Executive Briefings

The Trends Changing the Face of Logistics Outsourcing Worldwide

Leading universities and other researchers reveal trends that show how 3PLs and their customers need a better understanding of each other's needs to build more successful relationships.

Outsourcing logistics is a very mature business in the U.S. and around the world. According to a recent survey of Fortune 500 companies conducted by Northeastern University and Accenture, 83 percent of these companies use third-party logistics providers and nearly 60 percent use multiple 3PLs. According to a survey covering Global 1000 companies conducted by the Georgia Institute of Technology and Cap Gemini Ernst & Young, major U.S. companies spend 49 percent of their entire logistics budget on 3PLs. Their large European counterparts devote 65 percent of their logistics budget to 3PLs.

But not all trends in the 3PL point to stability and customer satisfaction. Researchers from various universities, consultancies and trade associations that monitor 3PL trends have recently discovered that major shifts are taking place in logistics outsourcing around the world. Some of these trends are positive and suggest greater opportunities for 3PL usage, but others reveal troubling trends for 3PLs and their users. We have reviewed five major studies of both 3PL users and providers conducted by prestigious universities, leading consultants and research companies (See 3PL Industry Studies sidebar).

While these surveys disagree on many trends that are reshaping logistics outsourcing, they all agreed on one central point: 3PLs and their users have very different views of the state of the industry and the future of their business relationships. What follows is our synthesis of the key findings of these surveys, which we present as eight trends that will change the face of logistics outsourcing.

1. Consolidation: While hardly a new trend, consolidation of the logistics outsourcing industry through mergers and acquisitions has become the primary avenue of growth for many of the very large 3PLs. According to Joel R. Hoiland, president and CEO of the Association for Logistics Outsourcing (which now goes by the initials IWLA), its member companies are under tremendous pressure to grow their business or be acquired.

"There have been more mergers in the past five years than any five-year period leading up to 1998," says Hoiland. He adds that the warehousing-based providers have been a favorite target of international 3PLs rounding out their own service offerings. European 3PLs in particular have been acquiring U.S.-based warehouse logistics companies in order to enhance their distribution capabilities in this country.

Virtually all the studies noted consolidation as an important industry-changing trend. The only disagreement among these studies is where they see the trend heading. The Northeastern studies see consolidation moderating, if only because there has been so much merger and acquisition activity in the past five years. "Considerable industry energy and resources will continue to be consumed by these companies in their efforts to integrate their earlier acquisitions," says Northeastern's Robert C. Lieb, professor of supply-chain management.
The IWLA study reaches a more somber conclusion. "There are only a handful of firms that operate in the mid-sized space of $100m to $400m," according the IWLA. "The mid-sized firms have begun to disappear."

2. Globalization: Another long-standing trend has been customer pressure on their 3PLs to expand to support their business growth in new geographies. The recent surveys just focus this trend on specific parts of the world, especially China. Half of the 3PLs that Northwestern surveyed have operations in China, but these companies admit that scale of those activities is quite limited, as are the related revenues. However, this is likely to change given that half the 3PL users in the Northeastern study manufacture in China and 70 percent sell their products in that country. Logistics providers should especially note that only 39 percent of these manufacturers and retailers use 3PL services to support their Chinese operations, in part because they do not believe the 3PLs can provide the services they need.

"Large American manufacturers and retailers will exert pressure on their 3PLs to support their Chinese operations," says Lieb. He also points to Eastern Europe as a region where big 3PLs have to expand.

"Manufacturing is already moving into Eastern Europe, and as prosperity creates more consumer demand, retailers and CPG companies will be moving in there as well," says Lieb. "3PLs will again have to shift their distribution networks over the next few years."

Analytica is a U.K.-based marketing and business intelligence research firm that has been following the recent expansion of the EU to the East. According to their research, this expansion already is impacting the outsourcing plans of major manufacturers and retailers operating in the EU. Analytica reports that 60.9 percent of large manufacturers and retailers are currently satisfied with a multi-country approach to outsourcing logistics throughout the EU. However, within five years expectations change dramatically. Only 34.8 percent of manufacturers and retailers will be satisfied with 3PLs that just cover parts of the new EU, and 65.2 percent will expect their 3PLs to have pan-European capabilities.

3PL Industry Studies
Third Party Logistics Trends & Practice Study
International Warehouse Logistics Association
Conducted by Dr. Dale Rogers, professor of Supply Chain Management and director of logistics management at the University of Nevada at Reno.
www.iwla.com

The Use of Third Party Logistics Services by Large American Manufacturers (2003)
Northeastern University College of Business Administration
Dr. Robert C. Lieb, professor of Supply Chain Management
r.lieb@new.edu
Accenture
Brooks A. Benz
brooks.a.bentz@accenture.com

CEO Perspectives on the Current Status and Future Prospects of the Third Party Logistics Industry in the United States (2003)
Northeastern University College of Business Administration
Dr. Robert C. Lieb, professor of Supply Chain Management
r.lieb@new.edu
Accenture
Brooks A. Benz
brooks.a.bentz@accenture.com

3rd Party Logistics Study: Results and Findings of 2003 8th Annual Study
Georgia Institute of Technology
Dr. C. John Langley, Jr.
John.Langley@isye.gatech.edu
Cap Gemini Ernst & Young, U.S. LLC
Gary Allen
Gary.Allen@cgey.co
FedEx Corporate Services
Mark J. Columbo

European Supply Chain Director Survey 2003: Decision Making and Outsourcing
Analytiqa
http://www.analytiqa.com


3. Lead logistics versus niche logistics: One third of the 3PLs participating in the IWLA survey are already acting as lead logistics providers or 4PLs, meaning that their role is primarily to manage other 3PLs on behalf of their clients. "Many large 3PLs have identified a need to help companies manage complex supply chains that require multiple providers," says Hoiland. "Who else is better capable to manage other 3PLs and logistics providers than another 3PL?"

The Georgia Tech study also found a need among large manufacturers and retailers to outsource advanced service requirements to 4PLs. "Demand for broad supply-chain expertise and a desire for shared risk-reward arrangements continue to drive the relationships toward a 4PL solution," states the Georgia Tech study. This drive, however, is still limited to sophisticated users and providers because of the "difficulties and complications of migrating toward advance service offerings" from 4PLs.

