1999 3pl customer pointview

Third Party

Logistics Services:

Views from the

Customers

Results and Findings

of the1999 Fourth

Annual Study

E f f e c t i v e n e s s

D i f f e r e n t i a t i o n

E f f i c i e n c y

As conditions, markets, and capabilities change,

the opportunities, risks, and benefits associated with

outsourcing will change as well….The best third-party

providers understand the strategic importance of

supply chain management, and they are positioning

themselves to provide more and better services that

overcome their clients’ concerns about relinquishing

control of a key (if not core) competency.

Supercharging Supply Chains:

New Ways to Increase Value

Through Global Operational Excellence

Gene R. Tyndall, Chris Gopal, et al

John Wiley & Sons, 1998

Third Party Logistics Services:

Views from the Customers

Results and Findings of the 1999 Fourth Annual Study

T A B L E O F C O N T E N T S

2 Study Objectives and Methodology

4 Summary of Key Findings

6 Logistics Outsourcing Practices in Profile

10 Management and Relationship Issues

14 The Rise of Information Technology

16 Customer Value Outlook

20 In Conclusion

2 University of Tennessee Exel Logistics Ernst & Young

Study Objectives and Methodology

DURING THE SPRING AND SUMMER OF 1999, The University of Tennessee’s Center

for Logistics Research conducted a comprehensive study of the use of third party logistics

(3PL) services in the United States. This is the fourth annual research study to examine

critical trends and issues among customers of logistics service providers (LSPs).

The objectives of this study are as follows:

✗✗ Measure the development and growth of

LSPs across major industry markets

✗✗ Deepen the knowledge of the services

they provide

✗✗ Evaluate the rapid emergence of informa-

tion technology

✗✗ Understand customer buying and man-

agement processes

✗✗ Measure overall satisfaction and dissatis-

faction with LSPs

✗✗ Examine customer priorities relating to

the use of 3PL services

The principal vehicle for gathering logistics

customer perspectives was a survey sent to

the chief logistics executive at prominent

companies in the following industries:

✗✗ Automotive

✗✗ Chemical

✗✗ Computers and Peripherals

✗✗ Consumer Products

✗✗ Medical Supplies and Devices

✗✗ Retail

These industries have been selected because

they view logistics as strategically important

and are making purposeful moves toward

integrated supply chain management. The

total number of surveys sent to companies

in these industries was 1,182. Of the 1,182

surveys sent, a total of 277 usable responses

were received, for an overall response rate

of 24%. Statistical tests to control for non-

response bias were utilized.

The industries selected

for this study view

logistics as strategi-

cally important and

are making purposeful

moves toward

integrated supply

chain management.

1999 Fourth Annual

3PL Services Study

The University of Tennessee,

Exel Logistics, and

Ernst & Young

A Note on Terminology

To distinguish between logistics outsourcing companies and the services they provide, this study adopts the

following convention: The companies are referred to as logistics service providers (LSPs). The services are

referred to as third party logistics (3PL) services.

Third Party Logistics Services: Views from the Customers 3

The respondents representing the 277

companies have the following characteristics:

✗✗ Their companies represent a relatively

broad cross-section of industry. Most

respondents are from the manufacturing

sectors, with 65% indicating they manu-

facture finished product, and 10% indicat-

ing they manufacture components or

ingredients. Also, the respondents included

retailers (13%), wholesalers (4%), raw

materials suppliers (1%), and “other” (7%).

✗✗ Close to one-half (46%) of the responding

companies anticipate 1999 sales revenues

in excess of $1 billion. Another 19% are

in the range of $500 million to $1 billion,

27% are in the $100–$500 million range,

and 8% are less than or equal to $100

million.

✗✗ Principal factors affecting the respondents’

industries include pressure to reduce cost

(79%), emphasis on improved supply

chain management (66%), implementation

of new information technologies (56%),

rapidly-accelerating new product introduc-

tions (51%), significant pressures to

enhance logistics customer service (49%),

and globalization (46%). These findings

are very consistent with those reported

by respondents last year.

✗✗ The respondents attach great importance

to logistics processes and supply chain

issues. For example, 76% indicate agree-

ment with the statement that “logistics

represents a strategic, competitive advan-

tage for our company” (an increase from

the previous year’s study in which 72%

agreed with the statement). Also, 85%

are in agreement that “our customers

are placing greater emphasis on logistics

customer service,” and 62% that “we view

our LSPs as important to the improvement

of shareholder value.”

These characteristics reinforce the relevance

and applicability of the study findings.

This study was funded jointly by a grant from Exel Logistics and Ernst & Young. The structure and

content of the study benefits significantly from suggestions made by executives of these firms and

other professionals who are customers of third party logistics (3PL) services. The editorial content

and key methodological decisions, however, are the responsibility of The University of Tennessee

research team. Plans exist for the study to continue on an annual basis in order to examine further

and document key trends and issues regarding logistics service providers (LSPs) and the marketplace

for third party logistics services (3PL).

T h e A u t h o r s

A few words about

the authors of this

study:

C. John Langley Jr.,

Ph.D. is the John H.

Dove Distinguished

Professor of Logistics

and Transportation,

The University of

Tennessee, Knoxville.

