There seems to be a great deal of buzz surrounding the future prospects of the third party logistics industry. And while it's difficult to project the industry's growth rate with any degree of precision, anecdotal evidence suggests that it will be robust. It's not at all unusual to pick up a business magazine or industry trade journal and find multiple examples of strategic acquisitions and outsourcing decisions by major corporations to support that conclusion.

In fact, the anecdotal evidence, estimates from analysts, and our own research suggest that the third party industry is growing at an annual rate of 10 to 20 percent. Note, however, that increasing revenue does not correspond to higher profits. With a few notable exceptions, the third party providers do not appear to have figured out how to turn a revenue stream into a profit stream.

In assessing the future role of third party logistics in supply chain management, it's useful to begin with some basic questions. What is a third party? How does a third party create value, and how have requirements for third party value creation changed from a decade ago? How does the third party synchronize its value proposition with the client's supply chain value requirements?

A third party logistics services provider (3PL) is an independent economic entity that creates value for its client. Given this broad definition, a trucking company, a warehouse operator, and a contract manufacturer can all be considered third parties. Indeed, even the federal government has served as a third party. An important part of the Parcel Post Act of 1914 allowed farmers in rural parts of the country to use U.S. Postal Service trucks to move fresh milk and produce to market centers. In reality, the third party industry has its roots in trade and agriculture going back at least to the dawn of recorded history.

While the existence of third parties may be nothing new, the range of value propositions they offer today has changed dramatically from years past. Four key developments have driven this change:

1. Global industry consolidation. Mergers and acquisitions have created a number of big third party operators, some with a heavy U.S. focus and others with a more global orientation. These firms generally offer a wide range of services across the entire spectrum of their client's supply chain. The underlying economic rationale of this consolidation is to provide scale economies across services and geography while developing a degree of industry specialization. The UPS acquisition of Fritz is one example of this dynamic in play. Another is the just-completed acquisition of USCO Logistics by Kuehne & Nagel.
2. Technology integration. The advanced technology that has become available in recent years has enabled 3PLs to link their business processes more directly to those of their clients. This direct linkage, in turn, creates seamless operations and builds significant barriers to switching service providers. In some cases, the third party is taking the initiative in technology adoption; in other cases, a big client may be leading the way.
3. Industry specialization. A tighter regulatory environment, coupled with the pressure for more cost-effective business processes, has encouraged the third party firms to specialize by industry. In the automotive, pharmaceuticals, retail, and other sectors, 3PLs have emerged to support the unique industry needs. While specialization often favors the third parties with the greatest resources, it can also create opportunities for smaller niche players in the industry.
4. Industry alliance networks. Third party companies now are forming networks of alliances between each other—a development that would have been highly unlikely only a few short years ago. A good illustration is the partnership between FedEx and the U.S. Postal Service. So is the new joint venture called Integres Global Logistics, which involves Roadway, United Airlines, American Airlines, and Unisys. Integres will provide worldwide transportation services and tracking of packages weighing more than 70 pounds. Such emerging alliances offer the potential to create a new range of service offerings that will further change the shape of the third party value proposition. Notably, these joint ventures or alliances often are global in scope and multi- or cross-modal in network connectivity.

These powerful developments of the past decade have forced third parties to change their strategic approach to delivering value to clients. The first and probably most important change is that they are synchronizing the technology associated with the expanding menu of services provided. Increasingly, this effort is extending out across the entire supply chain. Some third parties have assumed the role of a "lead" logistics provider (sometimes called a 4PL) responsible for managing all warehousing, transportation, order management, and returned goods for a specific client. As they do this, these lead logistics providers have had to synchronize and integrate their technology with that of the independent companies providing each of these services. Without such synchronization, none of the key activities, like scheduling, order fulfillment, or on-time delivery, could take place accurately and efficiently.

In other situations, the third parties have extended their information and operating scope to include raw materials, work-in-process, and finished goods. In still other cases, a third party has assumed responsibility for managing all global material flow both inbound and outbound. With all of these service extensions, the synchronization of technology used becomes absolutely essential.

Another major change in the 3PL-customer relationship centers on customer expectations. In the 1990s, the client began to expect the third party provider to be ready to seamlessly splice its technology into the client's technology at the very beginning of the relationship. In the past, this kind of integration was generally considered to be a "learn-as-you-go" proposition; today, it's a front-loaded expectation. This translates to a significant increase in the front-end investment and a corresponding risk in business development for the third party. It also entails new requirements for staffing, training, and software investment on the 3PL's part. On the positive side, all of these commitments and investments may raise significant barriers that keep the client from switching to a new third party provider.

In summary, the developments of the past few years present a good news-bad news story for the third party firms that plan to play in the supply chain sandbox. The good news is that their roles have expanded significantly, which greatly increases the potential for even further account penetration. 3PLs today are better positioned than ever to differentiate their product, exit the commodity game, and build profitable long-term client relationships. The bad news is that the expanded customer involvement and heightened expectations requires new and expensive investments in staffing, software, and business development skills. These investments are front-end loaded, and as the selling cycle gets longer, the risk rises accordingly. The new environment demands a new mindset whereby third party providers must be willing to work closely with other 3PLs to bring network alliance solutions to the clients.

Who was the wise old person who said, "There ain't no free lunch"?