Fleet Management

3PLs Today and Tomorrow

January 2015, TruckingInfo.com - Feature

by Jim Beach, Technology Contributing Editor - Also by this author

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Third party logistics companies have become a key part of goods movement.
Third party logistics companies have become a key part of goods movement.

Third party logistics is a relatively new segment of the transportation industry, and 3PLs play an important role in goods movement. Outsourcing their transportation management functions to 3PLs gives shippers more flexibility to meet their shipping needs and access to the latest transportation management technologies.

As the industry has matured, 3PLs have begun to offer more than just transportation outsourcing.

“Our role ranges,” says Frank McGuigan, president of transportation management at Transplace, a 3PL headquartered in Dallas. He explains that 3PLs not only handle transportation management outsourcing for shippers, but many also offer technology, supply-chain consulting, brokerage and other services to shippers. “I don’t see that role changing in the future,” he adds. “Shippers are reporting very good outcomes with 3PLs.”

The role of 3PLs “has grown over time,” says David Ross, a transportation industry analyst with investment firm Stifel, Nicolaus & Company. A recent industry update from Stifel noted that most shippers use 3PLs for some aspect of international trade, especially in markets where they have little experience. 3PLs allow smaller shippers to “bundle their spend,” the Stifel update noted, which saves them money.

A recent survey of the CEOs of large North American 3PLs commissioned by the Council of Supply Chain Management Professionals in 2014 found that most are confident about continued revenue growth, with survey respondents predicting an average growth rate of 6.5% in North America.

The survey also found that these CEOs felt the growth in e-commerce offered opportunities for 3PLs. Some of these companies already support e-commerce customers with services such as warehousing, fulfillment and reverse logistics.

The trend of near-shoring of manufacturing — moving from China to Mexico, for instance — has also increased volumes and revenues for some 3PLs, the survey found.

“There used to be a rock solid wall between 3PLs and carriers … they are much less worried about the fox guarding the chicken coop than they were.”
– Mitchell Weseley, 3Gtms

Mitchell Weseley, CEO of 3Gtms, a software provider to 3PLs, shippers and brokers based in Shelton, Conn., notes that the 3PL industry “is an industry that has always been reactive/responsive to what customers want, as most industries are.” This responsiveness has led some to embrace roles they may not have previously. Shippers want to outsource their transportation functions, Weseley says, but now they want to do it at any point in the process. For instance, a shipper may want to use 3PLs only for international movements, or they may want the 3PL to offer warehousing or consulting services.

Big vs. small

While the Stifel report concludes that the largest growth in outsourcing has already occurred, there are still opportunities for 3PLs. On the other hand, shippers are moving to consolidate the number of third-party entities they work with, which puts pressure on 3PLs to distinguish themselves from the crowd.

As with other segments of the transportation industry, there has been some consolidation with larger companies acquiring smaller players. For instance C.H. Robinson is buying Freightquote, a brokerage business based in Kansas City.

“We’re seeing consolidation in the market, we will continue to see consolidation in the market,” Ross says.

In addition, McGuigan says shippers are reducing the number of 3PLs they are using. “Companies that were providing a niche relationship are finding that shippers are looking for 3PLs that can do everything for them,” he explains. While advances in technology have lowered the barrier to entry for smaller players, “the demands of the shipping community doesn’t mean it will play out for a small 3PL,” he added.

But that challenge hasn’t stopped new entries. McGuigan says at a recent industry meeting he saw at least 15 new names. “The question becomes, ‘can you get into the business,’” he says. The answer may be ‘Yes,’ “but going from zero to becoming a major player has become more difficult.” In Transplace’s case, they have met customer demands by acquiring companies in vertical, niche areas.

While consolidation continues, the big guys may not squeeze all of the little guys out. Weseley says he sees the opposite. “We see a lot of little guys. The cost of entry is low (because of software-as-a-service and other advances in technology). A lot of these very specialized approaches are easier for the little guys.”

Weseley contends that the 3PL industry is a place where “you can establish yourselves geographically and make a nice little business for yourself, even with large shippers if you can come with a cost effective solution.”