Brian F. Newton is

Director of Strategic

Development for

Exel Logistics

Americas.

Gene R. Tyndall is

a senior partner

and leader in the

Ernst & Young man-

agement consulting

global supply chain

practice.


Summary of Key Findings

OVERALL, THE RESULTS OF THIS STUDY help provide a better understanding

of the marketplace for third party logistics (3PL) services and the ways in which

logistics service providers (LSPs) continue to develop and grow. Considering that

the total annual revenues of these companies are currently in the range of $40-$50

billion, the services offered by LSPs consume a significant portion of overall logistics

and supply chain budgets.

✗✗ Given that the market for 3PL services is

growing rapidly (by 18%-22% annually),

the customer landscape is remarkably

stable:

◆ Nearly 90% of customers remain

satisfied with their LSPs

◆ The split between customers (70%) and

non-customers (30%) of 3PL services

remains relatively constant

◆ More than half of non-customers (60%)

continue to report that they have no

intention of using LSPs in the future

Of the industries studied, greater LSP use seems

to occur in the computer and peripherals,

consumer products, and retail industries. Use

among the chemical, medical, and automotive

verticals is somewhat below the average of

68%-70% for all respondents. As reported in the

1999 study, the most prevalent 3PL services

currently being used are outbound transporta-

tion, warehousing, freight bill auditing/ payment,

inbound transportation, freight consolidation/

distribution, selected manufacturing activities,

and product marking, labeling, and packaging.

Future planning focuses on most of these

services, as well as other activities, such as

product returns and repair, cross-docking,

and information technology.

The following points capture the major

findings of this research study:

✗✗ The market for third party logistics (3PL)

services continues to be in transition. At

one time, LSPs were viewed as vendors

for whom the key issues were cost, control,

and service. Now a partnership environ-

ment is emerging and the emphasis is

shifting to value, innovation, and perform-

ance in an increasingly global context.

Although LSPs have become very adept

at creating value within their areas of

expertise, many continue to struggle

to deliver the comprehensive, integrative

solutions that create real supply chain

savings. Considering that customer

demands for performance and sophistica-

tion are accelerating, improvement in

this area is a key imperative for LSPs.

Also evidencing this appetite for more

strategic relationships is the fact that

18% of the respondents think that having

a consultant manage their LSPs is

“worthy of consideration.”


✗✗ Logistics service providers most frequently

create value through the effectiveness

(68%) and efficiency (80%) of their oper-

ations, and by providing services that

allow their customers to differentiate

(27%) themselves in some way. The

respondents were likely thinking of this

when providing responses elsewhere in

the survey indicating the need for LSP

leadership, value-creation, and innovation.

✗✗ There appears to be a shift from the use

of transportation-based LSPs to those

providers which are oriented more

toward warehousing and distribution.

The 1999 study reveals a 46% increase

from the previous year in the use of ware-

housing/distribution-based providers (51%

vs. 36%), while the use of transportation-

based providers shows a decrease from

40% to 24%. While some of this decrease

may be due to the inclusion in the current

study of a new category of LSP, “supply

chain provider,” the survey data suggests

a more fundamental change may be

occurring.

✗✗ Customers for 3PL services are becoming

more knowledgeable and better pre-

pared to effectively utilize the available

range of services. While logistics/trans-

portation executives at customer compa-

nies are intensively involved in all stages of

the buying and management processes,

the 1999 study documents the increased

role of the information technology execu-

tives in the implementation stage of the

third party relationship. Also, a predomi-

nant tendency is for companies to manage

their third party relationships using their

existing logistics organizations.

✗✗ Although customers for 3PL services proj-

ect significant increases in demand for

information systems for e-Commerce and

supply chain planning, the development

and integration of these systems remain

huge challenges for LSPs and industry as

a whole. According to the study results,

information technology continues to be

regarded as a key to the success of third

party operations, and effective utilization

of technology requires meaningful work-

ing relationships between customers and

LSPs. Customers are relying increasingly

on their LSPs for the provision of informa-

tion-based services.

✗✗ Respondents suggest that the use of LSPs

is generally meeting their operationally-

focused objectives. But room for

improvement still exists for achieving

some of the more strategic objectives.

Included on the “to-do” list are objectives

such as facilitating e-Commerce offerings,

improving information technology, facili-

tating the move from “push” to “pull”

logistics, and hastening or improving

the implementation of change. Areas in

which improvement was noted since the

1998 study include the provision of more

specialized logistics expertise, more focus

on core competencies, and integration of

supply chains.

✗✗ As reported last year, the use of an LSP

is not inconsistent with the belief that

logistics and supply chain management

represent key areas of competency and

strategic advantage. While many compa-

nies elect to leverage certain areas of

core competency using internal resources,

the decision to use external suppliers for

certain logistics and supply chain services

is often made to achieve even greater

competitiveness in the marketplace.

✗✗ Future company priorities focus on

increasing the value derived from using

LSPs. They include increased emphasis

on the availability and utilization of infor-

mation systems for logistics and supply

chain processes, increased use of value

creation as a criterion for selecting LSPs,

and more strategic and meaningful use

of 3PL services.

LSPs are developing

innovative services

that are pushing the

bounds of conven-

tional practices, forg-

ing close, mutually

productive alliances

with their customer

partners. Despite these

advances, the profes-

sion still has much

progress to make.

