In my opinion Logistics industry can be described as wheels of Globalization and key to the market expansion and competitive product availability to the growing global consumers. Dynamic business conditions and confronting economic conditions are driving globalization. Globalization is resulting due to expanding markets, exploding retail market, product proliferation, ever changing needs of customers, economic downturn, cost pressures, technology, cultural integration and government policies around the world. It would be wrong to assume that globalization influences economy and trade only; we are seeing integration in the areas of culture, media, education, research and development, tourism and even climate change. On political front, we see collaboration and collective approach in addressing daunting challenges we face today. Globalization will make our societies more creative and prosperous, but also more vulnerable and in transforms economies more competitive.
Let us review some vital statistics (Source: Armstrong & Associates Inc.). First let us review the region wise Logistics spend vs. 3PL revenue (2012):
Obviously Asia Pacific Region heads the chart in all categories if we exclude remaining other countries which were consolidated under other countries. It would be worth looking into Asia Pacific region by country in order to identify the growth countries. Top five are highlighted here under:
If we look globally, it would be interesting to compare the numbers and easy to identify the globalization impact on different countries:
It would be very interesting to analyse 2013 numbers as the world trade is not promising. World trade is expected to grow by 2.5 percent this year and 4.5 percent in 2014 (source: The World Trade Organisation). More and more companies are developing agile supply chains and compressing product supply lead time and at the same time reduce the cost of production. In order to achieve all these goals, outsourcing supply chains is one of the solutions. According to CAPGEMINI Consulting 2014 report 72% of the shippers are planning to increase use of outsourced logistics services and whereas the 3PL companies believe that 78% increase in business. Let us hope economy responds well in 2014!
Dwindling global economy is a big cause of concern for 3PL industry. I remember a saying, “When the going gets tough, tough get going.” How relevant it is for today’s situation? Well, what I am trying to say is that we need effective human resources to tackle complex issues resulting due to melting global economy. Unfortunately, Supply Chaintalent shortage is almost threatening the existence of Logistics Industry. We did hear about Inventory shortages, it is strange to learn about Supply Chain talent shortage. My objective of this article is to review 3PL business trends, impact of global economy and how Supply Chain Talent shortage will have impact on Industry.
The global markets for 3PL (Third Party Logistics) services registered a growth rate of 6.8% in 2010 compared to 2009, according to Armstrong Associates. Asia Pacific region is only second to Europe in the areas of supply chain outsourcing 3PL revenues. The below pie graph indicates that Asia Pacific region contributes 29% of the global revenue. Asia Pacific registered a growth rate of 15% compared to 2009.
On an average the logistics spend as percentage to sales revenue is estimated to be 12%. Whereas US, Europe and Asia Pacific are at 11%, Latin America stands at 14%. This only indicates that Asia Pacific market is mature in offering 3PL services to their clients while Latin America is still emerging as a 3PL market. The general perception is that only Transportation activities are outsourced. To certain extent that is true. In Asia Pacific Region, 61% of the total logistics spend is directed towards transportation and 42% is incurred on Warehouse and other value added services. The global average stands at 56% on transportation and 39% towards warehousing and other activities.
It would be interesting to note that only 42% of the logistics spend is outsourced globally and in Asia Pacific it stands at 47% which is highest compared to US and Europe. This indicates that Asia Pacific can be considered as matured 3PL market.
Factors Fuelling the Growth:
Pressure on Corporates to cut costs;
Low Cost Country Sourcing;
Off-Shoring and outsourced manufacturing arrangements;
Focus on Core Competencies;
Ability to expand rapidly and establish business in local markets;
Complex global supply chains.
Global Volatile Economic Trend impacting SC Outsourcing:
According to one report global growth is likely to slow down and is expected to be approximately 3% per year on an average. Interestingly this slowdown is attributed to emerging markets slowdown and any recovery in advanced economies will be offset by the emerging markets sluggish growth. The projected negative growth of emerging markets in 2012 could be mainly due to slowing global trade. This is not going to be a good sign for Asia Pacific markets and in particular for 3PL industry. It is anticipated that the emerging economies will grow around 3.3% during 2017-2025 which is greater than 50% reduction compared to 2011 growth recorded by these economies.
