Last year, I wrote in this space about the convergence taking place in the third-party logistics (3PL) industry—that is, the convergence of fragmented logistics services with integrated logistics solutions, as well as the convergence of business models, specifically the business models of service providers, technology companies, and consulting firms.
We are halfway through 2015 and it's clear that this convergence is not only still happening, it's accelerating.
Take a look at the significant deals announced in just the past seven months (graphically represented in Figure 1):
These deals suggest that there is plenty of interest in executing more such big-ticket transactions in the weeks and months ahead.
What does this series of deals mean? For one thing, it means that investors are bullish on the 3PL industry's future growth opportunities—driven by e-commerce, global trade, companies in underserved industries (such as oil and gas) looking to move up the supply chain maturity curve, and other factors.
It also means, I believe, that the 3PL industry is becoming "barbell-shaped," with small, niche providers growing and thriving at one end; very large, global providers growing and thriving at the other end; and everybody else getting squeezed out in the middle. If you're a 3PL in the middle, the question for you now is, which end of the barbell will you race toward?
The convergence of business models is also accelerating, as these recent announcements demonstrate:
Simply put, the lines between 3PLs, consulting firms, and software vendors continue to blur. The Ryder and C.H. Robinson announcements, for example, underscore a point I made last year in Putting Software Vendors and 3PLs in a Box: That the answers to "What is a third-party logistics provider?" and "What is a transportation management system?" don't fit so neatly in a box any more. The boxes and labels of yesterday are giving way to a single amorphous category: "Providers of Supply Chain Software and Services."
A troubling trend
As all of this convergence accelerates, so does a troubling trend that is negatively affecting 3PL-customer relationships: Procurement organizations are looking to shift more and more risk onto logistics service providers—while also demanding lower costs, of course. To put it bluntly, many shippers still don't get it. There is no incentive for 3PLs to be innovative and creative if your objective is to beat them down on cost, shift all the risk to them, and then put the business out to bid again in one to three years. Procuring logistics services is not the same as buying paper clips, yet that's how many procurement organizations approach it.
This trend is explored in more detail in "Unpacking Risk Shifting: A White Paper Challenging Unreasonable Risk-Shifting in the Transportation and Logistics Industry," published by the University of Tennessee Center for Executive Education. I am a contributing author along with Kate Vitasek, Phil Coughlin, Peter Moore, Karl Manrodt, Emmanuel Cambresy, and Andrew Downard.
In the paper we argue that the 3PL industry is suffering from Gresham's Law, an economic principle that states bad money will drive good money out of circulation. In this context, good logistics service providers are being driven away as global shippers and consignees (GSCs) seek extreme commoditization of transportation and logistics services and also apply bad contracting practices to them.
Phil Coughlin, president of global geographies and operations at the 3PL Expeditors, shares this example, recounted by Kate Vitasek in her blog: a customer who was demanding liability terms that equated to 500 years' worth of Expeditors' revenue for a lost shipment. These types of terms and conditions put 3PLs in a very difficult position. The question for 3PLs, Coughlin said, becomes, "Do I sign the contract and hope like hell a risk does not come to fruition? Or do I walk away from a $20 million account?"
You can find the answer in the failed business relationship between Apple and GT Advanced Technologies (GTAT). Like so many companies, Apple took a "what's in it for me?" approach, where negotiations are viewed as a zero-sum game with a clear winner and loser, and the goal is to always be the winner. Meanwhile, GTAT accepted a bad agreement because it lacked the discipline to say no and walk away from a marquee customer dangling a very large revenue opportunity in front of it (emphasis on revenue, not profitability). GTAT subsequently filed for bankruptcy in late 2014. Although this was not an outsourced logistics example, it does show the costly consequences of taking a one-sided approach to supplier negotiations.
As we state in the white paper, far too many GSCs fail to recognize a fundamental flaw in their procurement practices: A "what's in it for me?" strategy is simply counterproductive. You can't convert a fundamentally weak, under-resourced, under-capitalized, unaware, or irresponsible 3PL into a responsible supplier through price concessions and shifting risk. Moreover, putting pressure on even good and credible 3PLs will simply speed up the "death spiral," running them out of business.
Be bold and different
In light of this growing trend in logistics outsourcing procurement, I have three recommendations for manufacturers and retailers: First, clearly define your desired supply chain and logistics outcomes. Second, when it's time to find the right partner to help you achieve those outcomes, recognize that you have a diversity of options today, beyond the traditional labels of 3PL, software vendor, and consultant. The best partner is the one that can provide the right combination of technology, services, and advice to help you achieve your desired outcomes. And finally, when you sit down with your 3PL partner to negotiate, be bold and different. Instead of viewing your 3PL as a "commodity" supplier and trying to squeeze every penny and shift as much risk as possible onto it, aim for something different: a relationship where the risks and rewards are shared in a fair and balanced manner; a relationship that is built on trust for the long term instead of the next bidding cycle; and a relationship that is guided by a shared vision statement focused on the end customer.
Be bold and different: That is my simple advice for shippers and 3PLs that seek profitable growth in the years ahead. Otherwise, you might find yourself caught in the middle, or in a failed relationship, with nowhere to go.
Copyright ©2023. All Rights ReservedDesign, CMS, Hosting & Web Development :: ePublishing