C. John Langley Jr.,

Brian F. Newton,

and Gene R. Tyndall

Supply Chain

Management Review

Fall 1999


Logistics Outsourcing Practices in Profile

OVERALL TRENDS

Of the 277 responding executives,186 (68%) indicate that their companies currently use or

are considering the use of third party logistics (3PL) services. This observation is consistent

with the 71% from the 1998 study, 73% from the 1997 study, and 72% from the 1996

study. The remaining 88 (32%) indicate that they are not using or planning to use 3PL

services. Exhibit 1 provides a summary of the use of logistics service providers (LSPs) by

industry. It shows that the most prominent use of 3PL services is in the computer and

peripherals (82.2%) and consumer products (75.9%) industries, followed by retail (71.1%),

chemical (61.4%), medical supplies and devices (56.2%), and automotive (53.8%).

The four years of results on this question sug-

gest that the percentage of companies using

3PL services across all industries is relatively

consistent from year to year. What does fluc-

tuate somewhat, however, is the actual per-

centage of surveyed companies using 3PL

services within each industry vertical.

Although the question was not included in the

1999 survey, results concerning the longevity

of use of 3PL services from the previous three

years are still of interest. When asked how

long they had been using 3PL services,

approximately 60% of the 1996, 1997, and

1998 respondents indicate three years or

more. Correspondingly, approximately 30%

indicate between one and three years of use,

while 10% indicate one year or less.

yrtsu

dnIybesU)sPSL(sredivorPecivreSscitsigoL—1tibihxE

0

20

40

60

53.8%

80

100

Auto

61.4%

Chem

ical

82.2%

Compu

ter

75.9%

Cons

umer

56.2%

Medica

l

71.1%

Retai

l

Percent

Using or

Considering

LSPs


Logistics Activities

Outsourced

Exhibit 2 summarizes the current and projected

utilization of specific logistics services for the

186 respondents who identified themselves as

customers of 3PL services.

Among the activities outsourced most frequently

to LSPs are outbound transportation (62.9%),

warehousing (also 62.9%), freight bill auditing

and payment (53.2%), inbound transportation

(48.9%), freight consolidation/distribution

(38.2%), selected manufacturing activities

(31.7%), and product marking, labeling, and

packaging (30.6%).

These observations are generally consistent

with those of the 1998 study. Of particular

note, however, is the modest increase in per-

cent of companies using warehousing services

(55.3% in 1998 to 62.9% in 1999). Also, the

percent of companies using LSPs for cross-

docking surprisingly declined from a reported

30.9% in 1998 to 23.1% in 1999. This reduces

support for one of the 1998 observations

that the incidence of use of cross-docking

services is increasing significantly. However,

even though the percent reported in 1999 is

smaller than 1998, it still is greater than the

figures reported in 1997 and 1996 (18.8%

and 21.7% respectively).

By contrast, the activities outsourced to LSPs

least frequently are order entry/order process-

ing (3.8%), customer service (6.5%), inventory

management (9.1%), order fulfillment (9.7%),

product assembly/installation (11.8%), and

information technology (12.9%). Looking at

these activities as a group, they appear to

share some common characteristics. Most of

them are strategically and customer focused,

and most involve significant degrees of infor-

mation technology enablement.

Based on future outsourcing plans, the activi-

ties for which companies plan to increase

outsourcing most are freight consolidation/

distribution (19.9%), freight bill auditing/pay-

ment (17.7%), warehousing (16.1%), inbound

transportation (15.6%), traffic management/

fleet operations (15.6%), product returns

and repair (13.4%), cross-docking (12.4%),

Outsourced Services Current Future

Outbound Transportation 62.9% 11.8%

Warehousing 62.9% 16.1%

Freight Bill Auditing/Payment 53.2% 17.7%

Inbound Transportation 48.9% 15.6%

Freight Consolidation/Distribution 38.2% 19.9%

Selected Manufacturing Activities 31.7% 8.6%

Product Marking/Labeling/Packaging 30.6% 10.2%

Cross-Docking 23.1% 12.4%

Traffic Management/Fleet Operations 22.6% 15.6%

Product Returns and Repair 19.4% 13.4%

Information Technology 12.9% 10.8%

Product Assembly/Installation 11.8% 4.3%

Order Fulfillment 9.7% 6.5%

Inventory Management 9.1% 5.4%

Customer Service 6.5% 8.1%

Order Entry/Order Processing 3.8% 6.5%

Exhibit 2 – Outsourced Services: Current vs. Future


and information technology (10.8%). The

presence of cross-docking and information

technology lends support to the notion that

priorities for future outsourcing are related to

current perceptions of the direction in which

supply chain changes are moving.

Respondents were asked about the extent to

which outsourced services are currently “tied

together” or “integrated by your supplier(s)

of third party logistics services.” Exhibit 3

shows their responses in percentages. Sixty-six

(66%) of the customer companies indicate

“significant” or “somewhat,” as opposed to

“very little.” It is notable that this percentage

and the results from the 1998 study (69%) are

up dramatically from the 59% reported in

1997 and the 60% reported in 1996. Still,

more than 30% of the respondents answered

that outsourced logistics activities do not

seem to be integrated or tied together.

