value-Added Basic Services 23 This year, when we asked if the respondents understood the differences between “3PL” and “4PL” providers, over 88% responded “yes” or “somewhat.” This is a slight increase from last year. When we asked if the 4PL terminology is “confusing” and “ambiguous,” 70% responded “yes” or “somewhat.” This is the second consecutive year with significant decreases from the previous year. Respondents also seem to be grasping the benefits of moving from a 3PL to a 4PL; 45% of the respondents replied “yes” or “somewhat” to whether they see the potential benefits of that move. One interesting point of difference is that only 31% of the North American respondents see the potential benefits of this shift toward a 4PL, while the other regions range from 55% to 70%. In short, users are just beginning to understand the differences and related benefits of the various relationship models. Unfortunately, and at the same time, companies are cautious about adopting these types of relationship models because of the complexities involved. This point was made during our focus group session by a user who said, “The problem we're having is finding a 3PL that's willing to act as a 4PL whereby they manage multiple providers. Today, consultants seem to be the ones that can really demonstrate this ability because they are not beholden to their own assets or limited service offerings. The problem you run into is the overhead cost—now I have to pay for them and the provider. Whereas if I go direct to a 3PL provider and it has the capability of managing other 3PL providers, that is the best of all possible worlds because I'm not adding this other layer of overhead on top. The problem is finding a 3PL provider that’s really adept at doing this and at providing consulting-like services.” Exhibit 19 2002 Responses 2003 Responses 2004 Responses 90% 80% 70% 60% 50% 40% Percent of Respondents 30% 20% 10% 0% Survey respondents were asked to rate the suitability of five types of companies to offer these advanced business models. In an effort to try to capture some of the new companies or business models being developed (e.g., 4PL), we added Types of Companies Best Suited to Offer 4PL Servicesa a new type of business titled “new firms staffed with former 3PL executives.” As Exhibit 19 shows, the companies with the highest ratings were existing 3PL providers and new firms with former 3PL 69 executives (57% and 41%, respectively). The “existing 3PL provider” 57 response is down from 69% the previous year. We believe that the new firms have contributed to this decrease. More respondents this year 47 41 than last year thought technology providers were best suited to offer 4PL services (22% versus 9%), while the suitability of the other types 27 25 of companies remained constant. 24 22 13 16 17 9 b c aAll regions. bThe 2004 survey did not have “web-based firms” as a category. c “New firms by former 3PL execs” was included as a category for the first time in the 2004 survey. ts Ne Fo w rm F er irm 3P s L E Wi xe th cs 24 ist Pr ing ov 3P ide L rs Te c Pr hno ov log ide y rs Ex Co Despite the general confusion over terminology and the value of the various logistics outsourcing models, and despite the fact that these models are new (12% of those surveyed currently use a 4PL model), enough evidence continues to exist to show that these logistics outsourcing business models will continue to prosper. -B Fir ased m s W eb ns ult an 3PL: Results and Findings of the 2004 Ninth Annual Study Involvement of Management Consultants This year’s study tried to identify how management consultants are involved in 3PLrelated processes. Survey respondents consider management consultants valuable in helping “to assess the need for third-party services,” developing an “implementation plan for the 3PL provider,” and to assist with the “technology implementation and integration” (32%, 35%, and 60%, respectively). This is consistent with last year’s results. A key change from last year is the decrease in having management consultants “help manage multiple providers of component supply chain services” (24% to 15% decrease). Although the results were objectively obtained, they continue to understate the extent to which current and potential 3PL users actually do involve management consultants. Not surprisingly, client relationships are of great interest to many management consulting firms. The knowledge, technology, and relationship-based skills of management consultants are differentiators that can significantly benefit 3PL users. Impacts of Globalization The globalization of traditional businesses is a major factor affecting logistics and supply chain management. In particular, globalization involves these considerations: market expansion, new