Has the Future of Third-Party Logistics Already Arrived?
By C. John Langley Jr., Brian F. Newton, and Gene R. Tyndall -- Supply Chain Management Review, 9/1/1999
One of the interesting business phenomena of the 1990s has been the continued emergence and evolution of the third-party logistics profession. Some observers refer to third-party logistics as an "industry." Yet a closer look reveals a higher order of calling, one that might justify the term "profession."
Providers of third-party services have steadily expanded their offerings across the breadth of the supply chain. They are developing innovative services that are pushing the bounds of conventional practice. And they are forging close, mutually productive alliances with their customer partners. Despite these advances, the profession still has much progress to make.
This article identifies the seminal changes taking place in the third-party logistics profession and suggests what the future might hold for this critical element of supply chain management. Specifically, it seeks to provide the following:
- An understanding of the third-party logistics profession.
- A third-party evaluation/report card.
- A look at the critical role of information technology.
- A discussion of strategic priorities for the future.
The article also will address to what extent the future of the third-party profession already has arrived. The answer may not be as clear-cut as it might appear at first glance.
Much of the information referenced here comes from a study called "Third-Party Logistics: Key Market/Key Customer Perspectives," conducted annually since 1996 by the University of Tennessee. The study is supported by Exel Logistics Americas and Ernst & Young LLP, both of which participate in the study's design and structure. The research examines current and projected use of third-party logistics services in six key markets: automotive, chemical, computers and high-tech, consumer products, medical and pharmaceutical, and retail. Survey respondents from these industries work in logistics, supply chain management, and related disciplines. They hold titles such as manager, director, or vice president. Most of the companies represented are in the manufacturing sector, with a smaller portion coming from the wholesale/retail area. More than half of the respondents are from organizations that report more than $1 billion in annual sales.
The most recent (1998) study findings are based on 174 responses to a mailing of more than 700 industry executives (a 25-percent response rate). The annual third-party study has become recognized as one of the most comprehensive and insightful of its kind.
Understanding the Third-Party Logistics ProfessionThe term "third-party logistics" (3PL) often is equated with outsourcing, contract logistics, and logistics-services providers. Though there's a general consensus that all of these terms broadly describe the same activity, we felt a more precise definition was in order for the purposes of this article. Specifically, we define a third-party logistics provider as a company that "provides multiple logistics services for its customers." Clearly, the third-party provider is external to the customer company and is compensated for its services. While this definition certainly encompasses the large, well-known Exel Logistics, Ryder Integrated Logistics, Menlo Logistics, Schneider Logistics, and FDX/Caliber Logistics, it also includes the many smaller players throughout the profession.
One desirable attribute of a third-party provider is that the multiple logistics services be integrated, as opposed to being performed on a stand-alone basis. By providing integrated solutions, the provider can solve its customers' business problems more effectively.
With this basic definition in place, we can proceed to gain a better understanding of the current state of third-party logistics. Toward that end, an overview of key survey findings is presented below.
Third-Party Usage in the United States
The results of the Third-Party Logistics studies conducted between 1996 and 1998 show that almost three-quarters of the companies surveyed either used or were considering using third-party logistics services. For the purposes of this study, these companies were categorized as users of third-party services. Exhibit 1 shows how the utilization percentages differ among the industries examined in the 1998 study. Companies in the chemical and consumer-products industries are the highest users (75 percent and 88 percent, respectively), while retail and medical companies are the lowest (at 52 percent and 57 percent). Among all users, only about 70 percent indicated that the logistics services were "tied together" or "integrated" by their third-party provider. Thus, if you argue that integration of services is a prime requisite for third-party logistics, the true level of third-party usage is somewhat less than the three out of four indicated above.
One other development, not specifically addressed by the surveys but observed with increasing frequency by the authors, bears mentioning. Namely, sophisticated users increasingly are outsourcing entire supply chains or major segments to a single third-party provider or a few providers.
Strategic Alternatives Emerging
The study results provided some interesting insights into the issue of depth vs. breadth of service offerings. Consistent with earlier findings, the 1998 study found a high level of agreement with the statement: "Third-party suppliers should provide a broad, comprehensive set of service offerings." In line with this opinion, respondents strongly disagreed with the statement: "Third-party suppliers should focus on a limited range of service offerings." In general, they want third-party providers to broaden and expand their service options, rather than limit the range of services available.