Considering that the integration of multiple

logistics services is a common objective for

many companies which utilize the services of

LSPs, this finding continues to be somewhat

disappointing. Of the six industries surveyed,

respondents from the computer and peripherals

industry are the only ones with a higher than

average percent of respondents (76.2%) indi-

cating that the services received from LSPs are

integrated or tied together. By contrast, only

53.8% of the automotive industry respondents

indicate their 3PL services are integrated or

tied together.

)sPS

L(

sredivorPecivreSscitsigoLybnoitargetnIecivreSfotnetxE—3tibihxE

0

10

20

30

40

50

60

70

80

60%

1996

40%

59%

1997

41%

69%

1998

31%

66%

1999

34%

Very Little

Significant

Percent of

Respondents

desU

)sPSL(

sredivorPecivreSscitsigoLfosepyT—4tibihxE

0

10

20

30

51%

40

50

Wareho

using

/Dist

ributi

on

9%

Supp

ly Ch

ain Pr

ovide

r

2%

Shipp

er/Man

agem

ent

7%

Forw

arder/

Broker

7%

Expr

ess L

ogist

ics

19%

Truck

load

5%

Less

-Than

Truc

kload

Percent of

Respondents


A concluding issue on service offerings

regards how customers feel that suppliers

should position themselves strategically in

relation to the depth vs. breadth of 3PL

services. Overall, and consistent with earlier

study findings, this year’s respondents indicate

significant agreement with the statement that

“third party suppliers should provide a broad,

comprehensive set of service offerings” and

disagreement with the statement that “third

party suppliers should focus on a limited

range of service offerings.” Thus, the general

preference is for LSPs to broaden their prod-

uct lines, rather than to limit the range of

choices available to customers.

Outsourcing by Type

of Service Provider

As indicated in Exhibit 4, the 1999 study

results suggest that the most prevalent type

of LSPs used are warehouse/distribution-

based (51%). This represents a significant

increase over the 36% reported in the

1998 study. Other interesting comparisons

between the 1998 and 1999 studies

include a decreased utilization of truckload-

transportation based LSPs (from 23% to

19%), and also a decreased use of less-than-

truckload based LSPs (from 17% to 5%).

While some of this latter decrease might be

due to the addition of “supply chain provider”

as an LSP type in the 1999 study, the survey

suggests somewhat of a decline in the use of

transportation-based LSPs.

VIEWS OF NON-CUSTOMERS

To be thorough, the survey asked companies which are not LSP

customers for the reasons they do not use or consider using 3PL

services. Exhibit 5 profiles their responses. While the primary rea-

son for non-use is “concerned about control,” it is interesting to

note that many satisfied customers indicate that their use of a

third party has actually helped them gain control over some

aspects of their logistics operations.

Other non-customers feel that costs would not be reduced, that

logistics is a core competency, that they had more expertise,

that service level commitments would not be met, or that logistics

is too important to outsource. Looking at the responses from

customers of LSPs, however, there are numerous instances where

the decision to utilize their services is being made for many of

these same reasons. In other words, the same reasons that non-

customers report for not using LSPs are often used by others as

justification for using them.

Of those companies which currently do not choose to use 3PL

services, approximately 69% indicate having no future plans to do

so. By contrast, 22% suggest that they are studying the possibility,

and 9% indicate having made a decision to move in this direction.

Exhibit 5–Non-Customers: Rationale for Not Using Third Party Logistics (3PL) Services

0

10

20

30

51

40

50

60

Conc

erned

abou

t Con

trol

49

Costs

Wou

ld Not

be Re

duce

d

43

Logis

tics i

s a

Core

Compe

tency

39

We Hav

e More

Expe

rtise

38

Servi

ce Co

mmitmen

ts

Wou

ld Not

be M

et

38

Logis

tics t

oo Im

porta

nt

to O

utsou

rce

Number of

Respondents


Management and Relationship Issues

MANAGING RELATIONSHIPS WITH LSPs

Exhibits 6 and 7 provide a perspective on the wide range of executives involved with logistics

service provider (LSP) issues. Exhibit 6 shows the extent to which senior management recog-

nizes a need for third party logistics (3PL) services. Although the logistics/transportation

executive is clearly the most frequently aware of need, 1999 study results indicate substantial

awareness of a need by the president or CEO and finance executives as well. In addition,

executives in the manufacturing, human resources, marketing, and information systems

areas are also aware of a need for 3PL services, but to a lesser degree. These findings are

consistent with the results of the 1998 study.

?dee

Nehtsezi

ngoceRohW:gnicruostuOnitnemevlovnI—6tibihxE

0

20

40

60

90

80

100

120

140

Pres

ident/

CEO

65

Finan

ce

122

Logis

tics/T

rans.

41

Manufa

cturin

g

21

3442

Human

Reso

urce

s

Inform

ation

Syste

ms

Marketi

ng

Number of

Respondents

Exhibit 7 helps to document the active

involvement of key executives in implementing

relationships with LSPs. As might be expected,

senior logistics/transportation executives tend

to become very involved in the implementa-

tion process, while the president or CEO and

finance executives tend to be less involved.

