Majority of 3PLs Are Using Cost Cutting Strategies

Sept. 21, 2009
Shippers devote between 47% (in North America) and 66% (in Europe) of their total logistics expenditures to outsourcing and this is expected to increase in the next five years.

The Fourteenth Annual Third-Party Logistics (3PL), which was released on Sept. 21, reported a few key findings:

  • The economic downturn has created significant challenges for both shippers and third-party logistics providers (3PLs) -- 82% of shippers are employing cost-cutting tactics and 60% are rethinking their supply chains and relationships with 3PLs as a result
  • 88% of shippers feel that IT-based logistics services are important, but only 42% are satisfied with the capabilities of their provider -- as a result of this IT capability gap, shipper respondents reported a lack of the key performance indicators, alerts and visibility required for an adaptive supply chain and 3PLs reported similar difficulties in getting the data and commitment they need from shippers
  • There are significant differences between how 3PLs evaluate their role in the supply chain and how they are viewed by shippers -- only 59% of shippers feel their use of 3PLs has a positive effect on customer service compared to 88% of 3PL respondents

Shipper respondents devote an average of between 47% (in North America) and 66% (in Europe) of their total logistics expenditures to outsourcing and this is expected to increase in the next five years.

"Shipper-3PL relationships are being impacted significantly by the prevailing uncertainty and economic volatility in global markets," said Dr. C. John Langley Jr., Professor of Supply Chain Management, Georgia Institute of Technology, one of the studies sponsors along wtih Capgemini, Oracle and Panalpina. "It is very important for 3PLs to mitigate or reduce any financial risk or service level impact that this may cause."

Economic volatility has challenged shippers and 3PLs alike to contend with factors such as unpredictable demand, instability in fuel costs and currency valuation, and excess inventory. In response, not only are shippers attempting to cut costs, they are also seeking to improve forecasting and inventory management (77%).

Cost reduction and improved reliability in services are the main factors likely to increase shipper respondents' use of 3PLs. This includes converting fixed to variable costs (59%), expanding to new markets or offering new products (56%), and restructuring the supply chain network to improve financial performance (48%).

The study shows that while shippers continue to outsource logistics services that are more operational and repetitive, they outsource less frequently those that are more strategic, customer facing and IT intensive. However, economic volatility presents an opportunity for shippers to assess their supply chains and make changes designed to increase agility and responsiveness, reduce costs and reconsider their relationships with 3PLs to drive them deeper. Overall, 75% of shipper respondents agree that more strategic 3PL relationships would help them reduce costs.

In order to achieve a more strategic shipper-3PL relationship, shippers want to see 3PLs investing in enhancing their regional and vertical expertise to better understand their particular business. Shipper respondents will also need to be more forthcoming with their data and be willing to team with 3PLs to re-engineer business processes.

IT is viewed as central to the overall performance of 3PL-customer relationships. However, lack of IT integration within 3PLs leads the list of shipper respondent issues (55%) with 3PL IT capabilities. Shippers and 3PLs seek IT that is responsive, delivers valued information such as order, shipment and inventory visibility, builds on existing investments and allows for innovation. However, widespread use of manual practices and variations in standards make it difficult for shippers and 3PLs to exchange data reliably and connect workflows. Real-time interfaces to shipper order management systems (63%) and timely demand forecasts (54%) are the most desired IT capabilities 3PLs need from shippers.

Other problems cited by shippers with 3PL services include a lack of continuous, ongoing improvements and achievements in service offerings and unrealized service level commitments (both 46%).

While there is significant agreement between shippers and 3PLs on critical issues, 3PLs generally have a more positive view of relationship success than shippers and have lower awareness about potential problems. This suggests that 3PLs still have some way to go before they fully meet the expectations of their customers. For example, 82% of 3PLs believe they provide new and innovative ways to improve logistics effectiveness, compared with only 50% of shipper respondents who feel they receive services of this nature. Similarly, only 54% of shippers reported improvements in service levels compared with 71% of 3PLs.

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