sources of supply, advanced security processes, continuous improvement initiatives, and redesigning logistics and supply chains for greater efficiency and effectiveness. For a broader world view of 3PL services, we expanded this year’s survey coverage across Western Europe, Asia-Pacific, and now Latin America. Approximately 54% of the 3PL study respondents worldwide feel that 3PL providers would be able to keep up with the challenges of global supply chain integration. This percentage has dramatically decreased from last year’s response of 86%. This suggests, as we continue to stretch this study’s regional coverage, that 3PL providers need to address user demands for global supply chain solutions. A number of factors significantly affect the industries in which 3PL users compete. Globalization was respondents’ fourth concern with 84% of them categorizing this as a high concern, coming after “significant pressures to reduce cost,” “emphasis on improved supply chain management,” and “significant pressure to enhance customer service.” New product introductions, implementing IT, mergers and acquisitions, and new markets follow as factors affecting the respondents’ globalization efforts. In fact, the number of respondents pinpointing these factors increased from last year. Users of 3PL services continue to advance their purchasing decision skills and are more aware of the benefits and pitfalls of outsourcing. Likewise, 3PL providers continue to improve their capabilities and are slowly addressing the gaps between customer expectations and actual performance. These factors will continue to shape the industry and advance the relationship models toward more complex and more creative structures that offer higher upside benefits for both users and providers of 3PL services. 25 Customer Value Framework This section focuses on the perceived value that 3PL users get from 3PL services. To provide a perspective on the topic of customer value, Exhibit 20 illustrates the relationships among several important constructs: features, benefits, value, satisfaction, and behavior. Features are the specific 3PL attributes and service offerings that create benefit for customers. As they say in the sales profession, features do not “sell themselves,” but benefits do. Value for the customer is created in relation to the benefits that have been received. Then, the existence of value leads to satisfaction and ultimately to behavior, which may be reflected in subsequent decisions to purchase additional services from a 3PL or the 3PL sector. Exhibit 20 also contrasts short-term transactions to long-term strategic operations. To achieve customer success, 3PL providers should structure their long-term relationships to deal with short-term problems and priorities. Both over the short and long term, success depends on sharing vision, information, and strategies between 3PL providers and users. Also, 3PL relationships that emerge as successful over the long term are those that prove to be agile, flexible, and that address end-to-end solutions. Exhibit 20 3PL Value-Satisfaction Hierarchy Short-Term, Transactional Features Benefits Value Long-Term, Strategic Satisfaction Behavior 26 3PL: Results and Findings of the 2004 Ninth Annual Study Exhibit 21 summarizes the responses to the question “to what extent has your Exhibit 21 outsourcing to [3PL providers] been successful.” Based on this information, North North America American 3PL users continue to have successful (“very” or “extremely” successful) Western Europe outsourcing experiences—89% reported outsourcing success in 2004—and generally Asia-Pacific similar results have been seen over the previous years of this study. Overall, the Latin America success evaluations by 3PL users in Western Europe Customer Evaluation of Outsourcing Success, 1996 - 2004* tend to be slightly lower—from 80% to 85%—and 100% customers in Asia-Pacific have been relatively 90 90 89 89 89 88 86 consistent in their success ratings of just less than 85 85 83 82 81 79 78 80% in the current and preceding years in which 80% 76 72 this region has been part of the study. Notably, only 72% of Latin American 3PL users characterized their 60% 3PL relationships as successful. A few relevant thoughts about 3PL success emerged 40% from the focus groups. First, success is not inconsistent with changing from one 3PL to another. 