One of the most significant findings from

both the 1998 and 1999 studies, however, is

the increasing role that information systems

executives seem to play with regard to imple-

mentation of a 3PL service relationship. This

finding should not be surprising, considering

the key role of information technology in

many of today’s logistics processes. (This

important topic is discussed in greater depth

in the section, “The Rise of Information

Technology.”) Responses to questions

regarding who selects the supplier and who


“champions” logistics outsourcing suggest

that logistics/transportation executives are

those who are most involved.

Exhibit 8 (see page 12) offers some insight

into the organizational responsibility for man-

aging the provision of 3PL services. The find-

ings, which continue to be of interest, are

from the 1998 study. (The question was not

asked of respondents in 1999.) Although the

question allowed for multiple responses, the

largest portion of customers indicate that

responsibility for managing LSP relationships is

internal to their existing logistics organization.

Of particular note is that approximately half

this number look to the providers themselves

to manage and control their activities. Less

popular alternatives include having a separate

department or division manage these services,

or looking to an external party—consultant or

“comprehensive provider of services”—to help

manage the provided services.

?noit

atne

melpmIrofelbisnopseRs'ohW:gnicruostuOnitnemevlovnI

—7tibihxE

0

20

40

60

15

80

100

120

140

Pres

ident/

CEO

49

Finan

ce

139

Logis

tics/T

rans.

37

Manufa

cturin

g

14 13

60

Human

Reso

urce

s

Inform

ation

Syste

ms

Marketi

ng

Number of

Respondents

If you’re a buyer of logistics services, you’re…looking

for transparency, for flexibility in your contract, and

for quality performance and bottom-line impact.

Peter Bendor-Samuel

Outsourcing Journal

April 1999


seciv

re

S)LP3(scitsigoLytraPdrihTseganaMohW—8tibihxE

0

20

40

60

8680

100

Logis

tics O

rganiz

ation

10

Sepa

rate D

epart

ment

43

Prov

iders

Them

selve

s

6

Exter

nal P

arty

Number of

Respondents

A series of questions on the role of manage-

ment consultants offers some interesting

perspectives on how consultants may be able

to help companies who are using or consider-

ing using LSPs. Overall, 46% of the customers

believe that a valuable role could be played

by consultants as companies document and

assess the need for 3PL services. Approximately

40% believe that the consultant could provide

significant value as a “trouble-shooter” during

the selection and implementation stages of an

LSP relationship, and to help manage the LSP

selection process. Finally, about 30% indicate

a significant interest in having a management

consultant provide a comprehensive range of

services for managing relationships with LSPs.

The response to this last question suggests the

existence of an increasing market opportunity

for management consultants.

Logistics Service Provider

Buying Process1

Among customers of 3PL services, previous

studies show that 90% have a preference for

utilizing a bid process, in contrast to negotiating

with individual suppliers on a sole-source

basis. Almost 70% prefer a formal, written

contract, with respondents about evenly split

between preferring a “fixed term” versus an

“evergreen” or “rolling” contract. Overall,

respondents indicate a preference for limiting

the scope of involvement at first, followed by

more intense utilization of the LSP based on

growing experience and satisfaction.

Flat-rate pricing (53.%) and transaction-based

fees (64.%) are the most common forms of

compensating LSPs. While cost-plus (22%)

and percentage-of-savings (17%) are used

to a lesser extent, the percentage-of-savings

approach indicates the most growth, increasing

from 12% in the 1996 survey.

1 The content of this section is based on information from the 1997 3PL services survey. In 1998 and 1999, it was

decided, for reasons of length and content, to temporarily exclude a few questions. Although the discussion is

based on results from the earlier survey, the findings still have relevance to those interested in the 3PL services

buying process.

Source: 1998 Third Party Logistics Services Survey

data, University of Tennessee, Exel Logistics, and

Ernst & Young.


Respondents were asked about specific issues

which are addressed in their contract or

agreement for 3PL services. Among those

addressed most frequently are the following:

✗✗ Service standards and performance meas-

urement

✗✗ Process for termination or dissolution of

agreement

✗✗ Key performance indicators

Among those addressed least frequently are

the following:

✗✗ Potential collaboration with other third

party service providers

✗✗ Gain-sharing/performance incentives

✗✗ Specific goals related to continuous

improvement

✗✗ Procedures for conflict resolution

a wide range of executives

has become involved in the

decision to use third-party

logistics [and this] growing

interest...directly relates to

the expanding scope of supply

chain solutions now being

offered by some service

providers.

C. John Langley Jr., Brian F. Newton,

and Gene R. Tyndall

Supply Chain Management Review

Fall 1999


The Rise of Information Technology

THE 1999 SURVEY SIGNIFICANTLY ENHANCES the inquiry into third party logistics

(3PL) services in relation to information systems. Exhibit 9 shows the results of the data

provided by the 186 respondents who use 3PL services. More than half (101) of these

respondents report the provision of some form of e-Commerce services, followed closely by

systems for warehouse/distribution center management (94) and transportation management

(76). Looking at future plans, it is apparent that responding companies expect significant

increases in the use of logistics service providers (LSPs) in these three areas. While respon-

dents report somewhat less use of information technology (IT) for other purposes (i.e., sup-

ply chain planning, supplier management systems, customer systems, and export/import),

it is clear that the provision of systems for these purposes also is expected to increase.

