CSCMP's Supply Chain Quarterly
Third-Party Logistics
December 16, 2018
Third-Party Logistics

A strong and sustainable recovery

Thanks to post-recession market dynamics, the outlook for the third-party logistics sector is positive for some time to come.

Three years after the recession of 2008-2009, the third-party logistics (3PL) market in North America is showing clear signs of recovery. According to Armstrong & Associates, in 2010 the market's gross revenue exceeded 2008 to reach $127.3 billion, a 19-percent increase over 2009. In 2011 and 2012, the 3PL industry has so far delivered 6-percent annual growth—two to three times overall economic growth, demonstrating the strength of demand and the leverage that the major 3PL service providers hold.

The industry's operating income has recovered even more strongly and in 2010 exceeded 2008 levels. The positive outlooks for both gross revenues and operating income, shown in Figure 1, have been sustained by strong performance in volume and pricing.

Article Figures
[Figure 1] North American 3PL market
[Figure 1] North American 3PL market Enlarge this image

Impact of the recession
The 3PL sector includes outsourced logistics services both basic (warehousing, truck brokerage, intermodal, ocean and airfreight forwarding, and customs clearance) and customized (transportation management, load optimization, fulfillment, light assembly, and returns management).

Growth in the North American 3PL market in the past few years has been driven by supply and demand dynamics that grew out of the recession. These dynamics have transformed the market in ways that will keep paying dividends for third-party logistics service providers in the coming years.

Consider supply dynamics, for example. Significant capacity rationalization has resulted in rising rates. Low demand during the downturn led to a decrease in market capacity for most resources and assets (truck drivers, ocean and air capacity, tractors, trailers, railcars, containers, and warehousing space). Asset owners made a conscious effort to bring capacity back online slowly as they continued to enhance their cost structures, maintain pricing, and adjust to new regulations that constrained their hours of operation. This capacity adjustment led to higher rates, a situation that is expected to continue in the coming years as supply operates closer to demand.

Demand dynamics have changed, too. Shippers have been under pressure to optimize their logistics costs while finding the capacity to serve their customers. As a result, they have been forced to become more innovative and open-minded to implementing new transportation solutions, such as intermodal services, collaborative networks, and continuous moves. These new demands have made providers of 3PL services more essential to running shippers' supply chains.

Given this context, it's not surprising that 3PLs have reinforced their position as shippers' strategic service providers. Shippers have relied on them to find solutions, either by optimizing capacity in a rapidly evolving market, or by designing and offering new supply chain solutions that engage multiple transportation modes or shippers. Third-party providers bring a set of unique capabilities to the table that are not easily replicated by asset owners. These include technology infrastructure encompassing multiple providers; best-in-class track-and-trace and reporting capabilities; supply chain design and management skills; and the flexibility to establish the optimal carrier base to serve a shipper's specific needs.

Challenges to overcome
Despite the positive results and strengthened market position of the past few years, 3PLs must adapt in order to overcome such challenges as:

  • Changing demand patterns that have led to more complex and global supply chains
  • An evolving customer base, caused by new customers from emerging economies entering the market and traditional customers aggressively seeking ways to reduce costs
  • Difficulty establishing strategic relationships with shippers as some parts of the offering become commoditized and the cost of switching providers is reduced
  • "Green" mandates from shippers reflecting differing regulations around the world

Third-party providers will have to revise their service offerings and business models over time to meet these new market demands. By provoking a shift in the competitive landscape, these new demands can represent opportunities for both newcomers and existing players to gain market share.

In our view, the 3PL market will continue to be strong over the medium to long term. Shippers will continue to actively seek creative ways to optimize supply chains, a service that 3PLs are uniquely suited to provide, especially in markets with tight capacity. As long as 3PL providers can keep pace with customers' demands, the market will remain attractive.

Laurent Guerard is a partner and leader of A.T. Kearney's Transportation, Travel & Infrastructure practice in the Americas. Arsenio Martinez Simon is a principal in A.T. Kearney's Transportation, Travel & Infrastructure practice.

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