Not all 3PLs are large enough or sophisticated enough to be 4PLs, so there is a defensive trend among other 3PLs toward finding niches in vertical industries or specific types of services. In fact, the majority of providers participating in either the IWLA or the Northeastern study have decided to specialize in a limited number of industry verticals in which they believe their companies have distinct competitive advantages with retail being the most often vertical mentioned. 3PLs opting for a niche strategy also focus on specific services, especially those they believe are least affected by recession. Warehousing was the most common niche service with direct transportation service as a distant second.

4. Financial pressure: According to CEOs responding to the Northeastern study, financial issues are their central concern. In fact, eight of the 19 companies in the 2003 study failed to meet their revenue growth projections for the past year. The volume offered by many existing customers continued to fall, in some cases dramatically, and buyers have continued to emphasize cost cutting. This has exerted considerable pressure on 3PL profit margins. In stark contrast to these findings, Northeastern's study of 3PL users shows that every single company believes that the 3PL industry is moderately profitable. Lieb believes that this perception encourages these users to focus on pushing down the prices they pay to their providers.

"The burden falls upon the providers to educate the user community about the industry's economic realities," says Lieb. "Customers primarily select 3PL firms based on price, so nothing is going to change unless the providers take action."

The IWLA study confirms this disconnect between providers and their customers on the financial realities of the 3PL industry.

"The customer wants more, but wants to pay less," says IWLA's Hoiland. "The 3PL has to help educate the customer on what it takes to deliver the required services, and that means developing a deeper relationship that goes behind price. If that isn't possible, the 3PL may just have to walk away."

Lieb says that a reality check is close at hand. "Every big 3PL goes through customer profiling to look at how much they earn from each customer," he says. "This exercise usually reveals that 3PLs commit too many resources to accounts that generate good revenue but poor returns on the investments. 3PLs will be walking away from contracts with such accounts."

5. Higher customer expectations: Customers expect their service providers to be able to respond quickly with more services than ever before, but often they are not finding them with a single provider. In fact, the Northeastern study concludes that the reason 58 percent of the Fortune 500 companies in its survey use multiple 3PLs is that these providers do not have a broad enough service offering. So while the users in the study reported that they were especially satisfied with the cost and service benefits of their 3PLs' warehouse management, freight payment and direct transportation services, these positive responses are not the whole story.

As the Georgia Tech study points out, core 3PL product offerings such as warehousing and transportation management are being commoditized. Customers expect their 3PLs to focus on value-added capabilities to differentiate themselves from the competition.

The IWLA study also recognizes this growing demand for more services, but their members see this trend as positive. "Value-added services are substantially more profitable than storage, handling and other basic warehousing services," says Hoiland. "Providers that offer more and broader services are more profitable and have a greater chance of retaining their customers."

6. Changing relationships: While all of the studies found general satisfaction among users with basic services from their 3PLs, the studies also found that the business relationships were not as long lasting as they once were. Clearly, there is a problem somewhere in the relationship.

"The turnover of customers among our members is much more rapid than it was 10 years ago," says Hoiland, who adds that this trend is of great concern among his members. " Finding new customers is expensive and often disruptive to everyone involved."

Lieb believes the problem primarily rests with users that have unrealistic expectations about what 3PLs can do at the prices the user is willing to pay.

"We expect 3PLs to become increasingly customer selective, and focus greater attention on the quality of existing accounts," he says. "The best source of new and profitable business is increasingly with existing customers with whom they have developed a lasting relationship."

According to the Georgia Tech study, finding the elusive "partnership" relationship is essential for both 3PLs and the users. This study finds two aspects of the user-provider relationship must change. First, it suggests that users need to think of their providers as strategists and orchestrators of logistics activities. Now, however, 79 percent of the users view their 3PLs as mere resource providers, not resource managers. Second, users must be willing to participate in innovation and productive deal structures that motivate both parties to achieve desired results.

"Sustainable relationships require equitable deal structures, mutual investments, continual improvements and creative partnering," the Georgia Tech study states. Among the deal structures that the study finds promising are costing sharing and risk/reward sharing. However, the study pointed out the difficulties in measuring and managing these more complex deal structures.

"Companies are inherently bad at baselining their current performance, maintaining ongoing operations and adjusting for supply-chain network changes," says one study participant.

7. Need for integration: One of the more interesting findings to emerge from the Northeastern study is that 49 percent of users have their primary 3PL also serving their major vendors and 57 percent share their 3PL with major customers. More than two-thirds of the users believe the extension of 3PL services to their supply-chain partners by the same provider is important in promoting integration.

"The more that 3PLs serve multiple participants in a supply chain, the greater the likelihood that all parties will benefit from integration," says Lieb. "When 3PLs connect the parties, information is much more likely to be shared. We all hear that competition in the future will be between supply chains, not just companies, and here is a way to make it happen."

One example that Lieb provides is retailers sourcing more from Asian vendors. Right now, China is the hot location, but when even lower cost markets emerge in places like Cambodia, Thailand and India, the retailer will want to move its sourcing there very quickly.

"A retailer with a global 3PL broadly dispersed and well connected to suppliers and carriers will have a decided advantage," says Lieb. "The 3PL will ease the transition as the retailer follows the low-cost curve by maintaining consistent service to customers throughout the world."

8. IT conflicts: Exactly what IT capabilities users expect from their 3PLs, and what the 3PLs are prepared to offer, are among the most contentious issues in all of the studies. The Georgia Tech study looked at these issues in different parts of the world, and found that the answers varied widely by region. In North America, 24 percent expected their 3PLs to be their primary IT solution provider. In Europe, 29 percent of the users are looking to their 3PLs for IT support. In Asia, 32 percent of users reported they depend on their 3PLs for IT support. And even though the vast majority of companies in this study do not actually depend on their 3PLs for primary IT support, the vast majority of users identified leading edge IT capabilities as a major differentiator among 3PLs.