What are the activities outsourced today?
According to CAPGEMINI 2012 Survey, the below are the variety of services outsourced to 3PL Service providers globally.
Domestic Transportation 83%; Warehousing 81%; International Transportation 70%; Inventory Management 66%; Order Management and Fulfilment 65%; Customer Service 64%; Transportation Planning and Management 63%; Cross-Docking 62%; Product Labelling, Packaging, Assembly, Kitting 62%; Freight Forwarding 58%; Customs Brokerage 50%; Reverse Logistics (Defective, Repair, Return) 56%; Information Technology (IT) Services 51%; Supply Chain Consultancy Services Provided by 3PLs 51%; LLP (Lead Logistics Provider)/4PL Services 42%; Service Parts Logistics 38%; Freight Bill Auditing and Payment 34%; Sustainability/Green Supply Chain-Related Services 31%; Fleet Management 26%.
What is disheartening to note is that 24% of the respondents to the survey floated by CAPGEMINI indicated that they would be insourcing the logistics activity. Some of the reasons given for insourcing include cost reductions not realized, some believe that logistics is a very important function and their core competency and not willing to outsource. Diminishing service levels also could encourage the outsourcing community to think towards insourcing.
What is bothering Logistics Industry?
Logistics industry includes the Corporations (known as shippers) and also 3PL Service Providers. Generally, we hear about product shortages in the market place due to improper planning, gaps in business process, due to long lead times and raw material shortages. We are experiencing the TALENT shortage recently.
“ARE YOU PREPARED FOR THE SUPPLY CHAIN TALENT CRISIS?” This is not the title for my next blog article, this is the white paper published by Massachusetts Institute of Technology, US. This article identifies the key skills that are missing in Supply Chain talent today.
It is believed that Supply Chain practitioners need a combination of “hard” and “soft” skills to effectively manage in an unpredictable commercial environment. The above article reveals that “Supply chain analytical skills are necessary and important but not sufficient; sufficiency comes with these other skills.” The “other” skills he refers to fall into the “soft” category, which includes thinking creatively and appreciating the big picture. “Not getting bogged down in the numbers,” is how another supply chain leader describes the blend of skills he looks for. Managers must be able to use not only the analytical tools at their disposal, but also the qualitative output, he explains. This is an important observation in a profession that relies heavily on quantitative analysis.
I strongly believe that in today’s challenging supply chain world, the talent should also focus on managing situations and shortages. Inventory Shortages in today’s world is a certainty and every Corporation in the world goes through the phase of material shortages at some point of time. Supply Chain Managers are expected to manage the situations and fulfil empty promise, and that could be reason 64% of the Garner research survey respondents indicated that problem solving skill as the most important. This applies to 3PL as well. The shippers (outsourcing companies) expect the 3PLs to solve their problems and problems are resolved by humans and that talent seems to be in short supply.
CAPGEMINI 2012 survey indicated that organization success largely depends upon, “ability to Execute and Drive Operational Efficiency and Improvements” as the third most important driver for organizational success. This was agreed by both Shippers and 3PL operators equally. Factors that could affect retaining the talented staff include:
Team Environment (Office Politics plays a vital role in people leaving jobs);
Effective talent review process;
Performance linked rewards.
The above survey reveals that the right people and leadership in place is the number one driver of their companies’ success in the next five years. But the supply chain industry is experiencing supply chain talent shortages.
Even though many shippers and 3PLs share the same concern of talent management and retention is their biggest worry, nothing is being done to save the precious asset of the organization. According to Australian Human resources institute only 37% of Organizations have plans to attack the employee retention problems whereas the rest have no plan in place and press panic buttons when key employees gives the notice. Organizations may have to embrace the activities of the talent cycle (source: CAPGEMINI 2012 Survey) have the ability to ensure a continuous supply of experienced, well-rounded logistics talent.