)sPS

L(

srediv

orPecivreSscitsigoLybdeilppuSsmetsySnoitamrofnI

—9tibihxE

0

10

20

30

40

50

60

70

e-Com

merce

Supp

ly Ch

ain Pl

annin

g

Trans

porta

tion M

anag

emen

t

Wareho

use/D

C Man

agem

ent

Supp

lier M

anag

emen

t Syst

ems

Custo

mer Sy

stems

Expo

rt/Im

port

Percent of

Respondents

Future

Current

69.9%

15.6%

53.2%

65.1%

25.2%

40.9%

17.2%

Exhibit 10 provides further detail about use

of LSPs for e-Commerce services. Currently,

these services consist largely of EDI and ship-

ment tracking and tracing. The 1999 survey

data indicates significant projected use of

LSPs for other purposes, such as Internet

ordering, customer linkages, supplier linkages,

and linkages with supply chain partners.

For those respondents indicating the use of

LSPs for “improved information technology,”

the study solicited information as to what

specific areas of need are most critical. The

results suggest that information systems are

needed to help customers succeed in a highly-

competitive, information-intensive business

environment. The need for competency in areas

such as real-time delivery flows, Internet capa-

bilities, and real-time supply chain information

and visibility reinforce this observation.


sme

tsySnoit

amrofnIecremmoC-eerutuF/tnerruCtakooLresolCA

—01tibihxE

0

10

20

30

40

50

60

70

Intern

et Ord

ering ED

I

Shipm

ent T

rackin

g/Trac

ing

Custo

mer Lin

kage

s

Supp

lier L

inkag

es

Other S

upply

Chain

Partn

ers

Percent of

Respondents

Future

Current

36.0%

68.3%69.9%

31.2%

28.0%

23.1%

If it is looked at positively, planned for carefully, and during

implementation, is monitored and supervised effectively,

outsourcing can be a tremendous help in managing

information technology.

Professor Robert Klepper

Southern Illinois University

Respondents were also asked about areas in

which they had experienced any problems

with LSPs. Forty percent (40%) indicate that

there had been a problem due to a lack of

information technology advances. Explaining

their concerns more fully, customers report

that the LSP was responsible in about 46%

of these instances, that it was resolved in a

timely manner only about 15% of the time,

and that improvements were made in only

38% of the cases. The clear conclusion is

that the area of IT services offers significant

opportunities for improvement.

In particular, the study indicates that the areas

most in need of improvement are:

✗✗ Real-time delivery information flows

✗✗ Systems integration

✗✗ EDI

✗✗ Internet capabilities (e-Commerce)

✗✗ Cost effectiveness

✗✗ Real-time supply chain information/

visibility


Customer Value Outlook

CUSTOMER SATISFACTION INDICATORS

Exhibit 11 indicates that over the four years during which this study has been conducted,

respondents have been relatively satisfied with their use of logistics service providers (LSPs).

The 1999 finding that 88% finds their use to be either extremely or somewhat successful is

consistent with levels from earlier years. On a sector by sector basis, the highest levels of

customer satisfaction are reported by customers in the chemical (95%), medical (92%), and

consumer products (89%) industries.

Exhibit 12 provides further detail as to the rela-

tive importance of cost, value creation, and

performance as determining factors for evalu-

ating and selecting LSPs. While cost and per-

formance appear to be the most important

factors for evaluation and selection, the data

suggests that, in the future, company selection

processes will increasingly emphasize value

creation. This increasing emphasis on value

creation suggests that customers of third party

logistics (3PL) services are moving beyond

criteria that offer easy measurability and are

increasingly interested in assessing the overall

value derived from their logistics outsourcing.

)sno

sirapmoCylraeY(gnicruostuOfonoitaulavEre

motsuC—11tibihxE

50

60

70

80

90%90

100

1996

83%

1997

86%

1998

88%

1999

Percent

Satisfied

)sPS

L(sr

edivorPecivreSscitsigoLgnitceleSdnagnitaulavErof

srotcaF—2

1tibih x E

Selec

ting

Evalu

ating

Futur

e Sele

cting

Value Creation

Performance

Cost

38%

22%

40%

34%

22%

44% 45%

36%

19%

Percent of

Respondents

0

10

20

30

40

50


Exhibits 13 and 14 provide information con-

cerning the extent to which customer business

objectives are being met through involvement

of an LSP. The survey question was structured

so that respondents first identified what busi-

ness objectives they are seeking to meet by

using an LSP and then whether those objec-

tives are being met. The results, presented

in Exhibit 13, show that several objectives

are in fact being met by nearly 100% of the

respondents. Those objectives include asset

reduction; strategic/operational flexibility;

reduction in employee base; insulation from

restrictive labor environment; and expansion

of geographic coverage (domestic U.S. and/

or global). Notably, 92.9% of respondents

who identify supply chain integration as a

desired objective saw that objective met.

Coupled with the reported fulfillment of

strategic/operational flexibility objectives,

this supports the contention that the use of

LSPs is contributing to the achievement of

the high-level, strategic goals.