The Competitive Positioning Model developed by Robert V. Delaney, vice president of Cass Information Systems, and used in his annual "State of Logistics Report" provides insight into the strategic third-party options available. This model (see Exhibit 3) suggests that provider strategies can vary according to the relative emphasis placed on the industries served and on the differentiated levels of service provided—the X and Y axes in the model. It recognizes four quadrants of strategic focus: diversified, industry, operational, and customized. In the customized quadrant, the focus is on integrating the service providers' human and financial resources so that the end result is a truly customized service. As Delaney suggests, this result depends on an effective and mutually beneficial relationship between users and providers of the third-party services.
The industry and customized strategies represented in the model offer the areas of greatest future opportunity. And it is in these quadrants that the third-party industry leaders tend to operate. The authors believe that over time, 3PLs will create significant value by providing customized solutions to industry segments where logistics does not currently provide competitive advantage or differentiation.
Also as suggested by Delaney, perhaps the most relevant benchmarks of financial success in the third-party logistics profession are overall return on assets (ROA) and return on invested capital (ROIC). In the case of the former, critical performance measurements include asset turnover (ratio of sales revenue to assets) and profit margin (pretax operating margin on sales)—the product of which equals return on assets. The calculated value of ROIC helps to evaluate the financial productivity of the capital applied by the third party. Given the competitive environment and the market conditions in most business sectors today, companies pursuing the industry and customized strategies again seem better positioned to achieve key financial objectives.
Third-Party Logistics Buying Process
Recent study results indicate that a wide range of executives have become involved in the decision to use third-party logistics. In addition to the manager, director, or vice president of logistics, others with significant involvement are the president or CEO as well as executives from such areas as finance, manufacturing, and information systems. (Exhibit 4 from the 1998 study shows who in the organization recognizes the need for third-party services.) The growing interest among key executives like the CEO, COO, and CFO directly relates to the expanding scope of supply chain solutions now being offered by some service providers. In addition, the visibility level of the third-party decision is increasing as the financial and service impacts of that decision intensify.
These findings and trends suggest that the third-party buying process increasingly will become the responsibility of cross-functional teams. Having representatives from several key corporate functional areas will result in a more robust and comprehensive evaluation and selection process.
A Third-Party Report CardMost studies done to date have reported high levels of user satisfaction with third-party performance. Our findings are no exception. The 1998 study found that 86 percent of the user companies characterized their third-party experience as extremely or somewhat successful. (The other choices were "neither successful nor unsuccessful," "somewhat unsuccessful," and "extremely unsuccessful.") This positive figure, which continues to move upward slightly but steadily, supports the overall contention that customer satisfaction levels are actually increasing.
Although respondents generally were happy with their third-party experiences, they did not hesitate to identify the problems they encountered. Specific areas cited included poor cost control, unsatisfactory customer service, inadequate technology/communications, failure to understand the scope of work, substandard performance, and lack of proactive management. Some industry observers have suggested that even though 3PLs have expanded their capabilities rapidly, they may not have kept pace with escalating user expectations for bigger, more complex, more integrated, multitheater solutions.
Most customers said that the improvement strategies enacted by the third-party providers on their behalf were professional and responsive to their needs. The improvements focus on a range of processes and activities. The following key metrics represent averages calculated from individual responses:
- Logistics costs dropped by 7.8 percent.
- Logistics assets fell by 21.6 percent.
- Order cycle time was reduced from 6.3 to 3.5 days.
- Customer-satisfaction index advanced from 64.8 to 69.0.
Although third-party providers have met customer expectations in many key areas, they have fallen short in others. Exhibit 5 contrasts where user objectives have been largely met and where more progress is needed. Interestingly, several of those areas needing improvement are of great strategic relevance to the supply chain. These include business objectives like moving from "push" to "pull," integrating the supply chain, and implementing change more rapidly. Thus, 3PLs have a golden opportunity to help companies achieve these kinds of transformational goals associated with supply chain reengineering.
Finally, about three out of four respondents said that use of third-party service providers made them more efficient and effective. Furthermore, a third of the respondents reported that this option had led to market differentiation. When asked how the use of a third party resulted in differentiation, the users noted that the providers had accomplished the following:
- Improved customer service.