Source: CAPGEMINI 2012 3PL Study.
3PL industry needs talented people to manage today’s crisis world and deliver seamless solutions to the complex supply chain problems. The outsourcing activity will see tremendous growth when out of the box solutions are offered to the Corporations who are looking for help and solutions in managing their supply chains.
Tom Peter once said, “Do what you do best and outsource the rest”. It is a common practice to outsource logistics and supply chain activities. One would be surprised to know that some organizations strongly believe in insourcing logistics activities. The recent study by CAPGEMINI (2010) revealed few interesting facts on insourcing.
On an average of 24% of outsourcing companies indicated that they would be returning to insourcing some of their logistics activities, and 36% of 3PL respondents observe that some of their customers are insourcing certain logistics activities.
“Transportation is most Outsourced”.
The percentages of 3PL users outsourcing individual logistics activities (versus overall outsourcing) tend to be higher in Europe and Asia Pacific than in North America or Latin America.
The gap between expectation and satisfaction with regard to 3PL IT capability is widening (54%).
The outsourcing survey conducted by CILTUK revealed that logistics service providers (3PLs) are seen as:
“A necessary evil“
“They are only in it to make money these days”
“Deliver poorer service for disputed financial advantage”.
Further, the same report revealed that 52% of the respondents indicated that the length of the contract reduced. Outsourcing community is aggressive and they do not mince words in sending out a strong message to 3PLs, “don’t sell me what YOU want, show me what I NEED”. In 2009 UK’s largest retailer, Tesco, has decided to take some of its distribution operations in-house. The move follows a company review of supply chain strategy.
What prompts them to Insource?
The CAPGEMINI 2010 outsourcing review listed 12 different reasons for insourcing. And they include:
Logistics is a core competency at our firm – 19%;
Cost reductions would not be experienced – 15%;
Control over the outsourced function(s) would diminish – 14%;
Logistics too important to consider outsourcing – 13%;
Service level commitments would not be realized – 11%;
We have more logistics expertise than most 3PL providers – 10%
Corporate philosophy excludes the use of outsourced logistics providers – 9%
Too difficult to integrate our IT systems with the 3PL’s systems – 8%
Global capabilities of 3PLs need improvement – 6%
Issues relating to security of shipments – 5%
We previously outsourced logistics, and chose not to continue – 5%
Inability of 3PL providers to form meaningful and trusting relationships – 3%
Now let us review top 5 reasons individually and understand whether they are true or system failure is causing outsourcing to fail.
1.Logistics is a core competency at our firm: What is core competency? Core competencies are the key skills, characteristics and assets that any organisation brings to the marketplace. These competencies, on an organisational level, are a synergistic blending of the core competencies that people in the organisation individually bring to work every day.
If we go by the above definition, Logistics is the core competency of any 3PL company because managing logistics activities is their core business. Interestingly, one of the main objectives of outsourcing is to focus on core competency. Modern globalized companies are described as “intellectual holding companies” because they focus so strongly on their core technologies while they purchase other services from companies that excel at delivering them. Thus, their entire operations function at a high level, yet they do not have to maintain high cost infrastructure. They get world-class capabilities without the risks involved in developing them. With rapid globalization, it would be next to impossible to compete in a global platform without strategic alliances. In my opinion, this reason is a myth.
2. Cost reductions would not be experienced: This could be true to some extent. In my opinion shippers equally share the responsibility for this blame. During the initial phase of data collection, 3PL seek the existing costs, business processes, business volume etc., in order to understand the size of the business and develop a cost sheet. Often it was reported that the shippers are hesitant to provide this information citing confidentiality as a reason. Outsourcing should be considered as a strategic solution and the service provider should be considered as a strategic partner. Unless transparency is established, relationships do not flourish and this is one of the fallout. If the shipper could provide all required information to the 3PL and insist on the 3PL to provide the costing using ABB (activity based budget), this may not happen. If necessary go for an open book method which would establish transparency. Many shippers believe that they have very limited role to play in the outsourcing process. Outsourcing is a marriage; it may not work well for the organization unless both parties involved work for common objective with mutual interest. CAPGEMINI 2010 report reveals that outsourcing companies have reported 15% cost savings, 25% reduction in capital deployment, and 11% reduction in inventory. In my opinion if the outsourcing process is managed well one can avoid this problem.