20% Even with successful relationships, strategic differences may evolve between a 3PL provider and 0% its customers such that using another 3PL provider 1996 1997 1998 1999 2000 2001 2002 2003 2004 may be desirable. Second, success needs to be *Figures indicate the percentage of 3PL users by region who rate their relationship with their 3PLs as either interpreted in terms of financial results as well as “extremeley successful” or “very successful.” operational systems or program management. Last, differences between short-term and long-term success must be considered. Shortterm success may be validated by achieving desired objectives, while long-term Exhibit 22 success is related more to the attainment of strategic goals and objectives. Key Critical Success Factors Leading to Customer Value Exhibit 22 lists some of the key critical success factors that lead to creating customer value. This information is based on the results of the focus groups held •Well-understood goals and objectives of relationship – Mutual expectation-setting process in 2004 and the sessions that had been held with 3PL users in the preceding – Understanding business needs of both clients and years of this study. While the importance of individual factors will vary among 3PL providers individual 3PL provider-user relationships, this summary suggests that the • Ability to reach consensus on matters of importance – Trust and commitment success of a relationship is dependent on the ability to skillfully manage several – Effective communications important dimensions. Also, the “value” that is created by a 3PL relationship is a – Willingness to share risk and reward • Corporate compatibility function of several factors, including but not limited to the following: benefits – Management capability and philosophy derived from service offerings, price versus perceived benefit, standardized – Cultural alignment versus customized service offerings, integration (operational and technology – Multi-level organizational alignment between client firm and 3PL provider integration), and regional coverage. Based on focus group discussions, value in a • Effective measurements and measurement strategies 3PL provider-user relationship can be achieved only if both parties work together – Defined standard operating procedures – Cost and service baseline development to design, implement, and execute in key areas such as those listed in Exhibit 22. – Common scorecard and data measurement strategy – Flexible financial structure with a rigorous measurement process • Migration plan towards advanced services • Clear exit strategy Percent of Respondents 27 Exhibit 23 North America Western Europe Asia-Pacific Latin America 3PL Supply Chain Accomplishments Respondents were asked if they felt 3PL providers were accomplishing a number of specific supply chain objectives (see Exhibit 23). Overall, the 3PL users in each region studied felt that the greatest accomplishments were in the category of “facilitating supply chain improvement” (agreement ranging from 52% to 62%). For North American and Western 3PL Provider Accomplishments European users, there was about the same level of agreement with the statement that 3PL providers were “providing needed information technologies.”19 North 62 58 American users were much more likely to agree with 56 52 52 52 the statement that 3PL providers were “providing 43 means for geographical expansion.” The data suggest 41 40 38 35 34 that fewer Asian-Pacific and Latin American 30 29 respondents agreed with these statements. Finally, the 26 28 22 23 20 responses highlight three areas for improvement by 16 3PL providers in all four regions: “global supply chain solutions,” “supply chain integration solutions,” and “advanced supply chain services.” 80% 70% 60% 50% 40% Percent of Respondents 60 48 36 27 30% 20% 10% 0% ge Prov og id rap in hic g m ex ean pa s ns for Fa ion ch ci ain lita im ting pr su ov p em pl inf en y or P t m ro ati v idi on tec ng hn nee olo de gie d su s pp P ly rov ch id ain ing so glo lut b Pr ion al ov idi s int n eg g s rat u ion pp so ly ch lut ai ion n su Prov s pp id ly ing ch a ain dv se anc r v ed ice s Measuring Success and Opportunities for Improvement As in previous years, the survey asked participants to quantify the improvements in their supply chains by using 3PL providers. Exhibit 24 summarizes the various performance metrics. Highlights to note from these responses include: ❑ Logistics cost reductions averaged more than 10%. Aside from the consistency across the various regions, these percentages are somewhat higher than those reported in preceding years in this study. ❑ For the fourth year in a row, the fixed logistics asset reduction reported by North America was approximately 16%, and the percentage reductions indicated in the other regions were somewhat higher, including 41% in Latin America. ❑ The average length of an order cycle dropped, with improvements ranging from about 25% to 50% in terms of days. These percent reductions are greater than those reported in the preceding years of this study. ❑ Overall inventory reductions ranged from 7% in North America to 16% in Latin America. ❑ Cash-to-cash