Author: Sangam VK
Article Type: Critical review of Surveys
Key Words: Logistics; Outsourcing, Global, 3PL, Survey, Supply Chain, Strategic Alliance,
Sangam VK
Lecturer in Logistics and SCM
Massey University
Private Bag 102904,
North Shore Mail Centre,
Auckland, New Zealand.
Telephone: +64 9 4140800 ext. 41105
Facsimile : +64 9 4439640
e-mail: v.k.sangam@massey.ac.nz.
Today’s business success to a great extent depends on logistics and supply chain
performance. The role of Supply Chain has never been as critical as it is today.
Supply Chain speed and flexibility have become two key levers for competitive
differentiation and increased profitability.
Globalisation has opened many lucrative avenues to the business world and also
posed many challenges to be successful in the global trade. One of the biggest
challenges in the Global Trade is the ability to manage seamless forward and
backward flow of material and information. Faced with increasing global competition
in the last two decades, the popular reengineering strategy adopted by many
successful companies to address these challenges involves outsourcing logistics and
supply chain activities/processes to third-party logistics companies (3PL) and focus
on Core Competency. These alliances are also known as Logistics or Supply Chain
Outsourcing and Contract Logistics.
Till 60’ mostly transportation activity was outsourced. In the recent past all Logistics
and supply chain functions are being outsourced world wide. Further, the activity of
managing a 3PL operator and other contractors is also outsourced. As the third party
logistics (3PL) industry has continued to evolve, it has clearly become more global in
nature. Many commercial establishments world wide have turned to logistics
outsourcing as a way to re-engineer their distribution networks in order to meet the
global market demands and also gain competitive edge.
In responding to the needs of the customers who are increasingly global in it sourcing,
manufacturing, sales, and distribution has encouraged large 3PL companies to expand
their global network in order to meet the requirements of their customers. Some of
these 3PL companies have expanded their operations in the emerging markets by
acquisitions and by initiating new start-up operations. Where as they have developed
strategic alliances with the local service providers in other parts of the world. The
task of designing and developing global network and delivering consistent service
levels all over the network is a challenging task taken up by 3PL companies.
Outsourcing has become a successful strategy of getting some of the routine logistics
and supply chain activities executed by a 3rd party all over the world in order to save
costs and to focus on core activities. This review will focus on North America,
Western Europe, Asia Pacific region, China, Australia and New Zealand markets.
This section will provide answers to some of the critical questions in the area of
Logistics and Supply Chain Outsourcing. The focus is on the topics such as 3PL
Usage; Reasons for Outsourcing; Factors influencing the 3PL selection; Activities
Outsourced; Future of Logistics Outsourcing.
The discussion will focus on North America, Western Europe, Asia Pacific, China
Australia and New Zealand.
“North American third-party logistics has been a growth business since its inception
in the late 1980s. The cumulative annual growth rate from 1996 through 2003 was
14%. Armstrong & Associates estimates 3PL revenues for North America to be $104
billion (US). International transportation management which includes freight
forwarding and cross border transportation management accounts for $39 billion.
Value added warehousing/distribution is the second largest category.”4 Where as the
average revenue generated in 2003 by 23 leading 3PL companies in North America
recorded a growth rate of around 9.00% compared to 2002 revenue. The revenue of
these 23 leading 3PL companies alone in 2003 amounted to US $17 billion.5
According to the Capgemini 2004 report6 North America 3PL usage is steady around
79%, where as there is a 5% growth in Logistics expenditure directed to outsourcing.
The below given Exhibit (1) shows the graphic presentation of 3PL usage in North
America from 1996 to 20046.
80
79
78 78
75
73 73
70 71 71 71
68
65
60
1996 1997 1998 1999 2000 2001 2002 2003 2004
3PL Usage in %
Exhibit 1
1. Eighty percent respondents indicated that their logistics and supply chain
activities are outsourced and there was no growth recorded when compared
with last year outsourcing trend reported by the same survey7.