"The fact is that users do not see 3PL providers as leading edge IT suppliers, nor should they," says Lieb. He adds that financial pressures on 3PLs make big, ongoing investments in state-of-the-art IT solutions extremely difficult. "The customer does not want home-grown solutions for their 3PLs. They want solutions that are transferable. If they move to another 3PL, the IT solution moves with them."

Lieb says that successful 3PLs will put together alliances with truly leading edge IT providers. The 3PL will have the expertise to help customers with IT issues and tools, but it cannot be their core business. The technology is changing too rapidly, and the cost of staying on the leading edge is more than any 3PL is able to invest.

Choice Logistics Finds a Winning 3PL Strategy in a Unique Niche
Akibia Infrastructure Management Services is a global provider of enterprise-class IT solutions that enable leading companies worldwide to maintain and optimize their data center environments and security infrastructure. The Westborough, Mass.-based technology company has grown to be a global operator over its 18-year history by offering customized maintenance and support solutions, including parts availability, remote monitoring and diagnostic tools as well as dedicated on-site engineers - capable of performing multiple functions including systems maintenance, systems administration and moves, adds and changes.

Akibia itself outsources the parts support aspects of its business to Choice Logistics in order to seamlessly integrate and improve logistics processes for spare parts operations. Choice is a 3PL specializing in critical parts support and service asset supply-chain solutions. Choice has 250 strategic stocking locations (SSLs) worldwide to support its customer base.

Akibia's 400 clients have the choice of on-site engineers with some parts stocked on location or a range of quick-response service options ranging from two hours to same-day service. In either case, Akibia relies on Choice Logistics to provide the majority of parts support. For Akibia, Choice stocks and manages, in the U.S. and abroad, more than 10,000 parts at SSLs to support Sun Microsystems, Hewlett Packard, IBM and Dell platforms running on both UNIX and Windows operating systems. It can produce inventory and usage reports on demand for any of the SSLs. When a part is shipped, Choice tracks it from the moment it is ordered by an Akibia tech rep until it is delivered.

Akibia had six specific requirements for Choice Logistics:
1. Improve service levels to customers
2. Provide a managed process to deliver rapid time-to-value
3. Provide complete parts visibility both in the U.S. and internationally
4. Increase fill rates
5. Provide an automated proof of delivery process
6. Build a trusted partner relationship with Akibia

Choice met and exceeded Akibia's aggressive goals by establishing strategic international stocking locations in as little as 24 hours with virtually no reliance on Akibia staff and other resources. Choice provided Akibia with 24-by-7-by-365 access to data via the web to all of its SSLs, as well as round-the-clock access to its client support team.

"Choice Logistics is a critical component to Akibia's ongoing success as a leader in customer service," says Greg Palmer, senior vice president of the U.S. sales and operations for Akibia. "Choice supports Akibia's international logistics planning, enabling us to meet our aggressive service level commitments through the ability to scale concurrently with our needs. By making sure that the right part is in the right place at the right time, Choice allows us to steer benefit directly to the bottom line."

A major point of differentiation for Akibia is its best-in-class logistics that in part is based on Choice's spare parts inventory.

"Choice Logistics has enabled us to enhance our logistics infrastructure, parts management and overall logistics processes, furthering our ability to efficiently exceed our customer service level agreements," says Mike Parisi, director of logistics for Akibia. " With its visionary approach and specific focus on service parts logistics, Choice serves as Akibia's main logistics partner as we enhance and expand our logistics operations."
Kuehne & Nagel Takes on Lead Logistics Role
Nortel Networks is a global leader in telecommunications equipment with customers in 150 countries. Its customers include major telecommunications providers like AT&T, MCI, Deutsche Telecom and Vodaphone. Installers for these companies depend on Nortel to deliver products just in time to sites ranging from skyscrapers to remote mountaintops.

In the late 1990s, Nortel Networks began to outsource warehousing to 3PLs, including Kuehne & Nagel, to gain more agility in their logistics infrastructure. Part of the outsourcing strategy was to shift away from an asset-heavy, fixed logistics cost structure to a variable cost model that better allowed the company to deal with the severe peaks and valleys that characterize the telecommunications industry.

By the end of 2001, Nortel was ready to outsource its entire $200m in logistics spend to a lead logistics provider that would manage its global transportation, warehousing and related supply-chain activities. After a detailed, competitive-bid process, Nortel chose Kuehne & Nagel in January 2002 to manage the performance of multiple Nortel logistics providers around the world.

According to Nortel Networks' head of global logistics, Tom Dorval, the mission for Kuehne and Nagel was to "help the company in its ongoing efforts to build on its advanced supply chain and optimize service to global customers."

Kuehne & Nagel established a separate company called KN Lead Logistics (KNLL) to manage more than 80 primary and 200 secondary logistics service providers used by Nortel. KNLL became the single point of contact to Nortel Networks for a range of management functions, including:

• Oversight of all warehousing, delivery and other logistics operations
• Contract administration and management of competitive bids for logistics services
• Metrics management, distribution network design, global systems connectivity and supply-chain visibility.

According to Dorval, divesting its global logistics operations management to a best-in-class supplier enabled Nortel Networks to focus investments and resources on developing and strengthening core competencies that provide differentiated value to the customer. Under the terms of the agreement between Nortel and KNLL, each shares the financial benefits of supply-chain performance improvement.

Central to the optimization strategy is the creation of a minimum-inventory, merge-in-transit fulfillment model. Under this model, order components are shipped from different points to staging locations where they are combined with other components for shipping as a complete order direct to customer job sites. KNLL manages the merge-in-transit activity with real-time inventory visibility throughout the supply chain, as well as with its exception management capability that is driven by established business rules for transit times and minimum inventory.

