Today’s long-distance supply chain reaches across nations, thus heightening both complexity and competition. In this global environment, more companies are turning to the specialized services and expertise of third-party logistics providers. When assessing a 3PL provider, does size matter?

Today’s long-distance supply chain reaches around the world, embraces cultural barriers and encompasses a number of complexities. This environment of heightened complexity and competition is driving companies to turn to the specialized services of third-party logistics (3PLs) for value-added competence in supply chain management.

“While global trade is not a new phenomena, it is new to a lot of companies,” states Gene Long, president, Consulting Services, UPS Supply Chain Solutions (UPS SCS), in a recent World Trade article. As such, not too many companies have the resources or the staff to devote to the complexities required to manage global supply chain issues effectively. The burden on that staff would be phenomenal.

Yet providing the requisite expertise needed to maintain supply chain continuity is one of the key services offered by a 3PL. So the dynamic of the 3PL relationship has shifted.

When companies assessed 3PL providers (primarily for domestic logistics) 10 years ago, they were inclined to base much of their choice on cost and service, which sometimes made them fall into the trap of not using their 3PL as strategically as they could. Now companies looking for a global 3PL provider are just as likely to value such factors as experience, knowledge and relationships in the market — and to rely on their 3PL as a true partner rather than simply as just another vendor.

In addition, the 3PL market has grown significantly in the past decade. Fewer than half of large companies outsourced their logistics in the early 1990s, according to another World Trade article. Now that number is closer to 80 percent.

Indeed, 3PL revenues in the U.S. broke $100 billion for the first time in 2005, according to a recent Armstrong & Associates, Inc. report entitled “Is Bigger Better? – 3PL Financial Results – 2005″. Gross revenues hit $103.7 billion, a 16 percent increase over 2004. Not only is the 3PL industry growing at a rapid pace, it is becoming more sophisticated and more concentrated at the top. Merger and acquisitions activity among the world’s leading 3PLs in 2004 amounted to $9 billion and has been gaining momentum over these last few years. The pace is expected to stay hot for two to three more years.

Yet are customers better off going with these juggernauts, Global Logistics & Supply Chain Strategies asked last month. Do global reach, expanded IT capabilities and standardized processes provide the best solutions for customers? Do individual customers loose clout with mega-3PLs?

One notable feature of mega-3PLs is the greater effect from brand names. This is a basic argument of any industry — Is the competition a good thing, especially for the customers? Tier-one global 3PLs (e.g., DHL, UPS and TNT) are included in the request for proposal (RFP) process by large customers. The second- and third-tier 3PLs with less well-established brand names are seeing fewer bid opportunities. As well, larger players are increasing the probability of success by using more direct sales rather than waiting for the RFPs to come in. Brand name recognition opens doors for those direct sales efforts. Direct sales are designed to avoid going through a bidding process and increase the probability of securing business.

One argument is that, in the long run, only the largest and best-staffed 3PLs will be able to deliver logistics expertise at all points along the supply chain. Can only companies with global scope and coverage can control service consistency and quality? Such expertise usually requires a large staff with strategically located global offices. In this industry, a large staff is a cost issue if there is redundancy or confusion of responsibilities. “No company can afford that,” Inbound Logistics has said in the past, “and you should not have to pay for redundant services or idle staff.” But if a large global staff is well trained and available to deliver the highest quality logistics solutions at any time and to anywhere in the world, then that staff is adding value to customer service.

There seems to be ambivalence amongst large global corporations about what they want from their 3PL providers, Global Logistics & Supply Chain Strategies says. The fact that some say they want a one-stop 3PL that can provide all the services and geographic coverage that their customers need no doubt has helped to encourage mergers. Larger 3PLs seem better suited to deliver a wider range of services all over the globe.

GL&SCS also notes:

Yet, most large customers are afraid to put all of their eggs in one basket. They don’t want to risk their entire supply chains on one or two 3PL partners, nor do they want to limit their negotiating potential. For the most part, the result is that the global corporations are reducing the number of 3PLs that they use to those that offer a wide assortment of integrated services.

However, small 3PLs under $250 million in net revenues generally have a competitive advantage in providing stronger customer relations, as their scale allows them to have close communications, thus resulting in more flexibility and quicker adjustment to market needs compared with their larger competitors. Further, such smaller 3PLs tend to have better operating margins than many of the very large 3PLs, due to lower overheads.

The problem small 3PLs face, obviously, is that they often do not have global scale, so their growth prospects and sales are limited to customers looking for a North American or other single-market solution. Solutions — usually tactical — are offered to small and midsized companies, which is turning out to be a good strategy. Since 2001, 3PL penetration has doubled within small to midsized customers to the point that more than half of these companies now use 3PLs.

The 3PLs between $250 million and $500 million are having the most difficult time competing, due to limits of regional or functional focus and because they often are asset-oriented. This asset focus normally lessens their operating margins, earnings and returns.

The most successful 3PLs are in the group from $500 million to $1 billion, as they have enough critical mass to provide a variety of integrated services and they are international operators. They have enough scale and density of network so that they can standardize operations supported by good IT. They have good services and a good customer following that allows them to have profit margins that are a few points higher than most other 3PLs. Most in this group have grown organically.

There is no question that the technical supply chain management capabilities of 3PLs will continue to improve. The levels of service to customers are much better today than a decade ago.

So does 3PL size matter? We loathe to be ambiguous or vague, but it depends from company to company, and nothing is definite. So you tell us.

Resources

Options Abound as Integration of the Global Supply Chain Becomes a Top Priority
by Karen Thuermer
World Trade magazine, May 30, 2006

How Global Supply Chain Management Has Changed in the Past 10 Years
by Brett Harper
World Trade magazine, May 30, 2006

Is Bigger Better? – 3PL Financial Results – 2005
Armstrong & Associates, Inc., March 2006

The Top 25 Global 3PLs: Is Bigger Really Better?
by Thomas A. Foster and Richard Armstrong
Global Logistics & Supply Chain Strategies, May 2006

Becoming Truly Global: 3PLs Face New Challenges
by David Beatson
Inbound Logistics, January 2004