Software & technology

While the 3PL world is pretty new, Weseley says the biggest change he has seen has been in technology.

Many 3PLs tout their technology as the thing that differentiates them from competitors. The Stifel report said 3PLs with the best technology, service and people should come out on top. “3PLs have a lot of technology they can leverage, so shippers don’t have to come up with a lot of that,” Ross says.

“Technology is foundationally what we deliver to our customers,” Transplace’s McGuigan says. “Everything we do is technology based.” And as shipper demands grow, the technology a 3PL deploys must grow as well. “As our customers are challenging us to do different things for them, we have to make sure the technology is up to task. As the shipping community is expecting more, the technology has to be in lock-step with those expectations.” After all, the true value of a 3PL is that it can automate things that have not been automated in the past.

“We’re seeing consolidation in the market, we will continue to see consolidation in the market.”
– David Ross, Stifel Nicolaus

“If you go back 10 or 15 years, there wasn’t third-party SaaS technology available,” he says. There’s more availability in the market today, and where technology had been a barrier to entry in the past, it is not a barrier today.”

3PLs have a ready audience for their software, because the transportation management systems they deploy are often at least a decade newer and many times more capable than TMSs used by shippers, Weseley says.

“The software is the key for 3PLs,” he says. “A shipper comes and says, here’s my problem,” but a 3PL will say here’s 10 problems to solve. “They are looking at the problems differently.”

Blurring of the lines

Another change for 3PLs is that some are taking on different roles, and companies that would not have been considered a traditional 3PL have entered that space.

“What we’ve seen is a merging of the various parts,” Weseley says. “The lines are blurring between 3PLs, brokers and carriers.”

“There used to be a rock solid wall between 3PLs and carriers,” he explains, because shippers didn’t want 3PLs to favor some carriers over others at the shipper’s expense. “But now, some customers don’t want that wall to exist. I think that is a fundamental shift. They are much less worried about the fox guarding the chicken coop than they were.”

Stifel’s Ross says some of that blurring has occurred because truck drivers are hard to find. “Trucking companies that want to grow are looking at ways to grow without having to buy new trucks and find drivers.”

On the other hand, many 3PLs are content to remain behind the wall. “Most of the non-asset based companies enjoy being non-asset based and they have not seen any reason to change,” Ross said.

Challenges

While 3PLs continue to show growth, there are a number of challenges ahead, with capacity being right at the top of the list. In the CSCMP survey, nearly 70 percent of CEOs surveyed reported capacity problems in all modes of transportation: truckload, LTL, intermodal and rail. Freight rates have risen and on-time schedules are harder to keep as a result of the capacity crunch.

“Technology is foundationally what we deliver to our customers. Everything we do is technology based.”
– Frank McGuigan, Transplace

McGuigan says Transplace is approaching the capacity problem “carefully and not with a broad brush,” and that its strategy moving into 2015 is different than it was in 2014 as a result of capacity problems.

“We are working with expanding our carrier relationships and diving deeper into the carrier networks to help them. It’s times like these that we earn our money,” he says.

An improving economy will have an impact on capacity, he says, but he’s not sure if that will be enough to spur more carriers to invest in new trucks. “Maybe it will, but there are trucks parked now because of the driver shortage. Carriers are saying, ‘Why buy more assets when I can’t keep drivers now?’”

He pointed to other issues that hamper goods movement, including port congestion and labor issues, as things to keep tabs on.

Other challenges include the increasing complexity of freight movement. With companies sourcing from other countries, keeping up with varying requirements for international trade is another challenge 3PLs take on for their customers offering international freight management.

Perhaps one of the biggest challenges facing 3PLs is the emergence of e-commerce giants such as Amazon.

Amazon operates hundreds of warehouses and provides shipping not only to its own customers but to its suppliers as well, offering a kind of hybrid third-party logistics services.

The CSCMP survey found that logistics CEOs are aware of the impact Amazon has had on supply chain management, with many noting that Amazon was both a customer and a competitor in some markets and that its sheer size could lead it to becoming a huge competitor to 3PLs in the future.

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