The state of the industry

by Array

MM&D MAGAZINE, JANUARY/FEBRUARY 2011:

In business as in life, if something has always been done a certain way, it doesn’t mean it should always be done that way. The world of 3PL providers is no different. In some cases, courses must be corrected and new trends followed.

But knowing what course to chart requires expertise. To tap that expertise, MM&D magazine assembled a virtual panel of experts who shared, via email, their expertise in the third-party logistics industry, recent trends affecting 3PL providers, as well as how companies can best respond to those trends.

Participants were Steve Ramescu, president of Axsun Group; Douglas Harrison, president of Calyx Transportation Group Inc; Darren Fitzgerald, operations manager for Whirlpool Canada; and Al Leger, partner and practice leader with Supply Chain Alliance Partners.

Looking for true partners

Before discussing where the industry is headed, our panelists first looked at the state of 3PLs today—including definitions of a 3PL and what services those companies provide.

“To me, a 3PL is a provider of customized logistics services—could be a single element or several,” said Harrison. Such providers must also offer a solutions-based approach to their enterprises, as well as develop a close relationship with the customer, based on analysis, logistics strategy and joint goals.

Fitzgerald emphasized the partnership aspect of a 3PL’s relationship with its client. “This partnership is built on a long-term, vested outsourcing commitment to drive long-term benefits to a mutual advantage,” he said.

For some panelists, the term 3PL has become overused. According to Ramescu, the industry has seen the rise of “camouflaged contenders,” or companies that bill themselves as 3PLs when what they really provide is load brokerage, warehousing or other services. Some companies offer fewer services than they say they do.

“Many say they do everything, however very few actually do, and hence they turn themselves into a 4PL,” Ramescu said.

Ramescu agreed that more and more customers are looking for a true partner in a 3PL. That role includes the ability to strategize, facilitate, help manage transportation and distribution and, increasingly, offer technical expertise. Recent years have seen a drop in the number of carriers and suppliers, he said, which presents a challenge to 3PLs that don’t offer more than one service.

The 3PL industry has become very competitive, said Fitzgerald. Like many companies, Whirlpool had developed a sourcing strategy that requires a blend of 3PL providers to manage the company’s North American network, he said.

But 3PL providers need to keep improving their services to compete in the marketplace. “In my opinion, we often see the ‘comfort’ phenomenon, where 3PLs become very comfortable and the focus on continuous improvement, productivity enhancements, and/or overall strategic initiatives seems to be less frequent,” Fitzgerald said.

The case for consolidation

Panelists pointed to consolidation as a recent trend among 3PLs. Ramescu pointed to the aging executive teams of some companies as one reason for this shift.

Some senior players have sold their smaller, private firms since they feel daunted by the notion of making the changes to IT platforms and business practice required to stay competitive.

But consolidation makes good business sense, he noted, since the power of two (or more) is often stronger than the power of one.

“It [consolidation] facilitates in acquiring experienced people rather than trying to hire and expand at a slower pace,” Ramescu said. “By acquiring, expansion can be had immediately and having the new experienced group brought in allows the whole to be more educated and seasoned in handling many and more aspects of the total supply chain.”

An appetite for market share has helped drive consolidation among 3PLs, said Leger. He agreed that companies had much to gain by acquiring a competitor, such as added services, industry expertise, key management personnel and financial leverage.

Consolidation also drives innovation, since the process requires investment in people and systems. Ultimately, the customer benefits from the value created as a result of consolidation.

Consolidation of the 3PL industry is similar to other industries, said Harrison. Usually, industries consolidate to add new services to their roster, extend their geographic reach and gain economies of scale. Acquisition is usually driven by the need for public companies to grow revenue and earnings, he said, also noting consolidation offered various advantages to customers.

“For a customer, an acquisition gives financial stability and leverage, new services, a stronger industry and—in some cases—greater geographic scope,” he said. “As customers are looking to consolidate their vendor base and deal more seamlessly through the supply chain with fewer handoffs, greater service capabilities of a provider allow for a more seamless solution.”

Does size matter?

Some panelists noted that while the industry was seeing more consolidation and acquisitions, there was also an emerging line between larger 3PL companies and smaller, more regional players. Ramescu saw a “changing of the guard” across the field, with smaller players becoming larger and some larger players shrinking or perhaps disappearing altogether. Size doesn’t always translate to being better, wiser or more able to make new changes—flexibility, vision, a qualified staff and the ability to use technology are more important, he pointed out.

For Harrison, segmentation was driven by the service and strategy of the 3PL provider. Such companies couldn’t be all things to all customers, he said, and companies need to focus on a specific segment in order to provide quality service and gain economies of scale.

“It’s difficult for a small player to match the service offering and scope of a major player,” he said. “That said, as a customer you can become forgotten with a major global provider if you aren’t a significant client. As well, a regional provider has more local market presence and expertise, which may be beneficial.”

For Leger, the division between larger and smaller players was based on capital and the access to capital. “The regional players will always be in existence, as they provide more tactical services on a variable cost scale, which is appealing to a segment of the marketplace,” he said.

Economic crisis and recovery

There was agreement among panel members that the economy was improving. The later part of 2009 and through 2010 had been a challenging period for 3PLs, Leger said. Fewer opportunities meant more aggressive competition for the opportunities that did arise, he said. That in turn drove profit margins below industry norms.