"The benefits of the lead logistics provider strategy are already clear," says Dorval. "Nortel Networks is seeing faster cash-to-cash cycle times, increased order visibility worldwide, a sharp drop in fixed assets, improved on-time delivery, improved planning process and reduced inventory, carrying costs and product obsolescence."
TNT Transforms the 3PL Relationship
When Michelin decided to transform its business in North America to gain adaptability and competitive advantage, the tire company started with its logistics network to gain immediate impact. The costs associated with 18 distribution centers throughout North America, nearly 700 employees and more than 125,000 shipping and receiving transactions processed annually was a heavy burden. Michelin's legacy logistics systems were also due for expensive upgrades or replacement. The global tire company decided that outsourcing its distribution network was the right path to leveraging new capabilities for competitive advantage. Michelin reviewed 10 3PLs, but TNT Logistics North America's experience in owning and operating DCs tilted the decision in its favor.

Bob Brescia, vice president for logistics at Michelin, says TNT's ability to reduce operations costs, rising personnel-related costs, transportation costs and handling costs was significant. "Getting out from underneath the real estate was a very large piece of the solution," he says.

Michelin realized a $70m cash flow all in one day as a result of selling four of its DCs to TNT. This figure increased to over $130m after all the DCs were sold.

The cultural fit of the two companies was a critical element of provider evaluation. TNT shared two important Michelin corporate values: a respect for the facts and a respect for the company's people. Retaining only 20 of its nearly 700 logistics employees to handle international transportation, customs and duty drawback functions, Michelin was looking for an outsourcing provider that would treat its transitioning employees as they were accustomed to being treated at the tire manufacturer.

"Rarely have I seen a company other than ours have such respect for individual employees and allow all of the employees and managers to prosper professionally and nurture them and mentor them," says Brescia.

Michelin's outsourcing initiative with TNT, known as Project Delta, is the tire manufacturer's biggest business transaction since it acquired BF Goodrich in 1996. The project includes a set of performance-based incentives.

"TNT can be in the red, amber and green areas from the metrics," says Brescia, "but if they are above green - platinum - they really start rolling in the bucks. And, frankly, we've budgeted for that. We want them to be in the platinum area as much as possible, and they have gone into that area."

The incentives have led to several notable supply-chain initiatives brainstormed in a joint work group and jointly developed. Among these are dormant, slow-moving and off-grade stock management improvements; reverse logistics; cross-border traffic management; and fleet management.

The initiative for dormant, slow-moving and off-grade stock management generates cost savings by separating these items from DCs with fast-moving stock. "A slow-moving facility only takes 25 percent of the manpower and 25 percent of the cost because the number of ticks is so reduced that it becomes more of a warehousing operation than a distribution operation," says Brescia, who points to several other successful TNT initiatives:

• Reverse logistics to speed up customer returns, so the tire dealers have the necessary credit to place new orders

• Cross-border traffic management to move tires in and out of Canada, resulting in faster time to market and lower costs

• Fleet management using the TNT family of carriers; Michelin has gained cost reductions and increased customer satisfaction levels in New England because more shipments arrive on time and with less damage

• Network design to determine the optimal locations for Michelin DCs

This outsourcing relationship has been studied by Michelin's headquarters in France to see if it would work in Europe, Asia or in other regions of the world.

"This relationship is different in its result of partnership, trust and competence between two very, very large companies - much more than I have ever seen in other deals in 35 years of knocking around in logistics," says Brescia. "I've been in some very bad, some good, and some very good relationships; and this one with TNT is the best I've ever seen."
OHL Meets Murray's Higher Expectations
Murray Inc., the Tennessee-based manufacturer of lawn mowers and other outdoor maintenance products, turned to logistics outsourcing to improve supply-chain performance while reducing operating cost. Murray's existing strategy of placing inventory in many stocking points across the country on a seasonal basis to reduce shipping time and distance to its major customers did not meet the demanding expectation of such major retail customers as Wal-Mart, Home Depot and Sears. Murray needed an integrated 3PL that could provide a national distribution network, as well as manage other aspects of the supply chain as a 4PL.

One of the companies that Murray evaluated was Ozburn-Hessey Logistics (OHL) because of its broad geographic scope, its ability to manage other logistics vendors and its supply-chain expertise. For example, OHL's first task was to complete a strategic network plan to match product inventory with customer demand, as well as to handle Murray's seasonal needs.

A key challenge for Murray is the seasonality of demand for its outdoor maintenance products. The compressed shipping season is only eight to 10 weeks long, so it is critical to ensure that product is available to meet sales commitments. As the new 3PL and 4PL, OHL had to select and manage numerous regional facilities that could handle fast-moving inventory in a concentrated period of time, and that allowed the shortest possible transportation times to customer destinations.

"We configured a network of OHL facilities and other 3PL distribution locations offering seasonal distribution services that optimized the retailers' fleet transportation lanes," says Willie Vaughn, OHL's regional vice president of operations, who adds that it currently uses 12 sites across the country to handle the Murray account.

Handling multiple sites with a single management approach relieved Murray of expensive annual or multi-year distribution site contracts with warehouse operators that were not able to keep up with growth of the retail sales channel. Since orders are primarily customer pick-up either by internal fleets or contracted alliances, having numerous sites that are geographically located to optimize the retailer's in-house fleet transportation lanes means Murray is able to better respond to their changing customer base. Small parcel and LTL are also utilized extensively.

Operating within a single, common system is not only more efficient, it gives the customer greater control. And as a single source of contact for all logistics issues, OHL allows Murray's accounting department to deal with just one monthly invoice for all logistics services.

In its role as a 3PL, OHL manages Murray's distribution center in Lawrenceburg, Tenn., using its Synapse WMS system. OHL is responsible for inventory control, returns processing, product refurbishment, and small parcel program. As a 4PL, OHL manages the total outbound logistics flows to include the outside warehouse network and shuttle services. OHL evaluates all providers, negotiates rates, and manages the relationships. Using its logistics expertise, OHL also consults with Murray on ideas for changing technology and helps the company identify supply-chain opportunities through OHL network.

"The managed network that OHL provided allows Murray the flexibility to meet its customer's changing logistical needs and allows for shorter lead time for pick-up and deliveries," says Dwight Smith, director of logistics for Murray.

Murray's managers can concentrate on core customer issues such as product availability and quality.

In addition to a significant reduction in distribution costs as a result of an increased optimization, Murray enjoys a 99.9 percent on-time delivery rate to retailers. This is up from 65 percent when the program began. OHL allows us to commit to meeting or exceeding our customers' expectations for quality, price and delivery," says Smith: "These are the marks of a company that goes the distance."