- Provided "value-added" services to customers.
- Provided access to larger markets.
- Increased responsiveness.
- Brought about process improvement/increased knowledge.
The Strategic Role of Logistics
Almost 60 percent of the 1998 survey respondents regarded logistics as one of their company's core competencies, and 80 percent said it represented a key competitive advantage. These figures, which are consistent with our earlier findings, suggest that the third-party option is not necessarily inconsistent with the belief that logistics is strategically important to the company. Although the users' focus is shifting from execution to logistics strategy, the provider perspective is moving from functional expertise to broader, integrated operational capabilities and relationship management.
The 1998 study incorporated a new question on how companies view third-party providers. Most of the user companies thought of their 3PL as a resource provider, and many also viewed it as a resource manager or a problem solver. (See Exhibit 6.) Though some third-party relationships are no doubt considerably deeper and more strategic than these terms would suggest, there appear to be opportunities for third parties to be perceived as a supply chain strategist or "orchestrator." Interestingly, several 3PLs—notably TNT, Menlo, and Exel—have built sophisticated supply chain design groups. These design groups join leading management consulting firms like Ernst & Young, Mercer, Andersen Consulting, and CSC in providing customers with strategic supply chain guidance.
Emerging User Preferences
Third-party users appear to be calling for a wider range of value-added services. Our surveys reflect a desire to expand services beyond the traditional freight-bill auditing and payment, warehousing, inbound transportation, freight consolidation and distribution, and traffic management/fleet activities. The responses suggest significant future interest in more strategic areas such as information technology and inventory management.
It's important that both the users and providers share the responsibility for developing new services. Although some users refrain from this process, their participation is essential in creating services that deliver true customer value. At the same time, third-party providers should recognize that new services and capabilities are the lifeblood of future success. It's a continuing challenge that should not be taken lightly.
Another emerging user preference is for services that are integrated. With order fulfillment, for example, a provider might tie together such activities as order picking and packing, shipment preparation and consolidation, and customer delivery. To cite one example of integration, Exel Logistics has created a comprehensive supply chain solution for consumer-goods companies wanting to enter the Mexican market. It has created a central resource campus, nine regional cross-docks, and a freight-management system. Exel also has designed an integrated information systems solution that allows companies to enter the market rapidly by leveraging an infrastructure shared by multiple users. This type of initiative's success depends upon the ability to integrate multiple logistics activities in serving multiple customers effectively.
Undecided on Single Sourcing
The survey findings offer no clear direction on the issue of single vs. multiple sourcing of third-party logistics services. While some of the companies surveyed are working to reduce the number of third-party companies they do business with, others are not. One conclusion that may be drawn, however, is that very few, if any, companies are pursuing a strategy to increase the number of third-party providers significantly.
Global Capabilities Under Development
Although current and potential users sometimes specify a preference to do business with provider companies viewed as having global capabilities, in practice few users are equipped to take full advantage of such capabilities (if, in fact, they do exist). Perhaps the most plausible explanation for this situation is that relatively few companies have integrated their global operations and strategies. As a result, they are not yet ready to utilize a third party with a global presence effectively.
In reality, however, even those third-party providers with a significant global presence might best be described as multidomestic. Clearly, those 3PLs that can provide true global solutions while responding to the needs of local markets are well positioned to help customers manage their worldwide logistics more effectively. Because their customer companies obviously need advice and direction in this area, 3PLs should strive to become a trusted source of information and advice on global strategies and operations.
Niche or Focus for Individual Providers
Businesses in general are seeking to develop specialized high-value capabilities and services. Not surprisingly, they want their 3PLs to support that strategic direction. The idea of individual third-party providers developing a niche or focus takes that strategy a step further, suggesting the advantages providers will gain from formulating their business strategies consistent with and complementary to their customers' strategies.
Critical Role of Information TechnologyThe role and importance of information technology is a subject of intense interest. It's generally accepted that third-party providers need to exhibit a range of IT capabilities. Considerable debate, however, has centered on what applications they should provide and how they should deliver these applications to customers (customized, packages, hybrid solutions, and so on). Interestingly, this debate has been ongoing for the past 20 years as 3PLs have brought to their customers increasingly strategic system solutions. The rapidly emerging Internet collaboration model undoubtedly will have a profound impact on this debate.
