third-party fulfillment: trends and outlook rama ramaswami editorial director operations &...
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Third-Party Fulfillment:Trends and Outlook
Rama RamaswamiEditorial Director
Operations & Fulfillment MagazinePrimedia Inc.
April 3, 2004
Bright Future for 3PFs
While most other sectors languish, outsourcing is booming.
Using a 3PF is no longer a luxury; it’s an essential growth strategy for every company.
Defining the Terms
Fulfillment is a horizontal function that cuts across most industries.
Terms and acronyms often used interchangeably: 3PFs, 3PLs, outsourcing service providers, value-added contract services, suppliers, outside contractors
U.S. 3PL Market Stats
FY 2003:
$76.9 billion in gross revenue
$32.9 billion in net revenue
Net revenue up 6.1% from FY 2002
Net income = 3.9% of net revenue
Source: Armstrong & Associates Inc., 2004
Sticker Shock
Direct marketers will shell out $157 billion for order fulfillment in 2004.
E-commerce fulfillment will account for47% of that amount.
Source: The Winterberry Group
Farming It Out
The third-party e-fulfillment market totaled $4 billion in 1999, 56% of the $7 billion 3PF market.
By 2004, the market for e-fulfillment outsourcing will reach $8.8 billion.
Source: The Winterberry Group
Outsourced Services
North America W. EuropeWarehousing 73% 91%Outbound transport 71% 95%Customs brokerage 66% 57%
_________
Customer service 9% 14%4PL services 7% 10%Inventory ownership 6% 0Trade financing 0 5%
Source: Third-Party Logistics Study 2003, Georgia Tech et al.Note: Base = 400 respondents; annual revenue = $100 million to $25 billion
What Small CompaniesPlan to Outsource
<500 employees 500-999 employees
IT 46% 67%
Administration 39% 39%
Finance 23% 24%
Human Resources 18% 22%
Distribution/ Logistics 14% 30%
Source: The Outsourcing Institute, 2004
Most ImportantIndustry Dynamics
Continued downward pressure on pricingBroader array of servicesLarge-scale 3PL mergersMore pressure to go globalForeign 3PLs entering the U.S.New service providersCollaborative arrangementsPerformance mandates from parent company
Source: Northeastern University/Accenture survey of 20 CEOs of 3PLs, 2003
Best Opportunities
Expansion of integrated supply chain services
Continued globalization
Integrated information technology
Reduced customization
Source: Northeastern University/Accenture survey of 20 CEOs of 3PLs, 2003
Problem Areas
Managing the vendor-client relationship
Legal and contractual issues
Service quality
Level of technology
Performance benchmarks
Five-Step Action Plan
1. Collaborate.
3PL user/provider deal structuresCost sharing 47%Risk/reward sharing 38%Revenue sharing 10%Joint ventures 8%
Source: Third-Party Logistics Study 2003, Georgia Tech et al.Note: Base = 400 respondents; annual revenue = $100 million to $25
billion
Five-Step Action Plan
2. Add value.
Consulting/process reengineering Small-package fulfillmentOrder management Pool distribution/cross-dockingReverse logistics Inventory/vendor managementKitting/pick and pack Customs brokerageCall centers WMS, RF, and bar codingLight manufacturing Transportation network planning
Source: Armstrong & Associates Inc., 2004
Five-Step Action Plan
3. Invest in technology.
IT requirements North American 3PL users
Supplier management systems 44%Product vertical electronic markets 37%Supply chain planning systems 36%Transport/logistics electronic markets 35%Web-enabled communications 22%
Source: Third-Party Logistics Study 2003, Georgia Tech et al.Note: Base = 400 respondents; annual revenue = $100 million to $25 billion
Five-Step Action Plan
4. Improve service quality.
Areas for improvement North American 3PL users
Service-level commitments not met 66%Lack of strategic management skills 53%
Cost “creep” and price increases after relationship has begun 51%
Time and effort spent on logistics not reduced 43%
Cost reductions not realized 43%
Source: Third-Party Logistics Study 2003, Georgia Tech et al.Note: Base = 400 respondents; annual revenue = $100 million to $25 billion
Five-Step Action Plan
4. Improve service quality. (continued)
Measures of 3PL success Average improvement/North America
Fixed logistics asset reduction 16%Logistics cost reduction 9%Overall inventory reduction 8%Average order-cycle length change (days) From 9.8 to 7.9Cash-to-cash cycle reduction (days) From 25.6 to 18.3
Source: Third-Party Logistics Study 2003, Georgia Tech et al.Note: Base = 400 respondents; annual revenue = $100 million to $25 billion
Five-Step Action Plan
5. Develop global capabilities.
International operationsEmerging markets: EU, China, Asia-PacificCore competencyNew sources of supplyAdvanced security processesRedesigned logistics and supply chainsOffshore outsourcing?
Q&A
Contact Information
Rama RamaswamiEditorial DirectorOperations & Fulfillment(203) [email protected]