The times they are a-changin’ for the 3PL industry

With apologies to Bob Dylan, the next two to five years will see a shift to asset-driven companies.

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The 3PL industry has flourished for over 25 years in providing non-asset services. However, in the near future the focus of 3PLs is likely to shift to having assets. That’s a major shift. To prepare for it, let’s take a look at where 3PLs have been.

Historically, the traditional 3PL provider’s only asset was its balance sheet. The 3PL was an existing non-vessel operating common carrier (NVOCC) already providing ocean services on the import side of the equation. The NVOCC provided ocean services through contracts with the steamship lines.

During the late ‘80s and early ‘90s, the theory of supply chain started to be developed into defined synergies that would address such issues as product throughput, inventory control and cash management. Traditionally, the shipping community directed most of its decisions on rates and services through its purchasing departments. Fragmented decisions were usually decided by the lowest cost or price with companies’ different operating silos. Business awards were made through a simple request for quotation, usually the lowest price. Integrators carried a majority of international air freight and domestic deliveries. Integrators owned and operated their assets and had dominance that could be focused on particular clients.

The strong freight forwarders with vision educated themselves on the developing theories of an integrated process to provide origin to destination in-house and bundled. The bundled concept would allow the forwarder/3PL to control and generate revenue at each fragmented transaction to produce a seamless and cost-efficient solution for their clients.

At the beginning of the developing supply chain, opportunities with the 3PL initially took hold with the high-tech industry, mainly computer manufacturers. The service provider’s ability through the budding digital sector is to manage their client’s purchase orders while providing visibility to their purchasing departments. The information allowed the 3PL to consolidate raw materials into combined shipments on a single Bill of Lading, custom clearance, and door-to-door service.

Almost as quickly as supply chain activities were becoming seamless, the shipping community was experiencing system-wide cost reductions through their internal process and bottom-line revenues. Transit time from origin was reduced by a third and sometimes by over half.

In the Nineties, there were barriers to entry from the 3PL providers. The development of proprietary electronic systems was expensive and was usually developed in-house. As more customers came online, IT developers got behind in meeting customer demands. Internal project costs per project started to be simple estimates, not firm and allocated costs.

Another barrier to entry was the considerable cash outlay of carriers’ costs, customs duties forwarded to the government, deconsolidation and delivery to their clients. In the best case, after invoice presentation, payment averaged 30 days.

An additional barrier was that agents represented many freight forwarders. For the process to integrate, the agent network had to become stronger or be acquired by the company controlling the business and strategy. If the agent relationship remains intact, then the agent must share the original cost on their side. It would be impracticable for the domestic provider to wait for this side to receive payment, reimburse them, and pay profit splits.

Individual cultures and business practices had to be merged and again required for continuity of service. Remember that the only way to communicate was by fax or international phone calls. The premier freight forwarder and 3PL was the Fritz Companies, which focused mainly on Fortune 100 companies and above. The 3PL services became an extension of their clients with no direct cost or investment other than providing the services. Costs were incrementally covered by transaction costs and bundled into the per-unit price. At times a company employee would deploy within the company to interface with the client.

What changed

Some of the first changes occurred when customers moved from a request for quotation (RFQ) to a request for proposal (RFP). The latter allowed the customers to see, understand and allow the previous unheard-of release of control to the 3PL. However, a program that worked for one client would not wholly work in its entirety. While most transactions were similar specific adjustments were programmed into the RFQ as was price from the outside providers. Online retail businesses had to control the distribution cost and processes. They must internally control their destiny. The development of a fully digital experience became a reality as their information was provided by the 3pl. In most cases, the customers feed information to outside service providers.

The onset of online commerce has changed how the 3PL can perform and exist. The players in retail trade understood that to control delivery and cost the mindset must change. The change brought attention back to using providers that operate their assets. Further, due to volumes, they understood that new and different levels of receiving stations and fulfillment centers need to be established based on the demographics of their customers and buying patterns.
Covid had its own list of consequences starting with the vessel log-jams on the U.S. West Coast. It remains challenging to blame all the U.S. transportation network issues on the virus. However, retailers, in many ways, caused many network failures.