2. The perception of the users in North America about the 3PL companies is
undergoing a change. There is a clear indication that 3PL companies role is
beyond basic transportation and warehousing. 3PL companies are considered
as Supply Chain Integrators and Strategists. According to the Capgemini
report 20046, 81% of the respondents consider 3PL providers as “Total Service
Provider”, 26% feel that 3PL companies act as Supply Chain Integrators and
20% treat 3PL companies as Logistics Strategists (only 13% felt that the 3PL
companies act as strategists during the 2003)8.
4. North American users outsource only around 13% of their value added
services to the 3PL companies. Where as in Europe and Asia 3PL companies
handling value added service is relatively high. 6
7. Forty two percent of users indicated that the value delivered by their providers
has “continued to increase over time”. Forty six percent said that it “stayed
9. The rationale given for not to outsource logistics include factors such as non-
reduction of costs, loss of control, the importance of the logistics function, and
the service levels.6
11. On the costing side, more and more organisations are inclined towards “gain
share”, this is a good sign and this could lead to supply chain partnership and
long term outsourcing.6
13. Fifteen percent cost reduction was achieved in North America, Sixteen percent
Asset reduction was also noticed, average order cycle was reduced to 6.8 days
(44% improvement), seven percent inventory reduction was achieved, Cash to
cash cycle reduced to 19.8 days (11% improvement) and 58% service level
improvement was reported.6
"There will be continued growth in the outsourcing of more complex logistics tasks
such as order handling, logistics management, and the provision of value-added
services," said Tom Mills, Datamonitor logistics analyst.11 One of the reasons for
Western Europe 3PL usage is around 76%, which amounts to 4% negative growth
over 2003 as shown in exhibit 2. However, the Logistics expenditure directed to
outsourcing is expected to grow at the rate of 11.5%.6 Thirty two percent of the 3PL
company’s revenue came from new accounts and the rest from the existing accounts.
This small piece of information reveals the growing trend of Logistics outsourcing in
Western Europe.12 Here is a graphic presentation of Logistics Outsourcing trend in
Western Europe during 2002, 2003 and 2004.6
100
94
80 79 76
Usage %
60
40
20
0
2002 2003 2004
Year
3PL Usage in %
Exhibit 2
4.3.1 Highlights:
1. The 3PL industry is very optimistic about the business growth. It is projected
that the industry will grow next one year at the rate of 10% and in next 3 years
the industry is expected to grow at a rate of 11%. 12
2. The 3PL industry accepts that the year 2003 was challenging. However,
majority of the 3PL companies have expressed satisfaction about meeting the
revenue growth targets. Twenty three percent of the 3PL companies
participated in the survey reported that they have exceeded the growth targets,
fifty four have met their targeted growth rate where as twenty three percent
failed to meet the targeted growth rate. Where as in North America more than
one third of the participants failed meet the targeted revenue growth.12
3. The industry dynamics include, the universal demand for cost reduction
occupies the first place followed by large scale 3PL mergers, increased
pressure to globalisation, 3PL top management participation in decision-
making process and business alliances and broadening service offerings
occupies the last place.12
7. Western Europe non-users feel that Logistics is their core competency and
they also consider Logistics management is very important. Further, they
strongly feel that they will loose control over operations and customer service
related issues. This year findings are no different from last year.6
8. Gain share and risk and reward share deal structure are popular in Western
Europe. 6
9. Western Europe users also expressed satisfaction (81% - 3 year average) over
outsourcing success consistently from 2002 to 2004.6
10. Automotive industry seems to be hot favourite for the 3PL companies in
Europe. This was followed by High Tech/Electronics, Manufacturing, retail,
consumer goods, Chemical, Health Care, Pharmaceuticals, and Wholesale.12
The 3PL Companies operating in Asia Pacific region reported average revenue of US
$ 425 million for the year 2003. This constitutes 16% revenue growth over 2002.
The same report also indicates that the revenue growth would be around 15% every
year for next 3 years.13 Interestingly, Capgemini report also indicated 15.5% growth
in 2004 over 2003. Where as 21% percent growth is projected in Logistics
Expenditure directed to outsourcing for the period 2007 to 2009.6
Exhibit 3
4.4.2 Highlights:
2. Capgemini 20037 report projected that 50% of the logistics expenditure will be
directed to outsourcing and that projection has come true. Where as the
projection for the year 2006 to 2008 was sixty percent and the latest report
(2004) indicates that seventy six percent of the logistics expenditure will be
directed to outsourcing during 2007-2009.6 That is phenomenal growth of
27%.