cycles dropped as a result of 3PL use. The number of days reduction ranged from 2.4 days in North America to approximately 10 days in Asia-Pacific. Exhibit 24 Quantifiable Measures of 3PL Success Cost/Benefit Logistics cost reduction Fixed logistics asset reduction Average order-cycle length change (days) Overall inventory reduction Cash-to-cash cycle reduction (days) Service level improvement (percent “yes”) North America 15% 16% From 12.2 to 6.8 7% Western Europe 11% 17% AsiaPacific 15% 25% Latin America 17% 41% From From From 7.1 to 4.8 38.7 to 19.4 20.7 to 15.3 11% 10% 16% From From From From 22.2 to 19.8 23.5 to 19.6 49.0 to 38.7 36.2 to 26.6 58% 69% 71% 72% 19 Referring back to the section that discusses 3PL Service Offerings and Technology, however, it is still clear that from a user’s perspective, IT capabilities have significant room for improvement. 28 3PL: Results and Findings of the 2004 Ninth Annual Study Respondents also reported service level improvements (North America, 58%; Western Europe, 69%; Asia-Pacific, 71%; and Latin America, 72%). These results are consistent with the focus groups, which suggested that the most significant accomplishments of 3PL providers are cost control, technology, and service consistency. Although significant evidence exists that 3PL customers are benefiting from their choice to outsource certain logistics services, these 3PL provider-user relationships are not without “areas for improvement.” Exhibit 25 identifies several key areas where improvement is needed. The percentages in this exhibit indicate the extent to which 3PL users have experienced recurring problems in these areas. While each of the areas listed could be a separate topic for discussion, suffice to say that some of the key areas where improvement is desired are: service level commitments not realized, cost “creep” and price increases once relationship has commenced, cost reductions have not been realized, and time and effort spent on logistics not reduced. While these factors are of general concern across the regions studied, there are a couple of notable exceptions. First, compared with the results from the other regions, more 3PL users in Asia-Pacific (67%) feel that the time and effort spent on logistics has not been reduced. Second, North American 3PL users experience a greater incidence of cost “creep” and price increases once the relationship has commenced. These areas for improvement should serve as a good “check list” for 3PL providers to assess the quality of their customer relationships. While this advice should be worth considering, a few related thoughts need consideration. First, the problems cited may not necessarily be “critical”; many instances of problems can be resolved easily. Second, the problems identified may be relatively minor in comparison to the 3PL users’ experiences, whether they involve another 3PL or a proprietary approach to managing logistics. Third, these problems are somewhat minor in comparison to the benefits received as a result of using a 3PL provider. Exhibit 25 Areas for 3PL Provider Improvement Areas for Improvement North Western America Europe Service level commitments not realized 62% 48% Cost “creep” and price increases once relationship has commenced 51 35 Cost reductions have not been realized 47 43 Time and effort spent on logistics not reduced 42 28 Unsatisfactory transition during implementation stage 29 21 Inability to form meaningful and trusting relationships 22 15 AsiaPacific 71% 43 52 67 24 14 Latin America 65% 31 39 27 27 23 29 Strategic Assessment In many respects, the trends to be discussed in relation to the 3PL industry parallel trends that are affecting other service-related sectors of the business world. This report’s conclusions come in four sections: summary of key performance issues, industry misconceptions, future industry trends, and the value readers should get from this report. Key Performance Issues and Industry Misconceptions The 3PL industry continues to go through an evolutionary change. Not only are 3PL providers and their capabilities changing, but the expectations that user firms have of their 3PL providers and their services are also changing. In fact, the 3PL industry is finding itself moving forward and beginning to show signs of progress toward maturity. Based on the results of the 2004 3PL study and the focus group sessions, 3PL users are generally satisfied with the 3PL provider’s performance related to service levels, initial cost management, and overall client support. However, gaps continue to exist in several areas: ❑ Disappointment with the 3PL provider’s abilities to develop value-added (advanced capabilities) services. Although many 3PL providers satisfy user requirements around basic services, such as