Outsourcing logistics is a very mature business in the U.S. and around the world. According to a recent survey of Fortune 500 companies conducted by Northeastern University and Accenture, 83 percent of these companies use third-party logistics providers and nearly 60 percent use multiple 3PLs. According to a survey covering Global 1000 companies conducted by the Georgia Institute of Technology and Cap Gemini Ernst & Young, major U.S. companies spend 49 percent of their entire logistics budget on 3PLs. Their large European counterparts devote 65 percent of their logistics budget to 3PLs.

But not all trends in the 3PL point to stability and customer satisfaction. Researchers from various universities, consultancies and trade associations that monitor 3PL trends have recently discovered that major shifts are taking place in logistics outsourcing around the world. Some of these trends are positive and suggest greater opportunities for 3PL usage, but others reveal troubling trends for 3PLs and their users. We have reviewed five major studies of both 3PL users and providers conducted by prestigious universities, leading consultants and research companies (See 3PL Industry Studies sidebar).

While these surveys disagree on many trends that are reshaping logistics outsourcing, they all agreed on one central point: 3PLs and their users have very different views of the state of the industry and the future of their business relationships. What follows is our synthesis of the key findings of these surveys, which we present as eight trends that will change the face of logistics outsourcing.

1. Consolidation: While hardly a new trend, consolidation of the logistics outsourcing industry through mergers and acquisitions has become the primary avenue of growth for many of the very large 3PLs. According to Joel R. Hoiland, president and CEO of the Association for Logistics Outsourcing (which now goes by the initials IWLA), its member companies are under tremendous pressure to grow their business or be acquired.

"There have been more mergers in the past five years than any five-year period leading up to 1998," says Hoiland. He adds that the warehousing-based providers have been a favorite target of international 3PLs rounding out their own service offerings. European 3PLs in particular have been acquiring U.S.-based warehouse logistics companies in order to enhance their distribution capabilities in this country.

Virtually all the studies noted consolidation as an important industry-changing trend. The only disagreement among these studies is where they see the trend heading. The Northeastern studies see consolidation moderating, if only because there has been so much merger and acquisition activity in the past five years. "Considerable industry energy and resources will continue to be consumed by these companies in their efforts to integrate their earlier acquisitions," says Northeastern's Robert C. Lieb, professor of supply-chain management.
The IWLA study reaches a more somber conclusion. "There are only a handful of firms that operate in the mid-sized space of $100m to $400m," according the IWLA. "The mid-sized firms have begun to disappear."

2. Globalization: Another long-standing trend has been customer pressure on their 3PLs to expand to support their business growth in new geographies. The recent surveys just focus this trend on specific parts of the world, especially China. Half of the 3PLs that Northwestern surveyed have operations in China, but these companies admit that scale of those activities is quite limited, as are the related revenues. However, this is likely to change given that half the 3PL users in the Northeastern study manufacture in China and 70 percent sell their products in that country. Logistics providers should especially note that only 39 percent of these manufacturers and retailers use 3PL services to support their Chinese operations, in part because they do not believe the 3PLs can provide the services they need.

"Large American manufacturers and retailers will exert pressure on their 3PLs to support their Chinese operations," says Lieb. He also points to Eastern Europe as a region where big 3PLs have to expand.

"Manufacturing is already moving into Eastern Europe, and as prosperity creates more consumer demand, retailers and CPG companies will be moving in there as well," says Lieb. "3PLs will again have to shift their distribution networks over the next few years."

Analytica is a U.K.-based marketing and business intelligence research firm that has been following the recent expansion of the EU to the East. According to their research, this expansion already is impacting the outsourcing plans of major manufacturers and retailers operating in the EU. Analytica reports that 60.9 percent of large manufacturers and retailers are currently satisfied with a multi-country approach to outsourcing logistics throughout the EU. However, within five years expectations change dramatically. Only 34.8 percent of manufacturers and retailers will be satisfied with 3PLs that just cover parts of the new EU, and 65.2 percent will expect their 3PLs to have pan-European capabilities.

3PL Industry Studies
Third Party Logistics Trends & Practice Study
International Warehouse Logistics Association
Conducted by Dr. Dale Rogers, professor of Supply Chain Management and director of logistics management at the University of Nevada at Reno.
www.iwla.com

The Use of Third Party Logistics Services by Large American Manufacturers (2003)
Northeastern University College of Business Administration
Dr. Robert C. Lieb, professor of Supply Chain Management
r.lieb@new.edu
Accenture
Brooks A. Benz
brooks.a.bentz@accenture.com

CEO Perspectives on the Current Status and Future Prospects of the Third Party Logistics Industry in the United States (2003)
Northeastern University College of Business Administration
Dr. Robert C. Lieb, professor of Supply Chain Management
r.lieb@new.edu
Accenture
Brooks A. Benz
brooks.a.bentz@accenture.com

3rd Party Logistics Study: Results and Findings of 2003 8th Annual Study
Georgia Institute of Technology
Dr. C. John Langley, Jr.
John.Langley@isye.gatech.edu
Cap Gemini Ernst & Young, U.S. LLC
Gary Allen
Gary.Allen@cgey.co
FedEx Corporate Services
Mark J. Columbo

European Supply Chain Director Survey 2003: Decision Making and Outsourcing
Analytiqa
http://www.analytiqa.com


3. Lead logistics versus niche logistics: One third of the 3PLs participating in the IWLA survey are already acting as lead logistics providers or 4PLs, meaning that their role is primarily to manage other 3PLs on behalf of their clients. "Many large 3PLs have identified a need to help companies manage complex supply chains that require multiple providers," says Hoiland. "Who else is better capable to manage other 3PLs and logistics providers than another 3PL?"

The Georgia Tech study also found a need among large manufacturers and retailers to outsource advanced service requirements to 4PLs. "Demand for broad supply-chain expertise and a desire for shared risk-reward arrangements continue to drive the relationships toward a 4PL solution," states the Georgia Tech study. This drive, however, is still limited to sophisticated users and providers because of the "difficulties and complications of migrating toward advance service offerings" from 4PLs.