“I suspect that 2011 will see a recovering trend, with activity levels closer to normal as companies are poised to address market opportunities within their respective industries,” he said, noting companies would continue working on reduced inventories and advance inventory strategies into the future.

But Fitzgerald felt there were still some challenges on the economic front. Consumers had also become more price conscious as the economy improved, he said. “The economy has seen some improvement,” he noted. “We continue to see consumer confidence as a challenge impacting our overall business.”

Most 3PLs went into a defensive mode during the economic crisis, said Ramescu. Those companies hunkered down and stopped investing in technology and people. Others took an aggressive approach and made the investments at a fraction of what those investments would have costs during a better economy. Those companies are growing tremendously, he noted.

Harrison said while the economy had shown signs of improvement, Canada really had two economies: the resource sector in the west and manufacturing in the east. Manufacturers had been hit hard but had shown signs of recovering and learning to deal with the effects of a Canadian dollar that hovered at par (or higher) with the US currency.

“The logistics industry—transportation, warehousing and 3PL—has been hit hard from the recent downturn with volumes being off dramatically,” Harrison said. “There is a shift in trade patterns and lanes. More Asia import volumes are now being de-stuffed on the west coast and, rather than moved east to only be moved west again, companies are opening import DCs and redistributing to the west through these DCs.”

The role of IT

The world seems to be shrinking, and a 3PL’s Canadian customers no longer sell exclusively to the US. Companies must therefore invest in the proper IT and the need to adopt similar operating systems, has become more important for 3PLs, several panelists agreed.

“We’ll see in the next decade heavy spending being required to revamp systems and this will drive who stays and who disappears,” Ramescu said. “If you have made the investment you will be well rewarded. If the investment is still two or three years away, time might just be up for those who are sitting on the fence.”

According to Harrison, a solid footing in IT is not only necessary for success or competitive advantage—it’s the price of admission into the 3PL industry. Technology provides value and efficiencies, he said, allowing for more automation, as well as data analysis and capture.

“More and more, 3PLs are acquiring packages of software that are broadly available,” he said. “The competitive advantage comes from what you do with the software, the processes and the people.”

Industry leaders are those who can integrate their systems seamlessly with those of their clients, said Leger. Simply having tier one systems is not enough, he noted. Companies must use those systems to design flexible solutions for their customers.

“The point of differentiation is how these systems are deployed and the solutions that they support,” he said. “On their own, the systems are of little use. It’s much like a paintbrush without the artist. Systems help to magnify a provider’s intellectual design capability. The leaders are those who can create a conduit of solutions—proven and tested—which are appropriate and drive the highest value at the lowest cost.”

Keeping it green

Like many industries, sustainability is an issue for 3PLs. But simply because something has always been done a certain way doesn’t mean companies should continue doing it if more environmentally friendly ways of doing business exist, said Ramescu.

“Shipping by truck 2,500 miles over the road doesn’t mean you need to keep doing this,” he said. “Shipping intermodal can save customers hundreds and sometimes thousands of dollars. Transit may increase by a day or so, but consumption of fuel is one-sixth of going over the road. Cost savings makes this a complete win-win situation.

“This is just one thing we can do,” he continued. “There are thousands of other things, and in time we all will keep getting better at it. Going green can be very profitable but in the end if we burn our resources and our planet, does profit really matter?”

A project or initiative that can call itself green must make good business sense before a company will consider investing in it, said Harrison.

“In many cases, green initiatives do add economic value, in others they do not,” he said. “Currently, while there is interest in green initiatives, it would be my view that the supply chain is unwilling (in a significant way) to pay a premium for this.”

Demonstrating the benefits of an environmentally friendly initiative can be a challenge for 3PLs, said Leger. Those benefits can be subtle, such as brand definition and market positioning, and the need to feed into the client’s business culture. Also, deciding whether an initiative will be profitable can be a challenge.

Some of the financial gains are hard to see and measure, such as reducing your electricity consumption by investing in efficient light fixtures, he said. Or, investing in alternative fuel-burning equipment where the payback is measured over a longer time and some benefits don’t appear on the income statement.

“Profit measured how and when is the question to be posed,” he said. “Arguments have been made that green initiatives will drive profitability. The argument is when and how will it be measured?

“When all is said and done, the marketplace emphasis on green initiatives—supported by a willingness to invest in a shorter term—will impact the industry’s behaviour. Being ‘green with envy’ will drive others to follow those leaders within the industry that are being rewarded with sustainable business while supporting green initiatives.”

Attracting new talent

Another challenge the group discussed was finding new talent. Canada’s low birth rates, the first wave of baby boomers retiring and an improving economy will mean a shortage of talented young workers to fill positions in the industry, Harrison said.

“The Conference Board of Canada has studied this for several years and has reconfirmed that Canada will face ongoing labour supply issues in the future,” he said. “The transportation industry is beginning to speak about driver shortages and, with new safety regulations introduced in the USA, this will be even more of a concern.”

Seeking and retaining new talent is very hard, said Ramescu, and the transportation industry has never really been a solid choice for university students.

In time, the industry may be able to attract new talent, he noted. In competing with other fields it must remain rewarding for young people looking to enter the workforce.