transportation or warehousing, users continue to identify ongoing development of capabilities as a key issue. A driving factor in this dissatisfaction is that the original needs of the users, those that drove the user to outsource at the beginning, have changed over time. Users continually state that they are initially satisfied with 3PL performance, but they fail to advance their capabilities around their users’ evolving needs. Examples stated by users include globalization, 4PL services, inventory/asset-based services, contract manufacturing, and supply chain optimization. A critical success factor in satisfying this requirement is for 3PL providers to get closer to the user to properly understand their industry challenges and to anticipate their evolving needs or demands. Properly understanding the users and their particular industries requires additional investment as well as changes in skill set by the 3PL provider, but it yields payback by creating longer-term relationships. ❑ Need for relationship re-invention, mechanisms for continual improvement, or value generation. Clearly, users expect more from the 3PL sector than they say they receive. While this finding may be partially explained away by increases in expectations over time, it also may signal a need for 3PL providers and users to “re-invent” themselves to be more capable business partners to one another. The success of future 3PL relationships will depend on the ability of both parties to take their individual and collective capabilities “to a new level”; they will have to effectively “re-invent” themselves to be more responsive to changing logistics and supply chain environments. The short-term response by some 3PL users may be a reversion to insourcing; the intermediate and longer-term response will be tailoring 3PL provider capabilities to meet the changing and increasing needs and 30 3PL: Results and Findings of the 2004 Ninth Annual Study requirements of the buyers of those 3PL services. The challenge for the 3PL provider is to continually invest and evaluate how to build proper continual improvement mechanisms into each client relationship. ❑ Increasing value of information. Successful supply chain integration causes the value of information (baseline and real-time user and provider information, realtime supply chain logistical information, and more) to increase in relation to the value of functional execution. Although the need for successful functional execution is great, a strategic shift has occurred: The need for capable data and process management, coupled with the availability of low-cost standard information, is now a high priority for both 3PL users and providers. ❑ Emerging role of supply chain integration. The stated need for additional supply chain integration and for organizations that may serve as “integrators” has validated the 4PL model. Specifically, providers that can bring multiple service capabilities relating to the use of logistics information, operational knowledge, userprovider relationships, and supply chain integration are of critical importance. Realistically, however, the use of 4PL providers may be limited—and financially justifiable—to supply chains that are complex, large, and rapidly changing, as well as limited to user organizations that are themselves large, complex, and global. ❑ Global evolution of 3PL usage. Principal among the strategic directions for the future is the need for 3PL providers that offer globally capable services; that is, providers that can integrate processes and information across vast regional boundaries. Although many 3PL providers market their “global” abilities, 3PL users indicate significant improvement is needed before most of these claims are realistic. One way to accomplish this objective is for existing 3PL providers to sufficiently modify their abilities so that the goal of being globally capable is within reach. The other way is to suggest that the truly global business model is not only an extension of the capabilities of existing providers, but an area of core competency for the 3PL provider as a whole. Achieving this goal may be more realistic as a result of “re-invention” rather than “marginal improvement.” Several of these issues were highlighted when we asked our focus group participants to identify industry misconceptions. Some of the most commonly discussed misconceptions were: ❑ ❑ ❑ ❑ “It’s not going to be painful; it’s easy to implement.” “Your business, company’s needs, and customers’ needs will be treated uniquely.” “Outsourcing the functionality means you can decrease management headcount.” “They can do it all, they know it all, and can meet performance on what they say they can do.” ❑ “They can expand their services beyond the original core contract.” ❑ “The cost-savings approach/benefit can be applied to all 3PL services.” 