4. Further, it was revealed that domestic Chinese 3PL companies are preferred
over MNC 3PL companies. Insufficient global capabilities were indicated as
one of the biggest reason for not outsourcing Logistics activities. This was
followed by apprehension about poor customer service levels, loss of control
and Chinese users feel that Logistics Management is their core strength.
Further, the Chinese users also feel that it may not be economically viable to
outsource logistics functions.14
6. Apprehension about loss of control and scepticism of cost reductions are the
main reasons for not outsourcing in Asia Pacific region. This was followed by
reasons such as “Logistics too important to outsource”, “Logistics is our Core
Competency”, “Service levels would not be realized”, and “Customer
complaints would increase”. 6
7. The Massey University study15 reveals that around 26% of the current non-
users have plans to outsource logistics activities in the coming years. The
same report reveals that majority of users feel that their 3PL operator is very
co-operative. Further, the users are very satisfied with main 3PL operator with
a rating of 4 on a scale of 1 to 5 (4 and 5 being Very satisfied).
8. ALPHA Survey – 200316 report indicates that IT remains the key enabler for
achieving benefits in outsourcing.
9. ALPHA Survey - 200316 reveals that Finance and Operations play a key role
in 3PL selection decision making process, followed by Sales, Customer
Service and Purchase.
10. It is quite common for the users to hire multiple 3PL companies for executing
logistics related activities. However, in order to achieve best possible co-
ordination in the areas of supply chain efficiency maximisation, it is always
suggested that one 3PL company should handle all activities. The Massey
study15 reveals that around forty four percent users deploy one 3PL company
and twenty eight percent deploy two 3PL companies and the rest (28%) deploy
3 or more 3PL companies.
Logistics outsourcing, once a mere option, has today become a necessity. The growth
of Information Technology, increasing competition, globalisation, rise of mass
customization, product proliferation, scrambled merchandizing, demanding customer
needs and pressure to reduce costs etc. has forced the organisations to re-focus on
their core competencies and outsource non-core activities.
There are several reasons why outsourcing is becoming a necessity. The prime reason
to outsource is to focus on core strengths and improve product differentiation and
innovation in order to gain sustainable competitive edge in the market place. Many
commercial establishments world wide have turned to logistics outsourcing as a way
to re-engineer their distribution networks in order to meet the global demand and also
gain competitive edge. We have various surveys discussing reasons for not
In China17, reducing logistics cost is the prime reason for outsourcing followed by
Ability to focus on core business, Improve customer service and quality, Simplify
complex operations, Improve Logistics chain flexibility.
Where as the Australian users16 indicate that the Customer satisfaction as reason one
for outsourcing and followed by Flexibility, Productivity Improvement, Cost Savings,
Focus on Core business, Access to up-to-date techniques and expertise and employee
morale is given least preference.
The New Zealand users15 reveals that Focus on Core business as the primary reason
followed by Reduce costs, Reduce Investment in facilities and Inventory, Access to
cutting-edge technology & acquire expertise, seek greater flexibility, respond quickly
and others.
The Capgemini report6 identified factors affecting 3PL user firms and they are,
Significant pressures to reduce costs, Emphasis on improving supply chain, Pressures
to enhance customer service, Globalisation, Rapidly accelerating new product
introductions, Implementation of information technology, Consolidations, mergers,
acquisitions etc., New Markets, Security Issues, Intensifying Government and
regulatory policies etc., All these factors will strongly encourage companies to
outsource logistics activities.
North Western
Attributes All regions
America Europe
Service 3.2 3.5 3.4
Price 3.2 3.5 3.2
Product 3.0 2.9 3.0
Access 2.8 2.6 2.7
Experience 2.8 2.5 2.7
Exhibit 4*
The North America and Western Europe user preferences are the same6. They give
top priority for the Value-added services provided by 3PL companies (service) as
most important selection attribute followed by Fess paid for 3PL services (Price),
Core services (Product), Ease of doing business (Access) and finally Overall feeling
about 3PL (Experience).
