The 3PL Industry: Where It's Been, Where It's Going (page 4)
-- Supply Chain Management Review, 9/1/2005
Page 4 of 4
Implications for Providers and Users
This ten-year retrospective of our surveys of 3PL chief executives—coupled with the related studies we have conducted among the user community—yield some instructive insights into the longer term implications for both providers and users. (For a summary of the lessons learned, see the accompanying sidebar.) First and foremost, the 3PL industry in the United States seems well positioned to register solid revenue gains and improved profit margins over the next several years. The industry’s revenue base should continue to grow, absent any major contraction of economic activity, but at a considerably slower rate than in the 1990s. Industry consolidation will continue, not only reducing the number of major players but also providing market opportunities for niche competitors to serve smaller customers that may no longer be attractive to the big 3PLs. At the same time, the 3PLs that have broadened their service offerings and market coverage through mergers and acquisitions will continue to struggle with integration challenges.
From a service offering standpoint, 3PLs are expected to place greater emphasis on servicing import/export activities as business continues to go global. This will be particularly evident among providers that have seen major accounts move their manufacturing activities offshore. The 3PLs that already have added freight-forwarding and customs-brokerage capabilities will be best positioned for this transition. From a technology standpoint, the high cost and low return on IT investments will remain a chronic industry problem—one that is not likely to change any time soon. This problem can be traced to a combination of rapidly changing technology, user demands for systems customization, and user unwillingness to pay the true costs of these applications. There seem to be relatively few options available for 3PLs to deal with these issues. They must either be willing to live with the lower margins associated with such accounts and attempt to cross-subsidize them with higher margins on other service offerings or aggressively attempt to raise prices for such services. If the latter strategy puts an existing relationship at risk, the provider must then weigh the cost of losing clients against living with lower or nonexistent IT margins. Other provider strategies might involve unbundling their service offerings and charging separately for IT support. Alternatively, they may rely more extensively upon software alliance partners to provide such support. Those 3PLs that succeed in selling services to other companies along the customer’s supply chains might be able to market common IT solutions along those chains. In addition to providing some relief from customization pressures, this strategy would spread development and implementation costs across a broader customer base. Finally, staffing issues will continue to trouble the industry as the competition for management talent only intensifies. This will necessitate more extensive recruitment efforts, expanded internal training programs, and ongoing management development programs. The developments for the providers discussed above also have important implications to the 3PL-user community in the United States. For one thing, customers will have fewer (and larger) logistics service providers in the marketplace to consider. But those that remain will offer much broader service portfolios and geographic coverage. The oft-cited desire among some segments of the user community for one-stop logistics service shopping may finally become a reality. If 3PLs consider an existing or potential user an attractive account, the user should have little trouble finding the services required. However, for companies that are not seen as “attractive” the options will likely diminish. Similarly, small- to medium-sized companies that no longer reach the business threshold of the larger service providers will likely have to look to smaller niche players for logistics support. The formation of collective user organizations to broker larger volumes with 3PL service providers could be one viable strategy to increase service options for these smaller companies. Customers in the United States should also expect more pressure from their 3PLs to raise contract rates, particularly with respect to the technology support being provided. Clearly, the user community must allow the 3PLs to generate reasonable returns on their IT investments. If not, the relationships can’t be sustained. Programs that place greater emphasis on sharing cost savings and risk appear likely going forward.
The desire among many 3PLs to establish deeper, longer-term relationships with fewer customers presents a real opportunity for users to do more than just talk about the value of supply chain collaboration. As customers work more collaboratively with their service providers—and as the 3PL strategy of selling along the supply chain takes hold—the promise of true supply chain integration becomes closer to reality.
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Author’s note: I would like to acknowledge the support of Accenture, which has sponsored the annual 3PL surveys for the past six years. Also, my thanks to Brooks Bentz, associate partner with Accenture, who has worked with me on the surveys for the past three years.
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