Not all 3PLs are large enough or sophisticated enough to be 4PLs, so there is a defensive trend among other 3PLs toward finding niches in vertical industries or specific types of services. In fact, the majority of providers participating in either the IWLA or the Northeastern study have decided to specialize in a limited number of industry verticals in which they believe their companies have distinct competitive advantages with retail being the most often vertical mentioned. 3PLs opting for a niche strategy also focus on specific services, especially those they believe are least affected by recession. Warehousing was the most common niche service with direct transportation service as a distant second.

4. Financial pressure: According to CEOs responding to the Northeastern study, financial issues are their central concern. In fact, eight of the 19 companies in the 2003 study failed to meet their revenue growth projections for the past year. The volume offered by many existing customers continued to fall, in some cases dramatically, and buyers have continued to emphasize cost cutting. This has exerted considerable pressure on 3PL profit margins. In stark contrast to these findings, Northeastern's study of 3PL users shows that every single company believes that the 3PL industry is moderately profitable. Lieb believes that this perception encourages these users to focus on pushing down the prices they pay to their providers.

"The burden falls upon the providers to educate the user community about the industry's economic realities," says Lieb. "Customers primarily select 3PL firms based on price, so nothing is going to change unless the providers take action."

The IWLA study confirms this disconnect between providers and their customers on the financial realities of the 3PL industry.

"The customer wants more, but wants to pay less," says IWLA's Hoiland. "The 3PL has to help educate the customer on what it takes to deliver the required services, and that means developing a deeper relationship that goes behind price. If that isn't possible, the 3PL may just have to walk away."

Lieb says that a reality check is close at hand. "Every big 3PL goes through customer profiling to look at how much they earn from each customer," he says. "This exercise usually reveals that 3PLs commit too many resources to accounts that generate good revenue but poor returns on the investments. 3PLs will be walking away from contracts with such accounts."

5. Higher customer expectations: Customers expect their service providers to be able to respond quickly with more services than ever before, but often they are not finding them with a single provider. In fact, the Northeastern study concludes that the reason 58 percent of the Fortune 500 companies in its survey use multiple 3PLs is that these providers do not have a broad enough service offering. So while the users in the study reported that they were especially satisfied with the cost and service benefits of their 3PLs' warehouse management, freight payment and direct transportation services, these positive responses are not the whole story.

As the Georgia Tech study points out, core 3PL product offerings such as warehousing and transportation management are being commoditized. Customers expect their 3PLs to focus on value-added capabilities to differentiate themselves from the competition.

The IWLA study also recognizes this growing demand for more services, but their members see this trend as positive. "Value-added services are substantially more profitable than storage, handling and other basic warehousing services," says Hoiland. "Providers that offer more and broader services are more profitable and have a greater chance of retaining their customers."

6. Changing relationships: While all of the studies found general satisfaction among users with basic services from their 3PLs, the studies also found that the business relationships were not as long lasting as they once were. Clearly, there is a problem somewhere in the relationship.

"The turnover of customers among our members is much more rapid than it was 10 years ago," says Hoiland, who adds that this trend is of great concern among his members. " Finding new customers is expensive and often disruptive to everyone involved."

Lieb believes the problem primarily rests with users that have unrealistic expectations about what 3PLs can do at the prices the user is willing to pay.

"We expect 3PLs to become increasingly customer selective, and focus greater attention on the quality of existing accounts," he says. "The best source of new and profitable business is increasingly with existing customers with whom they have developed a lasting relationship."

According to the Georgia Tech study, finding the elusive "partnership" relationship is essential for both 3PLs and the users. This study finds two aspects of the user-provider relationship must change. First, it suggests that users need to think of their providers as strategists and orchestrators of logistics activities. Now, however, 79 percent of the users view their 3PLs as mere resource providers, not resource managers. Second, users must be willing to participate in innovation and productive deal structures that motivate both parties to achieve desired results.

"Sustainable relationships require equitable deal structures, mutual investments, continual improvements and creative partnering," the Georgia Tech study states. Among the deal structures that the study finds promising are costing sharing and risk/reward sharing. However, the study pointed out the difficulties in measuring and managing these more complex deal structures.

"Companies are inherently bad at baselining their current performance, maintaining ongoing operations and adjusting for supply-chain network changes," says one study participant.

7. Need for integration: One of the more interesting findings to emerge from the Northeastern study is that 49 percent of users have their primary 3PL also serving their major vendors and 57 percent share their 3PL with major customers. More than two-thirds of the users believe the extension of 3PL services to their supply-chain partners by the same provider is important in promoting integration.

"The more that 3PLs serve multiple participants in a supply chain, the greater the likelihood that all parties will benefit from integration," says Lieb. "When 3PLs connect the parties, information is much more likely to be shared. We all hear that competition in the future will be between supply chains, not just companies, and here is a way to make it happen."

One example that Lieb provides is retailers sourcing more from Asian vendors. Right now, China is the hot location, but when even lower cost markets emerge in places like Cambodia, Thailand and India, the retailer will want to move its sourcing there very quickly.

"A retailer with a global 3PL broadly dispersed and well connected to suppliers and carriers will have a decided advantage," says Lieb. "The 3PL will ease the transition as the retailer follows the low-cost curve by maintaining consistent service to customers throughout the world."

8. IT conflicts: Exactly what IT capabilities users expect from their 3PLs, and what the 3PLs are prepared to offer, are among the most contentious issues in all of the studies. The Georgia Tech study looked at these issues in different parts of the world, and found that the answers varied widely by region. In North America, 24 percent expected their 3PLs to be their primary IT solution provider. In Europe, 29 percent of the users are looking to their 3PLs for IT support. In Asia, 32 percent of users reported they depend on their 3PLs for IT support. And even though the vast majority of companies in this study do not actually depend on their 3PLs for primary IT support, the vast majority of users identified leading edge IT capabilities as a major differentiator among 3PLs.

