Logistics 2008: Delivering in a Tough Economy

Feb. 13, 2008
The impact that a 3PL can have on a company's bottom line is magnified when profit margins thin.

The logistics industry is accustomed to facing tough economic challenges and succeeding. In the face of obstacles such as inflating gas prices over the last decade and a notable shortage in qualified drivers, the 3PL market has managed to thrive. According to a benchmark study conducted in 2004 by a professor of supply chain management at Northeastern University in Boston, third party logistics providers (3PLs) recorded a notable revenue increase of about 38.5% between 2000 and 2003. The 3PL industry has been known to deliver great results in a tough economy.

This year, however, no one in the logistics industry is counting on such numbers. Evan Armstrong, the president of Armstrong & Associates and publisher of the respected logistics annual Who's Who in North American Logistics and Supply Chain Management, forecasts a truncated increase in the range of 7.5% this year. While a sector-wide growth rate of 7.5% would make many industries envious, logistics professionals should prepare for a slowdown.

Economists in both the private and public sector agree -- the U.S. economy is veering dangerously close to recession. The Federal Reserve Bank is forecasting that inflation will rise by nearly 2% in 2008, while the country's Gross Domestic Product is anticipated to increase by a mere 1.8-2.5%. The Fed is joined by a number of other federal sources, including the President's Council of Economic Advisors, the Department of the Treasury, the Office of Management and Budget, and the Congressional Budget Office who also see a tough year ahead. The private sector is echoing these concerns. A survey of 52 leading economists conducted by the newsletter Blue Chip Economic Indicators forecasts an anemic 2.4% rate of growth.

The logistics sector can expect to feel the impact. Analysts including the International Air Transport Association agree with the Federal government's calculations that the impending credit crunch, or lack of available capital caused by real estate losses, will push the economy into a recession. A 2007 study by the IATA further analyzes the ways in which the logistics sector will be affected. With serious limitations being put on banks' ability to lend money and drive the economy, supply chain management professionals will be faced with the challenge of growing business in a shrinking economy.

In the face of resistance, however, it is more important than ever for logistics firms to find opportunity in the increasing need for companies to run their supply chains more efficiently and cost-effectively. As Winston Churchill observed, an "optimist sees the opportunity in every difficulty." Based on this wise advice, let's look at how dynamic 3PL's can find opportunity in the increasing difficulties facing the US economy.

According to the Council of Supply Chain Management Professionals, 60% of all Fortune 500 companies outsource their supply chain services to a third party logistics provider. This represents a growing trend driven by the knowledge that outsourcing can create a higher performing supply chain. 3PLs can take advantage of their infrastructure, relationships, and the skill-set necessary to make logistics as efficient as they possibly can. In an increasingly hazardous economic environment, more and more companies will be open to anything -- including outsourcing their supply chain -- to save money and increase efficiencies.

Companies should understand what's at stake. The savings that a 3PL can identify and implement can be significant. According to a study by IBM, SAP Global, and AMR, changes in supply chain management can drive savings of between 10-20% in process costs.

Third party logistics providers reduce supply chain costs by applying the flexibility offered by outsourcing. A 3PL can provide an objective evaluation of how a company's supply chain is working and how it can be improved through the analysis of their individual supply chain needs. Designing a supply chain that fits a company's specific needs allows 3PLs to respond to clients' needs on a case-by-case basis. Third party logistics providers are often better positioned to mitigate higher costs as the costs of shipping, warehousing, and others driven by market forces continue to increase. For some clients, a 3PL can also make aggressive staff changes to improve performance through incentive-based changes in the workplace culture. As an outside firm, a 3PL has the flexibility to make changes that manufacturing firms often find difficult. Consequently, a 3PL is able to reduce costs in the short-term while also delivering consistent cost-savings year over year.

The work of streamlining a supply chain begins with learning about a company's current logistics. A 3PL would start by analyzing the existing supply chain for easily-realized cost savings and efficiencies. After a detailed analysis of the current supply chain, a 3PL will begin finding ways to reduce costs at every point in the process. From reviewing current trucking costs, warehousing costs, the price of time spent in transit, and the impact of utilizing temporary workers, a 3PL will review ever aspect of a company's logistics operation.

After determining where cost reductions can be achieved, a 3PL can start retooling the supply chain. These efforts could include, for example, changing warehouse and distribution center (DC) sites or making aggressive staff changes. A 3PL could then reorganize the DC/warehousing system to make long-haul shipping more efficient by applying cross-docking plans at DCs and making the schedule changes to cut down the number expensive less-than-truckload (LTL) shipments.

The impact that a 3PL can have on a company's bottom line is magnified when profit margins thin. The nearly 20% reduction in costs that a 3PL has the potential to find in a supply chain can make a real difference on the balance sheet, and that difference can determine whether a company ends a year in the black and a year in the red.

Ron Cain, author of "Logistics 2008: Delivering in a Tough Economy," is the President/CEO of TMSi Logistics (www.tmsilog.com). He can be reached at (603) 373-7233 or at [email protected]

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