Following a tumultuous year and a half of disruption to the supply chain, third-party logistics providers find themselves operating in a sweet spot of continuing demand from customers who need to find ways to navigate this new world of ever-evolving challenges.
That was one of several conclusions reached by the 33rd annual State of Logistics report, published each year by the Council of Supply Chain Management Professionals. The report was researched by the Kearney management consulting firm and sponsored by Penske Logistics.
“The role of 3PLs is becoming markedly more valuable as the economy adapts to the continued growth of ecommerce, reshoring and nearshoring, and the push to improve supply chain resilience through diversified supply options,” according to the researchers.
“In fact, a window of opportunity has opened for 3PLs to become more full-fledged consultative partners to shippers, where in the past they were often viewed as interchangeable commodity-service providers.”
3PLs did very well in 2021, earning both robust revenues and profits. This was especially true for those big players in the market who proved themselves capable of investing in additional warehouse capacity and automation, and who could offer integrated solutions that were built around data insights, the Kearney researchers found.
In 2021, United States business logistics costs rose 22.4% to $1.85 trillion, or 8% of 2021’s $23 trillion Gross Domestic Product. Total business logistics costs were $1.557 trillion in 2020, a 4% decrease from the previous year, according to the council’s 2021 State of Logistics report.
The researchers specifically advise 3PLs who are not yet involved in warehousing to make that a priority. “3PLs could stake out a more valued place in the market by building and operating specialized warehouse space,” they advised.
The researchers point to recent surveys suggesting that 45% of 3PLs identified adding warehouse space as one of their most significant opportunities for business growth in the coming year. Many of these are already important providers of warehouse space and are expanding their footprints.
Rising demand for last-mile fulfillment is driving a growing need for compact, strategically distributed warehouse spaces suited to customer picks. “3PLs could weave this fast-growing niche into a larger growth strategy,” the report suggests.
This is hardly the only warehousing subcategory that could heat up in the years to come, add the researchers – 3PL Central’s 2022 Annual Third-Party Logistics Study found that 91% of shippers and 100% of 3PLs expect demand for cold-chain capacity to increase over the next three years.
From March 2021 to March 2022, warehouse construction costs rose by 29%, which has done little or nothing to tamp down the persistent desire to build more space.
“In such a cost environment, investing in warehouse capacity makes little sense without corresponding investments to ensure the space can efficiently meet shippers’ increasingly diverse and specialized needs, including smart automation, smart storage, and retrieval systems,” the SOL report said.
‘Technology investments will likely become more common among 3PLs, particularly as longer, more lucrative contracts and higher manual labor costs justify the expense.”
Smaller warehouse-based 3PLs are under pressure to keep up with their larger competitors, even if they need to pick and choose the most effective and cost-efficient technologies so that they can secure their share in the growing opportunities.
The top 10 U.S. 3PLs in terms of warehouse space include giants such as DHL Supply Chain, XPO Logistics, Ryder SCS, NFI, Geodis, FedEx Logistics, Kenco Logistics, Penske Logistics, Saddle Creek Logistics and CJ Logistics.
“Contract logistics providers find themselves at a crossroads,” the researchers stress. “Should they focus their investments on additional capacity, or wager instead on optimizing the performance of available space via technology and other new capabilities? They can’t do it all.”
The supply chain challenges and disruptions of the past several years have left shippers more willing than ever to outsource the management of their supply chains, which they tend to look upon as non-core functions that serve as an extra expense and a drag on their primary operations.
“A proverbial pot of gold is now enticingly within reach,” the researchers contend. “3PLs can break free from the historical perception of contract logistics as a commoditized service and raise margins to unprecedented heights by focusing on high-touch, value-add services.”
However, they warn that shippers will not entrust such a wide range of responsibilities to just anyone. Instead, you can expect that they will seek out 3PLs with a partnership mindset and the capabilities that are required to provide customized solutions.
They quote Josh Garrison, head of Cisco Logistics strategy, sourcing and digital transformation: “Harnessing the value of quality data, leveraging data-driven insights, and executing across the supply chain with digital precision are required to succeed in today’s world and to truly leverage your supply chain as a competitive differentiator.”
This must be a shared journey between customer and logistics partner, he adds. “Investment and strategic alignment on a digital road map is an imperative to drive a truly successful relationship.”
The researchers said this means multi-service offerings “that include well-connected and frictionless international and domestic transportation structured around tailored warehousing solutions, all the while using rich data to keep shippers fully informed.”
The required investments will be substantial, and not all 3PLs will be able to keep up. Some 3PLs will win and others will lose. But the partnership path has an intrinsically higher upside with arguably less long-term risk, they explain.
“3PLs that invest purely in building and selling contract capacity as a hot commodity will find plenty of eager customers in the current environment – but once the demand-versus-capacity balance inevitably corrects itself, all of that added capacity could become a costly burden. This is why 3PLs need to protect themselves by linking leases to the length of underlying contracts with shippers.”
Whatever investments 3PLs care to make, the researchers believe the key to earning returns is building trusted partner relationships with shippers. “This begins with articulating a sophisticated value proposition, and with sales professionals who can cultivate very high levels of confidence.”
The 3PLs who persuade shippers to share their data and move to a managed transportation model can then use that access to achieve network economics, building a deep moat that those 3PLs unable to invest in capacity and efficient operations to offer integrated solutions will find it difficult to overcome, the researchers argue.
“In turn, shippers who select the best, most forward-looking 3PLs as their partners may be best positioned to make their supply chains markedly more resilient to shocks, as well as more adaptive to evolving consumer and customer demands.”