By contrast, Exhibit 14 identifies several areas

where business objectives are not being met

as frequently. Included here are objectives

such as facilitating the move to an e-Commerce

offering, improved information technology,

facilitating the move from “push” to “pull”

logistics, and faster/better implementation

of change. These represent key areas where

LSPs need to focus their attention.

On the positive side, comparison of 1999 and

1998 survey results suggests that the use of

LSPs has led to improvement in at least three

key areas: focusing on core competencies,

supply chain integration, and more specialized

logistics expertise. Inclusion of this last factor

is a positive finding for LSPs. A negative finding

would have suggested that LSPs are failing to

be the source of specialized knowledge and

expertise which they promote themselves to be.

Exhibit 13– Are You Getting What You Are Paying For? (Answer = Yes)

Business Percent Objective Experiencing

Improvement

Asset Reduction 99.0%

Strategic/Operational Flexibility 99.0%

Reduction in Employee Base 99.0%

Insulation from Restrictive Labor Environment 99.0%

Expand Geographic Coverage 99.0%

Specialized Services 94.1%

Supply Chain Integration 92.9%

Reduced Cycle Time 90.8%

Improved Logistics Service 90.2%

Operational Cost Reduction 90.2%

Exhibit 14– Are You Getting What You Paid For? (Answer = Not as Much)

Business Percent Objective Experiencing

Improvement

Facilitate Move to e-Commerce Offering 43.8%

Improved Information Technology 56.7%

Facilitate Move from “Push” to “Pull” Logistics 70.8%

Faster/Better Implementation of Change 72.7%

The logistics out-

sourcing marketplace

is now exploding

because [it enables

companies to] take

advantage of increased

economies of scale and

more sophisticated

process expertise,

which enables them to

release scarce capital

for more productive

uses elsewhere.

Editors

Outsourcing Journal

April 1999


Respondents to the 1999 study report experi-

encing a number of problems. Categorically,

their responses tend to focus on several key

areas of concern:

✗✗ Service level commitments are not being

realized

✗✗ Unsatisfactory transition is experienced

during implementation

✗✗ Information technology advances are not

occurring

✗✗ Time/effort spent on logistics is not

decreasing

✗✗ Performance measurements by LSP are

not being made

✗✗ Control over outsourced functions is

diminishing

When asked about the responsiveness of the

LSPs to problems they are involved in, respon-

dents provide a somewhat checkered report

card. For example, for the problems where the

LSP is responsible, only 32% of the respondents

indicate that they were resolved in a timely

manner. Mitigating this negative finding to

some degree is that improvement is reported to

have occurred (at least eventually) in approxi-

mately 65% percent of the cases. At the same

time, this leaves 35% of the problems without

an acceptable level of improvement.

On a more positive note, respondents were

asked about the types of improvements which

are being experienced as a result of using an

LSP. The following averages are calculated

based on individual responses:

✗✗ Logistics costs reduced by 11.8%

✗✗ Logistics assets reduced by 24.6%

✗✗ Order cycle length reduced from 7.1 to

3.9 days

✗✗ Overall inventories reduced by 8.2%

Finally, customers were asked what types of

value creation using an LSP had helped provide.

Overall, 80% indicate using an LSP contributed

to efficiency, 68% to effectiveness, and 27%

to differentiation or uniqueness. When asked

how the use of an LSP results in differentiation,

respondents offer the following major

differentiators:

✗✗ Flexibility/special services

✗✗ Unique delivery capability

✗✗ Improved customer service

✗✗ Improved reaction time to opportunities

✗✗ Use of the latest technology by LSPs

✗✗ LSPs take responsibility for supply chain

management

)sPSL(sredivorPecivreSscitsigoLweiVstnednopseR

woH—51tibihxE

0

10

20

30

40

50

60

70

80

Orches

trator

Supp

ly Ch

ain St

rateg

ist

Distrib

ution

Strat

egist

Prob

lem So

lver

Reso

urce

Man

ager

Reso

urce

Prov

ider

Percent of

Respondents

23.7%

90

15.6% 12.9%

82.3%

35.5%37.6%


Logistics’ Strategic Value

and the Role of LSPs

Of the 186 companies using 3PL services,

approximately 76% indicate that logistics rep-

resents a “strategic, competitive advantage”

for their company, and 62% that their LSPs

are viewed as “important in the improvement

of shareholder value.” As suggested in all of

the earlier studies, these figures imply that the

use of 3PL services is not necessarily inconsis-

tent with logistics being an area of strategic

importance to the company. Thus, it is appar-

ent that there are a significant number of

companies which view logistics as a core

competency and a source of competitive

advantage, but have also elected to outsource

certain portions of the logistics process.

The 1999 survey also includes a question

regarding how the respondents think of

LSPs. As shown in Exhibit 15, most customers

(82.3%) think of their LSP as a “resource

provider,” while 35.5% indicate they also

view the provider as a “resource manager”

or as a “problem solver” (37.6%.) While some

third party relationships may be considerably

deeper and more strategically focused than

these characterizations would suggest, it

appears that opportunities exist for LSPs to

be regarded more in the roles of “distribution

strategist,” “supply chain strategist,” or

“orchestrator.”

COMPANY VIEWS ON THE ROLE, VALUE,

AND FUTURE OF 3PL SERVICES

Respondents were asked to agree or disagree with a series of

key statements about the role, value, and future of 3PL services.