* All regions include Latin America also. Measured on a scale of 1 to 5, one being least important and
5 being most important.
Attributes Asia-Pacific
Service 3.5
Product 3.4
Price 2.8
Access 2.7
Experience 2.6
Exhibit 5+
+ Measured on a scale of 1 to 5, one being least important and 5 being most important.
The main difference in the Asia Pacific user’s preferences6 is that they would prefer
Overall feeling about 3PL than the price. The same feelings were reflected in the
surveys conducted in China14, Australia16 and New Zealand15. The selection criteria
are different in three different countries. Logistics Outsourcing is still evolving in
Asia Pacific region. Hence, the focus is more on Overall experience than costs. Each
country reviewed hereunder has different set of selection criteria. In order to present
the uniqueness of each survey, I have presented them as revealed in the survey.
According to China Survey17, the selection criteria attributes are given with
percentage of preference in the exhibit given below:
Attributes %
Industry/operations experience 31
Reputation 18
Network coverage 16
Lower price 16
Own strategic assets 9
Integrated logistics capabilities 4
Good IT system 4
Strategic fit 2
Exhibit 6
The ALPHA Survey16 posed the same question to the 3PL companies as well as the
users. What is presented hereunder is the user response which is critical.
# Measured on a scale of 1 to 5, one being least important and 5 being most important.
The below given selection criteria was ascertained from Massey University study15.
Measured on a scale of 1 to 5, one to three, not important and 4 and 5 being very important
One of the innovative trends used today is the outsourcing of logistics to manage
complex distribution requirements, postponement of manufacturing, cross docking,
Kitting or Assembly, Inventory Financing, Vendor Managed Inventories, Reverse and
Repair Logistics etc. This triggered phenomenal growth in 3PL business world wide.
The author classified outsourcing into three categories. The first level of outsourcing
is transactional outsourcing. This is typically based on transactions and no long term
contracts and no bonding between 3PL and outsourcing company. These types of
outsourcing are driven by pricing. The
second classification is Tactical outsourcing.
This kind of outsourcing is on medium to
long term basis with negotiated contacts in
place and with integrated IT systems, to
facilitate free flow of information and create
supply chain visibility. The pricing will
remain a factor but not prime factor for this
kind of outsourcing. This is considered as a stepping stone for strategic alliances
which is the third category. Strategic outsourcing is also known as Strategic Alliance
Very few 3PL companies are able achieve this status with their customers by
constantly innovating and constantly maintaining operational efficiency and integrity.
Some even follow open book costing method and gain share concepts to demonstrate
the transparency and win confidence of the customers.
The below given table is produced by the author based on Cap Gemini report6, The
2003 China Logistics user Survey14, The ALPHA Survey – 200316, and Massey
University Study 200315, in order to explain different levels of outsourcing and
Logistics activities outsourced to 3PL companies.
Where as The ALPHA Survey – 200316 projected the same information on scale of
one to five, one being “Not at all or low” and 5 being “Very extensive or High”. Here
is the classification of logistics activities outsourced in Australia.
Exhibit 10
3PL service providers are continually looking to provide innovative supply chain
solutions to customers by focusing on value-added capabilities, differentiating
themselves from the competition. They focus on priorities, such as implementing
information technologies, developing customised management processes, integrating
services and technologies globally, and delivering comprehensive solutions that create
value for 3PL users and their supply chains.
In view of the amount of manufacturing that has moved from North America to other
geographies, the Logistics outsourcing particularly in the areas of value added
services in North America is going through a “no” growth period. The same feeling
8.1.1 Highlights:
3. Greater product sourcing from overseas, with a notable increase from China,
will drive logistics suppliers to expand global operations and increase usage of
3PL services including inbound freight management. There will be increase
of 40% in 3PL service used in China by US manufacturers according to NEU
and Accenture report7.
5. Forty seven percent of North American users believe that existing 3PL
companies are best suited to offer 4PL service6.