31 Future Industry Trends Overall, the task of understanding the success of 3PL relationships is challenging. The results of the 2004 3PL study once again have identified a number of areas in which 3PL providers are viewed as creating significant benefit, and hence value, for 3PL users. However, there appears to be no shortage of areas where improvement is desired. One key learning from the focus group sessions was that the 3PL industry appears to be experiencing normal shifts as the market grows and matures—customers like what they’ve purchased, see the benefits, and now want something bigger/better. Being in a service industry, perhaps 3PL providers are trying to offer improvements (added value) on an ad hoc basis. A more traditional approach evident at many manufacturing enterprises is to have a separate research and development (R&D) department, rather than try time after time to create new value offerings for individual customers one at a time. Results from the 2004 3PL study, combined with our focus group sessions, identified several industry trends over the next three to five years. Some of these key trends are: ❑ Evolution toward a broad supply chain solution provider versus a transportation and warehouse provider. ❑ Increased outsourcing of transaction-based user activities to 3PL providers (e.g., order taking). ❑ Continued increase in 3PL provider technology abilities. ❑ Be customer-needs focused (provide the right solution, be involved in client integration planning, and understand the client industry). ❑ Continued activity in updating, enhancing, and improving/extending the overall 3PL provider-user relationship. ❑ Continued expansion, acquisition, and consolidation of the 3PL industry. ❑ Expansion of global markets and 3PL providers’ abilities to provide necessary services. ❑ Further clarity to the 4PL solution. ❑ Longer-term relationship management capabilities and thinking beyond a two-year contract. Last, keep in mind that significant challenges will always exist when measuring and quantifying the value created by a 3PL provider for its clients. Even if the types of benefits from using a 3PL can be accurately identified, the conversion of benefit-tovalue in financial terms typically is not an easy task. As the level of the playing field in the 3PL arena continues to rise, both 3PL providers and 3PL users should be better able to accurately identify and quantify value. 32 3PL: Results and Findings of the 2004 Ninth Annual Study Value of This 2003 Third-Party Logistics Report Although this report principally emphasizes views about the 3PL industry from a user perspective, we have written it to be of value to a broad range of interests in the logistics and supply chain arenas. The relevance of this study applies to users, nonusers, service providers, management consultants, and educators from a number of vantage points: ❑ ❑ ❑ ❑ ❑ ❑ ❑ Understand the development and growth of the 3PL industry. Compare personal experiences and results with market expectations and results. Gain a better understanding of the depth and breadth of 3PL services. Understand the 3PL value proposition and the results experienced by users. Assess your role within the 3PL market and determine market strategy. Understand sources of customer satisfaction and dissatisfaction with 3PL providers. Utilize this information to help close performance gaps. From a management perspective, this study documents the increased interest and sustainability of truly collaborative relationships between 3PL providers and their customers. While the study certainly identifies ways in which all parties can improve these relationships, long-term success in the marketplace requires that more effective logistics and supply chain solutions be developed. Finally, firms in all industries must see the 3PL option as one that can provide value creation for the user firm, its customers and suppliers, and the supply chain in general. As with previous years’ studies, we finish by again saying that 3PL providers will increasingly be at the focal points of strategy formulation, operational excellence, and information technology to make the maximum contribution in value creation for their customers. 