"The fact is that users do not see 3PL providers as leading edge IT suppliers, nor should they," says Lieb. He adds that financial pressures on 3PLs make big, ongoing investments in state-of-the-art IT solutions extremely difficult. "The customer does not want home-grown solutions for their 3PLs. They want solutions that are transferable. If they move to another 3PL, the IT solution moves with them."

Lieb says that successful 3PLs will put together alliances with truly leading edge IT providers. The 3PL will have the expertise to help customers with IT issues and tools, but it cannot be their core business. The technology is changing too rapidly, and the cost of staying on the leading edge is more than any 3PL is able to invest.

Choice Logistics Finds a Winning 3PL Strategy in a Unique Niche
Akibia Infrastructure Management Services is a global provider of enterprise-class IT solutions that enable leading companies worldwide to maintain and optimize their data center environments and security infrastructure. The Westborough, Mass.-based technology company has grown to be a global operator over its 18-year history by offering customized maintenance and support solutions, including parts availability, remote monitoring and diagnostic tools as well as dedicated on-site engineers - capable of performing multiple functions including systems maintenance, systems administration and moves, adds and changes.

Akibia itself outsources the parts support aspects of its business to Choice Logistics in order to seamlessly integrate and improve logistics processes for spare parts operations. Choice is a 3PL specializing in critical parts support and service asset supply-chain solutions. Choice has 250 strategic stocking locations (SSLs) worldwide to support its customer base.

Akibia's 400 clients have the choice of on-site engineers with some parts stocked on location or a range of quick-response service options ranging from two hours to same-day service. In either case, Akibia relies on Choice Logistics to provide the majority of parts support. For Akibia, Choice stocks and manages, in the U.S. and abroad, more than 10,000 parts at SSLs to support Sun Microsystems, Hewlett Packard, IBM and Dell platforms running on both UNIX and Windows operating systems. It can produce inventory and usage reports on demand for any of the SSLs. When a part is shipped, Choice tracks it from the moment it is ordered by an Akibia tech rep until it is delivered.

Akibia had six specific requirements for Choice Logistics:
1. Improve service levels to customers
2. Provide a managed process to deliver rapid time-to-value
3. Provide complete parts visibility both in the U.S. and internationally
4. Increase fill rates
5. Provide an automated proof of delivery process
6. Build a trusted partner relationship with Akibia

Choice met and exceeded Akibia's aggressive goals by establishing strategic international stocking locations in as little as 24 hours with virtually no reliance on Akibia staff and other resources. Choice provided Akibia with 24-by-7-by-365 access to data via the web to all of its SSLs, as well as round-the-clock access to its client support team.

"Choice Logistics is a critical component to Akibia's ongoing success as a leader in customer service," says Greg Palmer, senior vice president of the U.S. sales and operations for Akibia. "Choice supports Akibia's international logistics planning, enabling us to meet our aggressive service level commitments through the ability to scale concurrently with our needs. By making sure that the right part is in the right place at the right time, Choice allows us to steer benefit directly to the bottom line."

A major point of differentiation for Akibia is its best-in-class logistics that in part is based on Choice's spare parts inventory.

"Choice Logistics has enabled us to enhance our logistics infrastructure, parts management and overall logistics processes, furthering our ability to efficiently exceed our customer service level agreements," says Mike Parisi, director of logistics for Akibia. " With its visionary approach and specific focus on service parts logistics, Choice serves as Akibia's main logistics partner as we enhance and expand our logistics operations."
Kuehne & Nagel Takes on Lead Logistics Role
Nortel Networks is a global leader in telecommunications equipment with customers in 150 countries. Its customers include major telecommunications providers like AT&T, MCI, Deutsche Telecom and Vodaphone. Installers for these companies depend on Nortel to deliver products just in time to sites ranging from skyscrapers to remote mountaintops.

In the late 1990s, Nortel Networks began to outsource warehousing to 3PLs, including Kuehne & Nagel, to gain more agility in their logistics infrastructure. Part of the outsourcing strategy was to shift away from an asset-heavy, fixed logistics cost structure to a variable cost model that better allowed the company to deal with the severe peaks and valleys that characterize the telecommunications industry.

By the end of 2001, Nortel was ready to outsource its entire $200m in logistics spend to a lead logistics provider that would manage its global transportation, warehousing and related supply-chain activities. After a detailed, competitive-bid process, Nortel chose Kuehne & Nagel in January 2002 to manage the performance of multiple Nortel logistics providers around the world.

According to Nortel Networks' head of global logistics, Tom Dorval, the mission for Kuehne and Nagel was to "help the company in its ongoing efforts to build on its advanced supply chain and optimize service to global customers."

Kuehne & Nagel established a separate company called KN Lead Logistics (KNLL) to manage more than 80 primary and 200 secondary logistics service providers used by Nortel. KNLL became the single point of contact to Nortel Networks for a range of management functions, including:

• Oversight of all warehousing, delivery and other logistics operations
• Contract administration and management of competitive bids for logistics services
• Metrics management, distribution network design, global systems connectivity and supply-chain visibility.

According to Dorval, divesting its global logistics operations management to a best-in-class supplier enabled Nortel Networks to focus investments and resources on developing and strengthening core competencies that provide differentiated value to the customer. Under the terms of the agreement between Nortel and KNLL, each shares the financial benefits of supply-chain performance improvement.

Central to the optimization strategy is the creation of a minimum-inventory, merge-in-transit fulfillment model. Under this model, order components are shipped from different points to staging locations where they are combined with other components for shipping as a complete order direct to customer job sites. KNLL manages the merge-in-transit activity with real-time inventory visibility throughout the supply chain, as well as with its exception management capability that is driven by established business rules for transit times and minimum inventory.

"The benefits of the lead logistics provider strategy are already clear," says Dorval. "Nortel Networks is seeing faster cash-to-cash cycle times, increased order visibility worldwide, a sharp drop in fixed assets, improved on-time delivery, improved planning process and reduced inventory, carrying costs and product obsolescence."
TNT Transforms the 3PL Relationship
When Michelin decided to transform its business in North America to gain adaptability and competitive advantage, the tire company started with its logistics network to gain immediate impact. The costs associated with 18 distribution centers throughout North America, nearly 700 employees and more than 125,000 shipping and receiving transactions processed annually was a heavy burden. Michelin's legacy logistics systems were also due for expensive upgrades or replacement. The global tire company decided that outsourcing its distribution network was the right path to leveraging new capabilities for competitive advantage. Michelin reviewed 10 3PLs, but TNT Logistics North America's experience in owning and operating DCs tilted the decision in its favor.

