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Q: Professor Lieb, why did you decide to customize the survey by region?
Lieb: We made that change back in 2004 because it was clear the 3PL market was becoming more global. In my conversations with these CEOs, I was finding that there were a lot of different things happening in the various regions because the markets were at different stages of development. So we decided it made sense to structure the survey so that it would more accurately capture what was happening in each area. Over time we have seen the markets mature and become more similar in that we see a lot of the same problems surfacing in all three geographies at the same time. Consequently, a lot of the opportunities are starting to look alike in the regions. The U.S. and European markets are very similar now with Asia a bit farther back in the development curve.
Q: And Mr. Hartnett, why did you decide to sponsor the survey this year?
Hartnett: Penske always has been very interested in this research. It is very helpful to us internally and it also addresses the needs of our customers, who also are interested in knowing what 3PLs are thinking about and what problems they are working on. In the last four or five years, we and our customers have become more global and the survey has kept pace with those changes, making it even more important.
Q: What specific findings in the survey this year did you think were particularly important or surprising?
Hartnett: One finding that jumped out is the strength of the trend toward global growth among all companies that participated. That's across the board. Second is the internationalization of suppliers among 3PL customers -- they clearly are looking for providers and suppliers that operate in multiple regions around the world. Finally, I think the increasing involvement of customer procurement offices in supply chain activities is an important trend.
Lieb: Some of the things, like globalization, are a continuation of trends that have been going on for several years. But we also have tried throughout the years to highlight new issues and one of these is the involvement of private equity firms in the 3PL market, with respect to mergers and acquisitions. I didn't know how the CEOs would feel about this, so we asked several questions. And the answers indicate they are pretty well split down the middle, with very mixed feelings. Some view it favorably because private equity provides a major infusion of capital into the business. Others that don't like it very much are concerned about whether the acquiring companies are really committed to the 3PL market or if their focus is only short term, which would tend to erode the quality of service over time.
We added the questions on procurement involvement because I had been hearing that procurement offices were becoming more active in negotiating 3PL contracts. In general, the response showed a greater dissatisfaction with this development than I had expected. A lot of companies say it is stretching out the negotiations, though this is not universally true.
On the internationalization of business, which as Vince said is strong across all three regions, I think it is notable that when talking about opportunities, respondents basically are looking at cross-border moves within their regions. Putting together these cross-border capabilities on a regional basis is seen as extremely important. That came out in spades in the Asia Pacific survey, where CEOs say their major growth opportunity is intra-Asian trade. Even within the European survey, the focus is on moving East toward the newer members of the EU. And in the U.S., there is a continuing interest in Mexico.
Hartnett: I would just like to add a word about the procurement issue. In our experience at Penske, we have found that involvement of the procurement office can be a good enabler to help the supply chain champion realize all the efficiencies that the organization is looking for across its various businesses and regions. Today our multi-national customers are looking for efficiencies between the global regions and productivity between their different business divisions. This makes for very complex operations and the supply chain people often need professional help on the procurement side. So we find that the involvement of procurement can speed things up. The procurement people know these global companies, they have global terms and conditions already set, often the scorecards are already agreed on, so everything is a bit simplified. Of course, there is always the possibility that procurement will be seeking its own goals rather than supply chain goals, but more often than not we are finding it to be a potential ally as globalization moves forward.
Q: There seems to be more cross-border acquisition activity among 3PLs. Is this now the preferred means of global expansion?
Lieb: Many of these 3PLs started out with a strong presence in one of the three geographies. Then - and this is a pattern that I have seen over and over - a major client in that geography becomes more global and starts looking for 3PL support in other regions. So a lot of the big 3PL companies around the world were led into new markets by their major accounts. Then the real issue becomes how to set up operations in that marketplace. In many instances one of the most expeditious ways of doing that is to acquire a company in those markets that has complimentary services that match up with their own. This strategy enables a 3PL to put an operation in place rather quickly for a major client. We are seeing a lot of that now with respect to the Asia Pacific market. It's almost a weekly occurrence for one of the bigger 3PLs to acquire a Chinese company.
Q: According to the survey, 3PLs continue to have a pretty healthy growth rate. Is this mostly coming from new customers or is the growth more organic?
Hartnett: At Penske, our growth is pretty evenly split between growth with existing customers and new customers, maybe leaning a little toward the organic growth side. The trend is moving more toward new customers, though. For existing customers, growth is not just about more volume from existing business but rather the addition of new geographies or new divisions of the same company. The extension of services with a customer into new geographies has been an especially good support for our growth levels.
Lieb: Vince's experience is in line with what I am hearing from other companies. Probably somewhere from a half to two-thirds of 3PL growth is from the companies' efforts to sell more deeply into existing customers. In the area of new business, a number of 3PLs have adopted strategies focused on selling to more of the supply chains of their key customers. For example, if they have a manufacturer as a customer, they may try to sell to that manufacturer's key vendors or key customers. This strategy really gives them an opportunity to do more than just talk about the idea of integrated supply chain management. Also, as we have indicated, new growth in many cases comes from moving into a new geography. They may follow a key customer in but then they need to find enough additional business to support their growth in that area, beyond the initial customer.