33 Appendix: 3PL User Focus Group Sessions Two years ago, we used client workshops to bring multiple logistics executives together to jointly interpret the results of the 3PL survey and to collaboratively discuss the lessons learned within their respective industries. This year, we conducted this collaboration through conference calls to several user focus groups. These had similar objectives as the workshops, but the conference calls let us reduce the amount of user time and travel investment. Thirteen clients participated, representing multiple industry segments of varying sizes, across four focus group conference call sessions. Capgemini, Dr. John Langley, and FedEx thank these companies for their participation, insights, and teamwork in helping with the analysis of this ninth annual 3PL survey and report. The participants are: Scott Baxter Judy Bosko Danny Garst Mario Hegewald Jim Kellso Don Mills Tony Moran Aaron Pernat Rudolfo Santamaria Chuck Seminatore Mark Servidio Darren Smith Jamie VanDyke Vice President, Operations Director, Operations Vice President, Logistics & Supply Chain Director, Global Logistics Manager, Supply Network Consultant Director, Transportation Logistics Director Global Logistics Operations Manager, Global Logistics Vice President, Logistics & Supply Chain Manager, Traffic & Logistics Director Medela Sysmex Philips Consumer Electronics Eaton Corp. Intel ProCorp Dade Behring Foamex All-American Eaton Corp. Sharp Electronics Northrop Grumman All-American The objectives of the focus group sessions included: ❑ Jointly interpret and review a summary of the 2004 survey results. ❑ Discuss lessons learned from past 3PL experiences. ❑ Identify and discuss key industry themes, trends, and issues affecting 3PL. The results from the focus group sessions were incorporated into each section of this report, thereby bringing real-life experience to the survey’s interpretation. Our intent is to continually improve the study each year, through content enhancements and regional expansion, as well as collaborative activities, such as the focus group sessions. Through these enhancements, we feel you, the reader, will be better able to apply the results of our annual 3PL survey to your business needs. 34 3PL: Results and Findings of the 2004 Ninth Annual Study About the Participants C. John Langley Jr. Dr. C. John Langley Jr. is The Logistics Institute Professor of Supply Chain Management and a member of the faculty of the School of Industrial and Systems Engineering at the Georgia Institute of Technology. He serves as Director of Supply Chain Executive Programs at Georgia Tech and as Executive Director of the Supply Chain Executive Forum. Dr. Langley is a former President of the Council of Logistics Management, and a recipient of the Council’s Distinguished Service Award. The Richmond Events Logistics and Supply Chain Forum named him one of the “Outstanding Logistics Professionals” in 2004. Dr. Langley received the Ph.D. degree in Logistics from Penn State University, and he is a noted author and frequent presenter at professional meetings and forums. He is a co-author of The Management of Business Logistics: A Supply Chain Perspective, a 7th edition textbook published in 2003, as well as a number of other textbooks. In addition to his university duties, Dr. Langley actively consults with both logistics user and provider firms, and serves on the Boards of Directors of several major corporations. Georgia Institute of Technology The Georgia Institute of Technology, located in Atlanta, is a leader in logistics and supply chain education. Through its School of Industrial and Systems Engineering (ISyE) and The Logistics Institute (TLI), Georgia Tech is committed to serving logistics educational needs through its degree programs and its comprehensive professional education program. Included are two short course series—the Logistics Professional Series and the Logistics Management series—and a fully accredited Executive Master’s in International Logistics (EMIL) program. Also, TLI sponsors a Global Logistics Program, a TLI Asia-Pacific program in partnership with the National University of Singapore (a partnership with the National Science Foundation and more than twenty corporations and government agencies), and a Leaders in Logistics Program. Georgia Tech and The Logistics Institute impact logistics and supply chain direction setting and strategy formulation through its Supply Chain Executive Forum, founded in 2003. Information about Georgia Tech’s ISyE programs may be found on the web at, while information about The Logistics Institute and the Supply Chain Executive Forum may be found at and, respectively. Gary R. Allen Gary R. Allen is a Senior Manager in the Global Distribution team of Capgemini U.S. LLC based in Detroit, MI. He is the North American Distribution Sector Leader and has over fifteen years of supply chain experience and offers broad capabilities in supply chain management. He specializes in logistics and fulfillment and is leading efforts related to third-party logistics and supply chain outsourcing. He has worked across multiple industry sectors and a variety of client engagements, including AT&T, Farmland, Ford, GM, Gillette, Honda, Sprint, 3M, and Verizon. Before joining Capgemini, Mr. Allen spent ten years in various functions with FedEx Supply Chain Services. He has a degree in Supply Chain Management from Michigan State University. 