Bob Brescia, vice president for logistics at Michelin, says TNT's ability to reduce operations costs, rising personnel-related costs, transportation costs and handling costs was significant. "Getting out from underneath the real estate was a very large piece of the solution," he says.

Michelin realized a $70m cash flow all in one day as a result of selling four of its DCs to TNT. This figure increased to over $130m after all the DCs were sold.

The cultural fit of the two companies was a critical element of provider evaluation. TNT shared two important Michelin corporate values: a respect for the facts and a respect for the company's people. Retaining only 20 of its nearly 700 logistics employees to handle international transportation, customs and duty drawback functions, Michelin was looking for an outsourcing provider that would treat its transitioning employees as they were accustomed to being treated at the tire manufacturer.

"Rarely have I seen a company other than ours have such respect for individual employees and allow all of the employees and managers to prosper professionally and nurture them and mentor them," says Brescia.

Michelin's outsourcing initiative with TNT, known as Project Delta, is the tire manufacturer's biggest business transaction since it acquired BF Goodrich in 1996. The project includes a set of performance-based incentives.

"TNT can be in the red, amber and green areas from the metrics," says Brescia, "but if they are above green - platinum - they really start rolling in the bucks. And, frankly, we've budgeted for that. We want them to be in the platinum area as much as possible, and they have gone into that area."

The incentives have led to several notable supply-chain initiatives brainstormed in a joint work group and jointly developed. Among these are dormant, slow-moving and off-grade stock management improvements; reverse logistics; cross-border traffic management; and fleet management.

The initiative for dormant, slow-moving and off-grade stock management generates cost savings by separating these items from DCs with fast-moving stock. "A slow-moving facility only takes 25 percent of the manpower and 25 percent of the cost because the number of ticks is so reduced that it becomes more of a warehousing operation than a distribution operation," says Brescia, who points to several other successful TNT initiatives:

• Reverse logistics to speed up customer returns, so the tire dealers have the necessary credit to place new orders

• Cross-border traffic management to move tires in and out of Canada, resulting in faster time to market and lower costs

• Fleet management using the TNT family of carriers; Michelin has gained cost reductions and increased customer satisfaction levels in New England because more shipments arrive on time and with less damage

• Network design to determine the optimal locations for Michelin DCs

This outsourcing relationship has been studied by Michelin's headquarters in France to see if it would work in Europe, Asia or in other regions of the world.

"This relationship is different in its result of partnership, trust and competence between two very, very large companies - much more than I have ever seen in other deals in 35 years of knocking around in logistics," says Brescia. "I've been in some very bad, some good, and some very good relationships; and this one with TNT is the best I've ever seen."
OHL Meets Murray's Higher Expectations
Murray Inc., the Tennessee-based manufacturer of lawn mowers and other outdoor maintenance products, turned to logistics outsourcing to improve supply-chain performance while reducing operating cost. Murray's existing strategy of placing inventory in many stocking points across the country on a seasonal basis to reduce shipping time and distance to its major customers did not meet the demanding expectation of such major retail customers as Wal-Mart, Home Depot and Sears. Murray needed an integrated 3PL that could provide a national distribution network, as well as manage other aspects of the supply chain as a 4PL.

One of the companies that Murray evaluated was Ozburn-Hessey Logistics (OHL) because of its broad geographic scope, its ability to manage other logistics vendors and its supply-chain expertise. For example, OHL's first task was to complete a strategic network plan to match product inventory with customer demand, as well as to handle Murray's seasonal needs.

A key challenge for Murray is the seasonality of demand for its outdoor maintenance products. The compressed shipping season is only eight to 10 weeks long, so it is critical to ensure that product is available to meet sales commitments. As the new 3PL and 4PL, OHL had to select and manage numerous regional facilities that could handle fast-moving inventory in a concentrated period of time, and that allowed the shortest possible transportation times to customer destinations.

"We configured a network of OHL facilities and other 3PL distribution locations offering seasonal distribution services that optimized the retailers' fleet transportation lanes," says Willie Vaughn, OHL's regional vice president of operations, who adds that it currently uses 12 sites across the country to handle the Murray account.

Handling multiple sites with a single management approach relieved Murray of expensive annual or multi-year distribution site contracts with warehouse operators that were not able to keep up with growth of the retail sales channel. Since orders are primarily customer pick-up either by internal fleets or contracted alliances, having numerous sites that are geographically located to optimize the retailer's in-house fleet transportation lanes means Murray is able to better respond to their changing customer base. Small parcel and LTL are also utilized extensively.

Operating within a single, common system is not only more efficient, it gives the customer greater control. And as a single source of contact for all logistics issues, OHL allows Murray's accounting department to deal with just one monthly invoice for all logistics services.

In its role as a 3PL, OHL manages Murray's distribution center in Lawrenceburg, Tenn., using its Synapse WMS system. OHL is responsible for inventory control, returns processing, product refurbishment, and small parcel program. As a 4PL, OHL manages the total outbound logistics flows to include the outside warehouse network and shuttle services. OHL evaluates all providers, negotiates rates, and manages the relationships. Using its logistics expertise, OHL also consults with Murray on ideas for changing technology and helps the company identify supply-chain opportunities through OHL network.

"The managed network that OHL provided allows Murray the flexibility to meet its customer's changing logistical needs and allows for shorter lead time for pick-up and deliveries," says Dwight Smith, director of logistics for Murray.

Murray's managers can concentrate on core customer issues such as product availability and quality.

In addition to a significant reduction in distribution costs as a result of an increased optimization, Murray enjoys a 99.9 percent on-time delivery rate to retailers. This is up from 65 percent when the program began. OHL allows us to commit to meeting or exceeding our customers' expectations for quality, price and delivery," says Smith: "These are the marks of a company that goes the distance."