Most 3rd party logistics providers originated out of a core trucking industry. 3PL’s quickly realised that the vagaries of the trucking industry left their businesses under threat – after all it was really easy for a customer to move from one trucker to another – with minimal fuss.
Trucking companies realised that if they had “walls and wheels” – that is: they controlled the warehousing processes – it was then far more difficult for the client to move his business. With walls came the interleaved IT processes, and the better 3PL’s then moved into the related IT networks to ensure they could control the business processes.
In parallel with the warehousing IT needs, many 3PL’s also tried to gain a competitive edge by introducing tracking and routing and scheduling systems. They now realised they were logistics businesses rather than simple transporters and storage contractors. However, their opposition were doing the same thing, so they needed to do something else to differentiate themselves, and grab the prime contracts.
Many of the 3PL’s then tried to move into the intellectual space. Perhaps buy / create some freight forwarders, some logistics consultants, a 4PL business, etc. The idea being, if you can analyse the infrastructure needs better than you opposition, you can create a significant advantage. You also want to try understand the business needs, before the customer issues an enquiry, and try differentiate yourself by being “more intelligent”.
We now have several 3PL’s who have a complete suite of expertise. They are truckers (often still the prime source of income), warehouse experts, systems experts, track & trace experts, customs experts, modal experts and have a bunch of eager consultants who can tell you how to improve your operations. It seems like a sure formula for success – and many of the 3PL’s are making good money. However their business model is under many threats.
3PL Threats
Many 3PL’s have moved away from their core expertise. They have been so busy trying to show that they are in the complete logistics space that they have forgotten they need to do the basics right. They still need to be good, low cost, safe and effective truckers. As their opposition are also in the intellectual space, they no longer have a logistics advantage, and they thus need to show they can do the basics well.
Consider the XYZ 3PL who is running an aggregated distribution network for several fast moving consumer goods (FMCG) manufacturers. Most of the retailers have now set up their own networks to undertake this function. The retailers have the benefit that they can control the inbound network and the outbound network – where no 3PL can compete. With their “power” the retailers are going to dominate this business, and the 3PL’s are going to be scrapping for the remaining business (unprofitable small volume supply to the small stores without their own retail DC infrastructure).
Many of the 3PL’s do not add significant value other than supplying contract labour well below the labour cost their principals would pay. Certainly some 3PL’s pay minimum wages and this is their only differentiator to their opposition. However, as labour legislation changes and unions force companies to make labour permanent, this cost differentiator is going to disappear. 3PL margins will then come under pressure. Part of the problem is the very short contracts awarded to 3PL’s. If the contract is short, the 3PL is loath to invest substantial capital, and thus often survives on minimal equipment and systems and lots of labour.
3PL’s have difficulties in re-engineering supply chain channels. Generally a client contracts them for a given portion of the business (at the lowest cost possible), and then the 3PL executes this business. The 3PL is then often not in a position to affect stock control, availability, route to market, packaging, service levels, etc. Added to this many 3PL’s simply see their client as the contractor who employs them, rather than their “client’s client”. For example, in the illustration above, they see the XYZ FMCG manufacturer as the client, rather than his customer (the retailer). This drives their service focus – and this focus may be misplaced.
Many 3PL’s are caught in a spiral of increasing costs, and difficulties in achieving profitability and a highly unstable environment. They thus tend to become inwards focused, rather than focusing on their customer’s needs. As fuel and labour prices increase at rates well above inflation, 3PL’s are being continually placed under margin pressure. In many cases, added to this, the operational techniques used to differentiate themselves tend to rapidly disappear – as their opposition are quick to match the systems they implement. 3PL’s are thus likely to remain under margin pressure.
Conclusion
As 3PL’s continue to look at ways to differentiate themselves, in the future, they are going to face continued threats. While they will always have customers who see that they need to outsource their logistics, I predict more and more organisations are going to look at their complete supply chains more critically – insourcing many of the components and only outsourcing part of their operations. This leaves the 3PL’s with the difficult task of localised optimisation – and an inability to make significant changes to their customer’s the supply chain.
More 3PL’s will try to create intellectual property divisions, to try and create separation from their opposition. But as their opposition move in the same direction, these strategies will not provide a competitive edge. They will also try focus on customer service, but this will be hampered by pressure to maintain costs in a highly inflationary environment.
Those who do operations efficiently will survive, if they find the “right” customers. Those who focus too broadly and start considering themselves as supply chain experts, without the operational focus to back up their strategies, may find themselves in real trouble.
Contributed by Martin Bailey, Managing Director, Industrial Logistic Systems