Q: These CEOs seem concerned about the perception that their service is being viewed as a commodity. How real is that perception and how are these CEOs combating it?
Lieb: One of the longer term trends we have seen is price compression for 3PL services in all three geographies. Some of that is driven by the low-hanging-fruit syndrome. With a new contract there are some fairly obvious places where money can be saved by improving operations and reducing costs. But as they get further into the relationship, savings are harder to find. Still, clients want to generate year-to-year savings of 5 percent to 7 percent, which can begin to seem a little unrealistic. So 3PLs start to feel squeezed and start to look for ways to combat that. One tactic they are using is to do more value selling, where they attempt to address the value being delivered to the client, rather than looking solely at the cost of the service.
Another approach, and this is an issue I am going to investigate more closely over the next year or so, is to strengthen their brand. These companies are asking what it is that differentiates them from everyone else in the space. The answer may be any number of things: geographic coverage, breadth of service, capabilities in one particular element, or the quality of its people or of the service delivered. So a lot of companies are trying to figure out what sets them apart, and I think that will be a major challenge for this industry moving forward.
Q: Despite this price pressure, profits do not appear to be suffering. How are 3PLs protecting their margins?
Lieb: I have been asking questions about this for several years and one response I have received at one time or other from every participant is this: customer selectivity. These companies are being more selective about the customers that they go after and stay with. If there are certain customers that are not willing to work with them so that they can generate a reasonable return on investment, they will back away. Almost every company I have dealt with goes through some sort of process to identify target companies with which it would like to build long term relationships and these are companies that are sensitive to the provider's needs as well as their own needs.
This year most companies said they were taking action to deal with price compression, but most of the actions cited were focused on internal cost cutting. So I think a lot of 3PLs are saying, 'we have been focusing on taking costs out of client operations, maybe we have to start focusing on internal cost initiatives to try and reduce costs and protect margins that way.'
Another action they are taking is to put incentives like gain-sharing into contracts.
Hartnett: I second that. At Penske, we are using some of the same tools internally that we use with customers - processes like Six Sigma and Lean. Another of our strategies is to make sure that we have multiple relationships with our customers, not just with the supply chain people but also with people in finance, sales, plant management and operations. That way both we and our customer can have a more balanced scorecard in terms of how effective we are in delivering results.
Q: Another survey finding consistent across regions was the concern over a shortage of skilled people. Give me your thoughts on that.
Harnett: Yes, this is an issue for our industry. Penske has addressed this by strengthening our Human Resources organization and doing a lot of work in career development planning for both current and future leaders. And, importantly, we are offering our people opportunities to be involved not just with one industry and one geography but to work across many industry spectrums and different geographies. The supply chain is such an exciting area of the economy globally today - it's really where the action is. We need to communicate that message effectively to the young people who are looking for a stimulating career opportunity that offers a lot of rewards.
Lieb: I echo that in spades. Companies have issues both with recruiting and training issue as well as retention. From an educator's standpoint, I am delighted to say that over the last 10 years there has been a tremendous increase in the amount of on-campus recruiting that 3PLs are doing around the world. And there is great interest on the part of students. At Northeastern, more than 25 percent of MBA candidates are opting to study supply chain management versus finance, accounting or some other business specialty. And a number of 3PL companies come here to recruit our students. In the early days of this industry, I think there was a tremendous amount of personnel piracy that went on between companies. Now, the industry is going after new people who are excited about the prospects that this industry offers. And once these students are on board, companies are offering training programs that are really tailored to the individual and the career path that that person would like to follow. There is a lot more mentoring going on.
Q: What do you think will be the biggest trends over the next 12 months?
Hartnett: I think the human resource issues and issues around procurement involvement in contracts will continue. Also, in this survey CEOs were asked if they were seeing an increase in requests for LLP or lead logistics types of service and there was some indication that they were, particularly in Europe. The trend of LLPs and globalization are very connected because the increase in complexity is leading clients to want fewer suppliers that are willing to make larger investments in the partnership.
Lieb: I agree that in the last couple of years we have seen indications of a growing interest in LLP types of relationships. So looking toward next year, I expect we will include more questions about the specific nature of those types of agreements.
Another thing that has come up in the last couple of years is a growing interest in South America and Latin America. People have asked us to do a fourth survey in this part of the world. If we can find the time and resources, we might do that next year. Similarly, there has been a lot of interest in the little bit of data we generated on India. We asked the first set of questions this year about what is going on in India, and next year I think we will try to look more specifically at who is operating there and what they are offering in the marketplace as well as infrastructure issues that are very likely to bubble up as this industry grows in India. The last thing is something we are just starting to see surface in China, which is companies moving manufacturing out of China as wage rates and benefits there start to slowly rise. In some cases, we see indications that companies are moving some of this activity to India or, with European companies, to Eastern Europe. Some of it even appears to be migrating back to the Americas. This shift is very small scale at this point, but it is something I want to push a little deeper on next year.
Penske Logistics, www.penskelogistics.com
Northeastern University, College of Business Administration, www.cba.neu.edu/
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