Their responses show that companies using 3PL services are in

general agreement that:

◆ Customers are placing more emphasis on logistics

customer service

◆ LSPs should provide a broad range of service offerings

◆ Logistics represents a strategic, competitive advantage

for their company

At the same time, respondents feel somewhat certain that:

◆ They are willing to participate in “cost-sharing” with

LSPs as part of a commitment to “gain-sharing”

◆ They can measure the value of LSP involvement in

financial terms

◆ LSPs are important to the creation of shareholder value

◆ LSPs will be able to keep pace with the challenges of

global supply chain integration

Alternatively, there is an element of uncertainty expressed

by customers as to whether:

◆ LSPs offer new and innovative ways to improve logistics

effectiveness

◆ They rely on LSPs for leadership in information technology

◆ They are moving to rationalize or reduce the number of

LSPs they use


In Conclusion

TRENDS WHICH THE STUDY IDENTIFIES in the marketplace for 3PL services are con-

sistent with larger trends in the business environment. The growth of e-Commerce, which is

particularly dramatic at a business-to-business level, is reflected in growing company interest

As the business world

embraces the new millennium,

the third-party logistics

profession is changing

significantly and is moving

in new directions. These

dynamics are most evident

in certain key areas: business

growth and evolving

core competencies, global

strategic and operational

alliances, and the integra-

tion/leveraging of informa-

tion technologies.

C. John Langley Jr., Brian F. Newton,

and Gene R. Tyndall

Supply Chain Management Review

Fall 1999

in using 3PL services for e-Commerce-

related purposes. The widespread prevalence

of new forms of collaboration among busi-

nesses and their suppliers is reflected in the

growing desire of many companies for closer

and more comprehensive involvement with

their LSPs. The growing focus by companies

on generating shareholder value is reflected

in their increased interest in using 3PL

services for value creation. Overall, the

1999 study suggests that LSPs are in the

mainstream and, in some cases, at the

forefront of the rapid changes that mark

the new economy.

The Study Sponsors

THE UNIVERSITY OF TENNESSEE

The internationally recognized logistics program at The University of Tennessee, Knoxville, is

one of the most comprehensive and contemporary programs in the nation. The university is a

major research entity. The faculty publishes widely on current topics of industry concern and

explores future trends through research and studies. It has been ranked as the top school in

the country for educating logistics/distribution managers and its Logistics and Transportation

Program ranked as the best program of its kind in the United States. The University of Tennessee

Department of Marketing, Logistics, and Transportation can be found on the Web at

www.bus.utk.edu/public/mlt/mlt.nsf

EXEL LOGISTICS

Exel Logistics is one of the world's leading providers of logistics services with over 700

strategic operating locations in the Americas, Asia Pacific, and Europe. Exel Logistics partners

with world-class customers, helping them lower operating costs, improve asset utilization, and

create competitive advantages by improving supply chain efficiency and developing more

effective routes to market. A pioneer in industry-focused logistics, Exel Logistics is dedicated

to the automotive, chemical, healthcare, grocery manufacturing, electronics, and retail sectors

worldwide. The company offers a wide range of services, including integrated warehousing

and distribution, freight management, JIT distribution, and home delivery. Exel Logistics is a divi-

sion of NFC plc, one of the largest logistics companies in the world. NFC is publicly traded on

The London Stock Exchange and The American Stock Exchange. Exel Logistics Americas is head-

quartered in Columbus, Ohio, and has operations in the United States, Canada, Mexico, and in

Brazil. In addition to its logistics business, Exel Logistics Americas offers home delivery of furni-

ture, appliances, and electronics in North America for retailers and manufacturers. Exel Logistics

Americas has over 8,100 associates based in more than 330 operating sites. Exel Logistics can be

found on the Web at www.exel.com

ERNST & YOUNG

Ernst & Young is a global leader in providing companies with management consulting and

professional services. The firm employs more than 30,000 people in 87 cities throughout the

United States. Ernst & Young supply chain specialists have the functional skills and specialized

industry experience to provide business solutions tailored to client needs. Our integrated supply

chain services take companies from strategy development through implementation to results

and help managers create supply chain operational excellence for the maximization of shareholder

value. Ernst & Young LLP is the U.S. member of Ernst & Young International, an organization

whose member firms include more than 85,000 people in 132 countries around the globe.

Ernst & Young can be found on the Web at www.ey.com/consulting/sc/default.asp

For additional copies of this publication or for more

information about the study, please contact:

Brian F. Newton

Director of Strategic Development

Exel Logistics Americas

501 West Schrock Road

Westerville, Ohio 43081

614-890-1730

[email protected]

©1999 University of Tennessee. Any reference to, quotation from, or other uses of this document must

provide credit to the University of Tennessee, Exel Logistics, and Ernst & Young.

C. John Langley, Jr., Ph.D.

Dove Distinguished Professor of

Logistics and Transportation

The University of Tennessee

314 Stokely Management Center

Knoxville, TN 37996-0530

423-974-1646

[email protected]

Glenn A. Dalhart

Partner, Leader of North American

Supply Chain Practice

Ernst & Young

Sears Tower

233 South Wacker Drive

Chicago, IL 60606-6301

312-879-5305

[email protected]