As part of the 1998 Third-Party Logistics study, respondents were asked about the specific types of information systems third parties currently provided. As detailed in Exhibit 7, they cited a wide range of IT technologies. For each of those systems, the first portion of the bar shows how many companies currently receive the services indicated; the second portion indicates how many expect to receive them in the future. For example, 65 of the users indicated that their third-party company provided shipment-monitoring services and another 15 expected this to be provided in the future.
The findings suggest that the service offerings to date have focused on the more operational, recurring activities such as shipment monitoring, performance and exception reporting, and billing and payment. They also point to a considerable interest in further developing capabilities in areas such as inventory control and accounting, information linkages with customers, order management, and demand management.
Participants in the 1998 study also were asked an open-ended question about specific IT areas that needed improvement. Interestingly, the main topics of concern (listed below) separate neatly into functionality and information systems characteristics—each of which is critical to the supply chain's effective and efficient operation:
- Technology to improve inventory management.
- Shipment tracking capabilities.
- Seamless integration of information systems.
- Real-time data access.
- Transportation-management technologies.
- Supply chain integration solutions.
As the business world embraces the new millennium, the third-party logistics profession is changing significantly and is moving in new directions. These dynamics are most evident in certain key areas: business growth and evolving core competencies, global strategic and operational alliances, and the integration/leveraging of information technologies. The record of past performance in these areas, coupled with the prospects for the future, will help us respond to the question of whether the "future has already arrived."
Business Growth and Evolving Core Competencies
Consistent with the Competitive Positioning Model discussed earlier, there is good reason to believe that if 3PLs pursue an industry focus and differentiate themselves on service, they will likely increase asset productivity and realize an acceptable financial performance. Exhibit 8 expands on this topic by suggesting that profitable growth and value creation over time will result from improving performance in areas such as working capital efficiency, cost minimization, tax minimization, and fixed-capital efficiency.
As third-party providers look to develop new services, they must keep in mind that customers want an expanded menu of more responsive offerings. Although some of these initiatives will attract additional major market customers, a corollary result will be a broader appeal to more small and medium-sized companies.
Overall, third-party providers are well positioned to help companies facing major change—whether it comes in the form of globalization, corporate restructuring, mergers, or acquisitions.
Strategic and Operational Alliances Among 3PLs
Going forward, the 3PL profession will continue to develop new and innovative strategic and operational alliances. In addition to the traditional "vertical" relationships between 3PLs and their customers and their customers' suppliers and customers, third-party providers will increasingly develop "horizontal" relationships. Providers of complementary logistics services may, for example, work together to serve individual customers or consortia of industry users. Already, Schneider, GATX Logistics, and Fritz are collaborating to serve Case Corporation's domestic U.S. needs. In another instance, Exel Logistics, Circle, and TDS/JIT have come together to create a supply chain solution for Ford Motor Company's new Brazilian assembly plant.
In addition, 3PLs will place a high priority on enhancing their ability to form and sustain effective user relationships. The track record to date on relationships is nowhere near perfect (and the performance of individual 3PLs varies significantly). Yet the profession is learning from its errors and shortcomings. The end result is likely to be significant improvement.
One of the most significant developments will be the emergence of new types of relationships, particularly with companies having information technology expertise. While the most frequently cited example today is the relationship between Ryder, IBM, and Andersen Consulting, other meaningful collaborations are emerging. For instance, Exel Logistics and Ernst & Young are cooperating to share knowledge and collaborate on finding solutions to emerging supply chain challenges. Ernst & Young is teaming up with a few select 3PLs to assist its global customers more effectively. Exel Logistics, meanwhile, is working with a few select supply chain management consulting firms to gain best process and IT knowledge to leverage its competencies and services better. These kinds of alliances are becoming more common today as specialists join forces to bring true innovations and quality services to the market.
Also gaining in popularity is a concept known as "Lead Logistics Provider," in which one of the 3PLs bears responsibility for managing the relationships with all of the other service providers involved. This approach has been successfully applied in the automotive industry both domestically and globally.
Finally, evidence strongly suggests that third-party providers will grow by strengthening their capability to help manage multicompany supply chains. During the past year, for example, Exel Logistics conducted a successful pilot program for Ford and Daimler/Chrysler to blend the automakers' aftermarket distribution networks. The goal was to reduce costs and improve service by eliminating duplicate miles among the dedicated carriers hauling for both manufacturers. Everyone involved views the pilot as a success, and the participants now are working on a second phase for development of shared services.