35 Capgemini U.S. LLC Capgemini, one of the world’s foremost providers of consulting, technology, and outsourcing services, has a unique way of working with its clients, called the Collaborative Business Experience. Backed by over three decades of industry and service experience, the Collaborative Business Experience is designed to help our clients achieve better, faster, more sustainable results through seamless access to our network of world-leading technology partners and collaboration-focused methods and tools. Through commitment to mutual success and the achievement of tangible value, we help businesses implement growth strategies, leverage technology, and thrive through the power of collaboration. Capgemini employs approximately 55,000 people worldwide and reported 2003 global revenues of 5.7 billion euros. Capgemini’s Supply Chain Management Service Line is a recognized global leader in supply chain consulting, offering a range of services from supply chain strategy and architecture development, to business and technology integration, to full-service process and technology outsourcing. In addition, Capgemini has developed new offerings to address the current market's customer-centric business challenges and to help companies build dynamic, adaptive supply chains. For further information, please visit Thomas A. Dale Thomas A. Dale is a Director of Marketing for FedEx Supply Chain Services Inc. based in Memphis, TN. His career spans more than sixteen years in the third-party logistics/supply chain space. Mr. Dale joined FedEx Supply Chain Services Inc. in 1995 and has held a variety of positions in business development, operations, and marketing. He is currently responsible for developing, expanding, and managing supply chain service offerings, including transportation management, fulfillment, and fleet. Before joining FedEx, Mr. Dale spent eight years with Leaseway Logistics conducting market awareness and customer satisfaction research, as well as designing transportation management, dedicated fleet, warehousing, and integrated solutions for a number of Fortune 500 companies. Mr. Dale holds a degree from John Carroll University. FedEx Supply Chain Services Inc. FedEx Supply Chain Services (FSCS), a unit of FedEx Corp., meets the synchronized supply-chain management needs for companies of all sizes domestically and globally. FSCS focuses on three primary services: transportation management, which uses the world-class reliability of FedEx Corp. companies to provide customers with optimized, multi-modal transportation management; fleet services, which includes dedicated contract carriage; and fulfillment, giving customers end-to-end, scalable, turnkey warehousing and flow-through solutions for greater flexibility in distribution operations. 36 FedEx Corp. provides customers and businesses worldwide with the broadest portfolio of transportation, e-commerce, and business services. With annual revenues of $25 billion, the company offers integrated business applications through operating companies competing collectively and managed collaboratively under the respected FedEx brand. Consistently ranked among the world's most admired and trusted employers, FedEx inspires its more than 240,000 employees and contractors to remain "absolutely, positively" focused on safety, the highest ethical and professional standards, and the needs of their customers and communities. For more information, visit Contact Information For additional copies of this publication or for more information about the study, please contact: North America and Latin America: Gary R. Allen North American Distribution Sector Leader Capgemini U.S. LLC 500 Woodward Avenue Suite 1620 Detroit, MI 48226 Phone: (313) 887-1432 Fax: (734) 667-2194 Cell: (678) 571-6250 C. John Langley Jr., Ph.D. TLI Professor of Supply Chain Management Georgia Institute of Technology 765 Ferst Drive, N.W. Atlanta, GA 30332-0205 Phone: (404) 894-6523 Fax: (413) 556-3570 Thomas A. Dale Director of Marketing FedEx Supply Chain Services Inc. 5455 Darrow Road Hudson, OH 44236 Phone: (330) 342-3000 Western Europe: Erik van Dort Global Distribution Sector Leader Capgemini Papendorpseweg 100 3528 BJ Utrecht (or P.O. Box 2575, 3500 GN Utrecht) The Netherlands Phone: (31) 30.689.7119 Fax: (31) 30.689.9527 Cell: (31) 651.42.97.32 Asia-Pacific: Donato Caporale Vice President, Supply Chain Services Capgemini Australia Pty Limited Level 2 477 Collins Street Melbourne VIC 3000 Australia Phone: (61) 3.9613.3976 Fax: (61) 3.9613.3333 Cell: (61) 4.1838.3138
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