Quite simply, retailers overbought products. Somehow, their initial forecasting models of consumption and unions, including the longshoreman and our railroads, must have had some input on their purchasing models. Then, the steamship lines applying their shipping act antitrust protection wrecked havoc on rates and services. Next, the longshoreman were using two different scheduling systems for the trucker to pick up and deliver goods and return equipment. Nothing was straightforward or simple anymore.

New strategies

New strategic ideas and actions had to be developed to move cargo further to inland ports or even routing over the Canadian West Coast ports and land bridge containers into the Midwest. This included chartering their vessels, which is currently taking place. A few retailers have ordered their containers as well as dedicated chassis.

Additional operational concerns would be to find locations to de-consolidate the containers and find fulfillment centers away from their traditional delivery channels. Recently, large online retailers are chartering vessels. It is suggested that the jam up on the West Coast will continue for another year. The retailers can no longer accept 45 to 65 days before their cargoes can even be landed. Therefore, existing 3PLs are forced to add additional capacity to the new paradigm of facilities and providers operating from more of a macro logistic support network to a micro-network.

Massive inventories on the West Coast are now mandating retailers to entertain salvage companies to reduce their inventory levels as well as reduce their growing inventory carrying cost and diminishing balance sheets. The integrators such as UPS and FedEx will have to change their ground support systems with the redeployment of capacity to meet the changing requirements.

New 3PL providers will see the opportunity to meet many of these changes. However, they will need control over hard assets, primarily over-the-road trucks. The 1990 Ryder model would undoubtedly be an old concept that could fit these changes, including fulfillment.

While already tasked with spot market rates, the truck brokerage companies will see 3PL providers with dedicated truck assets as the more competitive or strategic alliances for lane segments collectively on a truckload basis. Over the past six months, seven different, less-than-truckload carriers (LTL) have been either sold or consolidated. The trucking acquisitions have been with Canadian investors, one from the U.S. and one from Germany.

It is suspected that possible ocean-going lines might be considering development of strategic alliances with the trucking companies. If that occurs, the vessel owners will use these assets to enhance their footprint in the U.S. trucking infrastructure to gain what they see as an opportunity to control the end users’ final mile of the logistical process.

Looking forward

During the next two to five years, there will be a sea change in the supply chain to a focus on asset-driven companies. It is felt that while the consumers will see some price increases on goods, there will be a move to pull away from free shipping. Also, as more vessel charters will be used as a life jacket to consumer demands of service, the importers that are chartering vessels will look for ways to use the returning vessels mostly with export cargoes.

To exploit the new revenue opportunities, they will either issue their NVOCC licenses or partner with existing NVOS that can share in the charter cost with spot rates on the export segment. Conversely, suppose they find their load forecast short of TEU capacity. In that case, they can sell off their over abilities and possibly generate a new profit line within their industries collaboratively. When the shipping community enriches its footprint as a viable collective, it is thought the sharing of warehouse space will be part of the new schemes. However, it is suggested that decisive methods would have to be developed so as not to have the emerging vessel owners’ anti-protections from being infringed upon. As mentioned, the vessel owners seem to be taking money from their customers and investing it in our domestic infrastructure, once again diminishing competition.

While this blog has focused on the inbound retail business, we don’t see much attention from the industry media concerning the rest of American commerce.

Recently, two of the largest lines, Maersk and MSC, have announced that they will be entering the air freight sector of the transportation industry. They intend to be a sole source provider incorporating the full services of a 3PL provider.
Their initial entry is small in the application as Maersk has stated that they will at this time only offer a single 767 freighter with a 51-ton payload while MSC will offer three 777 freighters each with a 100-ton payload. Unless each already has specific clients lined up the offerings will not be enough tonnage to make a difference in the market. Their specific routes have not been made public.

As the lines are pulling back on existing capacity and offering spot rates that are almost pre-pandemic levels, the additional offering of aircraft most likely will be yet another fumble on their part. In the late Eighties, the steamship lines attempted to enter the 3PL sector with dire results due to the inability to move quickly in the 3PL industry. Will history repeat itself?

Steve Knepp is a 38-year veteran in the global supply chain and logistics industry. His experiences span all sectors of the industry and modes of operation. He is as well experienced in the government sector designing and applying cargo movements in war zones. He is retired and residing in Knoxville, Tn, and be reached at [email protected].

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