Integrating and Leveraging Technology
As logistics and supply chain management becomes more and more information-intensive, the role of the 3PL becomes increasingly complex and challenging. Users are bringing their enterprise resource planning (ERP) systems online. And e-Commerce is pervading the buying and selling processes, affecting companies in all business sectors. In this environment, all of the supply chain participants will experience turmoil as users and software companies struggle to find better and more integrated supply chain information technologies for both planning and decision-making.
Most companies today operate a patchwork of nonintegrated packaged and customized software and systems across their supply chains. As they seek to connect with suppliers and customers for both transactions and for collaboration, they find that the IT architecture and software solutions are inadequate to meet the relevant business objectives.
In response, third-party users are turning to their third-party partners for help. Yet the 3PLs often don't have the resources or capital to invest in customized solutions for specific customers—or even for industry segments—to solve the complex IT issues. The results of our Third-Party Logistics study, combined with the collective experiences of the authors, indicate that only through joint efforts can this technology challenge be met. Users, 3PLs, and SCM software companies must partner more actively to address the extended supply chain's IT needs. Only in this way can they provide the seamless and real-time information so badly needed to plan and manage the supply chains of the future.
Growth and development of Internet and e-Commerce functionalities are outstripping our ability to provide adequate information for supply chain management. New systems and technologies are necessary to compete in this new electronic world—especially given the many e-Companies that are starting up every day to sell a variety of products and services. The quest for visibility, velocity, and consistency underscores the need for better IT for decisions and closer collaboration.
Has the Future Already Arrived?The question of whether the "future has arrived" really has two dimensions. The first is whether the profession's early expectations and aspirations have been met. Many observers would argue that they have not—that the profession has grown more slowly than projected. Supporting this argument is the lack of widespread integration of third-party services and the fact that multiple services are often provided to a customer on a stand-alone basis. If we were to chart 3PL's evolution on a traditional product life-cycle curve, the profession would now perhaps be midway along the growth curve.
The second key dimension focuses on the evolution of the profession into several segments, each of which has a unique set of capabilities and value propositions. Considering the extent to which the most aggressive, market-leading companies are investing in the IT component, one can argue that these providers will be able to manage far more extensive networks of relationships, resources, and services than their less-invested counterparts. While other 3PLs, for various reasons, have adopted a philosophy of lesser investment in information technology, these aggressive companies have established the IT component as a strategic beachhead.
Overall, then, it might be appropriate to suggest that for certain providers, the future has in fact arrived. These companies now are moving into larger-scale and more information-intensive capabilities while developing true alliances with their supply chain partners.
As to the extent to which such initiatives will prove to be successful, only time will tell. At any rate, it is clear that the 3PL leaders understand the 21st century challenges facing the profession and are moving to address them. If successful, these companies will be recognized as the leaders and innovators—not only in the third-party competitive environment, but also perhaps in the broader supply chain realm. If this proves to be the case, these companies will create value for themselves, their shareholders, and their customers.
| Logistics Service | % of Respondents |
| Outbound Transportation | 61.0 |
| Freight-Bill Auditing/Payment | 55.3 |
| Warehousing | 49.6 |
| Inbound Transportation | 49.6 |
| Freight Consolidation/Distribution | 40.7 |
| Cross-Docking | 30.9 |
| Selected Manufacturing Activities | 26.8 |
| Product Marking, Labeling, Packaging | 23.6 |
| Product Returns & Repair | 17.9 |
| Traffic Management/Fleet Operations | 15.4 |
| Information Technology | 13.0 |
| Product Assembly/Installation | 11.4 |
| Inventory Management | 9.8 |
| Order Fulfillment | 6.5 |
| Customer Service | 4.9 |
| Order Entry/Order Processing | 3.3 |
| Source: University of Tennessee/Exel Logistics Americas/Ernst & Young, 1998. | |
| Author Information |
| C. John Langley Jr. is the Dove Distinguished Professor of Logistics at the University of Tennessee. Brian F. Newton is director, strategic development for Exel Logistics Americas. Gene R. Tyndall is senior partner, global supply chain management at Ernst & Young LLP. |
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