Six years ago, I facilitated Think Tank sessions at The Logistics & Supply Chain Forum called “3PLs: Living Up to Expectations?” I recently re-read the report that we published (available to ARC clients only) based on those sessions and I’m amazed at how little things have changed. Are 3PLs living up to expectations? Here’s how I answered the question back then:
“This may be a simple question, but considering the fragmented nature of this market, the answer is anything but straightforward. It depends on who or what you consider to be a 3PL. It also depends on the expectations themselves, which vary depending on the complexity of a company’s business, and how the results are evaluated, either strictly on cost or service level factors, or against higher-level strategic goals, such as the ability to enter new markets quickly. In short, there may not be a right or wrong answer, only differences in opinion.”
I also highlighted many of the contradictions that existed back then, and still exist today:
“Companies want service providers to be more proactive and creative, but they often dictate every detail of how the 3PL should operate. Many 3PLs are trying to be global “one-stop-shop” providers, but most companies would never put all of their eggs in one basket. People are the root cause of success, but they’re also the primary mode of failure. Many contracts are “ever-green, eternal,” but they include a 30-day escape clause. A particular 3PL could be your best performer, but they could also be your worst.”
Every year I look forward to the Annual Third-Party Logistics Study conducted by Dr. John Langley from the Georgia Institute of Technology, now in its 13th year. While there are always nuggets of new and interesting information in each edition, many things stay the same year after year: 3PL customers are generally unhappy with the IT capabilities of their service providers; transportation and warehousing are the main operations that companies outsource; very few companies outsource more “strategic” functions like inventory management or establish “4PL” relationships.
What is changing, however, is a bit surprising, and troubling, for the 3PL industry. The logistics executives that participated in the Think Tank sessions six years ago generally agreed that outsourcing your logistics operations was a one-way street. Here’s how one executive put it:
“The real question is can you bring [your logistics operations back in-house], because most of my experience is that once you de-invest in an area, boy, it takes a major traumatic occurrence to ever be able to re-invest.”
It appears that the answer is yes, you can bring it back in-house, and it’s happening with greater frequency. CNH, for example, determined that it could achieve “significant cost savings” by bringing its transportation operations back in-house. In addition to embarking on a multi-year, global roll-out of Oracle TMS, the company is hiring a lot transportation planners and operations people. In short, CNH is investing a ton of money on IT and overhead to rebuild its transportation management capabilities and it still expects to achieve significant cost savings compared to staying with their 3PLs. Either their math is wrong, or their outsourcing contracts were poorly negotiated, or the economics of outsourcing are changing.
Why are companies bringing all or part of their logistics operations back in-house? I think there are several contributing factors. IT solutions like Transportation Management Systems and Warehouse Management Systems are much more affordable, flexible, and easier to deploy today than they were in the past. For example, a company can deploy a Software-as-a-Service TMS in just a few weeks, with minimal upfront investment and IT support. In the past, part of a 3PL’s value proposition was eliminating the need for customers to spend millions of dollars on IT. This value proposition is not as strong anymore, and as the annual surveys show, 3PLs have generally failed to meet the IT expectations of their clients.
Companies are also placing greater value on working directly with carriers instead of through a third party. Briefly stated, companies want to take control of their own destiny when it comes to securing capacity and negotiating strategic carrier relationships that ultimately impact rates and coverage. Most carriers also prefer to work directly with shippers. It allows them to demonstrate their value more clearly and effectively, which they can leverage to justify a premium rate or to acquire additional business. These trends go against the traditional 3PL model, where the service provider typically owns and manages the transportation contracts and carrier relationships.
In the weeks ahead, I plan to interview several companies that have said goodbye to their 3PLs to understand how they justified the decision. I also hope to gain additional insight on this topic at this year’s Logistics & Supply Chain Forum (April 15-18), where I’ll be conducting a Think Tank titled “Defining the Next Chapter in 3PL-Customer Relationships.” I’ll share my takeaways when I return. In the meantime, what do you think? Have you brought part or all of logistics operations back in-house, and if so, why? Is a fundamental shift occurring in how companies approach outsourcing and how they select and measure the ongoing value of a 3PL? How are 3PLs responding to this trend?