3. Control over the outsourced function(s) would diminish: In my opinion it is a myth. It is true that the shipper may not have transactional control but the overall control will not diminish. Again the responsibility lies with the shipper. If the shipper is able to develop KPIs for all the outsourced activities and monitor the KPIs regularly, one may not lose control over operations. In my recently published article, I have identified 32 different KPIs for warehousing function only. An effective set of interlocking performance indicators provides operational feedback to the enterprise and helps them in directing the 3PL operator effectively. Instead of describing an operation as appalling, if one can explain that 75% of transactions failed to meet the expectations, it would deliver a better message. Controls will never be outsourced, what are outsourced is transactional operations.
4. Logistics too important to consider outsourcing: There is no doubt Logistics is important function. Seamless flow of material information keeps the business moving forward. However, some of the activities within logistics function are mundane in nature. These activities can be outsourced and allow logistics/supply chain manager to focus on the value addition instead of managing day-to-day routine functions. Hence, it is necessary to develop a strategy on outsourcing and identify non-core activities and also develop a SWOT analysis to understand threats and weaknesses of outsourcing. Routine functions such as transportation and warehousing are non-core functions in my opinion. One can outsource them and save costs. In current economic conditions it would be next to impossible to develop infrastructure globally, it would be advisable to farm partnerships and strategic alliances to save costs and expand globally.
5. Service level commitments would not be realized: It is true to some extent. Again the shippers shares 50% responsibility for this blame. As long as the shipper is able to define the measurable service levels and monitor the same periodically and works with the 3PL proactively, this could be avoided. Operational efficiency should be measured on a daily basis. Some of the Fortune 500 Companies recruit specialists or appoint lead logistics service providers to monitor their operations. Nicholas and Amrik of Monash University indicated that formulating and quantifying the requirements was an obstacle to outsourcing in Australia. If you are not sure what to expect out of outsourcing, you have no right to complain about the service levels. Effective operational control will ensure high level of service levels. CAPGEMINI 2010 review reveals that 29% improvement in average order cycle length, order fill rate improved by 11% and whereas order accuracy improved by 7% through outsourcing.
Other reasons include; organizational logistics expertise. 3PL service providers globally consolidated their positions and are able to provide cutting edge solutions which individual organizations cannot afford. IT integration is very simple now days. Without penetrating firewalls one can exchange information through EDI and integration may not be necessary. 3PL capability improvement is an on-going issue; shippers may have work with the 3PLs to get what they want.
However, in my opinion there are two genuine reasons and they are security risks and relationships failure. I have discussed in length about the supply chain security risks in an outsourced environment earlier. It is a genuine reason and 3PLs are expected improve their performance on this subject. As mentioned earlier outsourcing is like a marriage. As long as it is not a marriage of convenience and both the partners are willing to invest time and effort to make the relationships work, the pact should be successful. The outsourcing goes through three phases before it firms up as a relationship. The initial phase is known as courtship where everyone is happy. The second phase would be hardship where the shipper notices inefficiencies and the 3PL struggles with resources and cost overruns. The third phase is battleship, in this phase both the parties involved are in a mood to terminate the relationship because of mounting issues. If both parties proactively work and sort out issues through well-defined escalation process, the outsourcing moves into a relationship mode.
Many organizations get caught up in the hype of the outsourcing craze and forget that it is a complex business strategy and lack of strategy, lack of top level management commitment and not dedicating best and brightest internal resources could lead to outsourcing disasters. If organizations embark on outsourcing with one dimensional approach of saving costs, it would be a big business risk and will have long lasting implications on the business. Ideally develop an organizational strategy, create an outsourcing frame work, and seek professional help (if necessary) to handle the process and select the right match (3PL) and this should work as mantra for outsourcing success.