"There will be continued growth in the outsourcing of more complex logistics tasks
such as order handling, logistics management, and the provision of value-added
services," said Tom Mills, Datamonitor logistics analyst.20
8.2.1 Highlights
3. The three industry dynamics identified in the Western Europe market by the
NEU and Accenture report12 include, continuing downward pressure on
pricing, large scale mergers of 3PL companies and increasing pressure to
internationalise.
4. Lack of variety in the service offerings and lack of strategic management skills
seems to be an issue with Western Europe users6. It is time for these advanced
markets to focus on 4PL companies to support organisational supply chain
strategy. If the 3PL companies remain focussed on transactional management
and ignore strategy development, 4PL Company’s growth is assured and 3PL
companies will loose wonderful opportunity to diversify into new avenues of
revenue generation.
6. Large percentage of Western Europe users (32%) views their 3PL companies
as Logistics Strategists when compared with North America and even the
growing market of Asia Pacific6.
Supply Chains in Asia are fragmented and less competitive when compared with US
and Europe. This does not mean that Supply Chain excellence, a key driver of value
addition and competitive differentiation across industries is ignored in Asia. The
growing trend of manufacturers and retailers to outsource and produce abroad,
particularly in Asia, has led to a situation where trade outstrips capacity, and the
world’s transportation and 3PL infrastructure is struggling to keep its head above
water. As the world focus is shifting to Asia Pacific region and particularly China,
the supply chain and logistics outsourcing market is expected to be US $ 12.08 billion
in next three years according to China’s State Economic and Trade Commission.
International Data Corp (in 2001) predicted the Asia-Pacific logistics outsourcing
market will reach US$29 billion by 2005.
8.3.1 Highlights
1. The Asia Pacific market is expected to grow at a phenomenal rate of 15% per
year over next three years. China will be the focussed market as far as growth
is concerned and India will be second targeted country by the 3PL industry13.
4. Around 21% increase is projected in logistics outsourcing spend for the period
2007-2009. 6
7. The impact of RFID usage in US is also felt in Asia Pacific region. Fifty nine
percent believe RFID is a requirement in future and only nine percent are
currently using. 6
According to this author, most of the 3PL relationships goes through four critical
stages and they are courtship
(happy time); battleship
1. Level Setting;
(struggle); hardship (resistance) Partnership 2. Dependent;
(Mutual benefit)
and relationship (mutual benefit). 3. Period of bonding.
Hence, it is very much necessary to take care of certain issues in outsourcing in order
to enjoy the benefits. Here are some of the challenges in managing logistics
outsourcing relationship.
Absence of Robust Selection Process can derail the objectives of outsourcing. Before
any organisation embark on the selection process, it is very much necessary to adopt a
scientific selection process or appoint a consultant (specialist in this area) to assist in
short listing and recommending the suitable service provider. Further, it is also
necessary to document the expectations in clear terms along with current performance
standards and costing information. This would help the outsourcing organisation to
evaluate the success of outsourcing from time to time. A site visit and one to one
interview with one of the existing customers of the service provider are very much
part of the selection process.
It would be ideal to develop SOP (Standard Operating procedures) for all the
processes to be outsourced. This would eliminate any gap in understanding of
expectation. The standard procedure followed in the selection process include, invite
all eligible 3PL companies for a formal presentation on capabilities without giving
any information about the requirements. This will help the outsourcing organisations
to assess the strengths and weaknesses of each 3PL company and their specialisation.
This would help in eliminating some 3PL companies and the second stage could be a
RFI (Request for Information) or a RFQ (Request for Quotation). The RFQ document
should always accompany with all relevant documents about the project and
expectations with regard to performance standards and statistical data. Once some
Inept Legal Documentation will also add confusion to the relationship and contribute
to the failure. Even though contracts are administered and managed by humans
through structured processes, it is very much necessary to document what is agreed
and what is disagreed clearly in order to avoid ambiguity in the relationship. The
legal document (contract) should address all possible friction points and address them
with remedies. In the absence of clarity, confusion prevails and confusion leads to
inefficiency and inefficiency leads to downfall. Exit strategies such as mediation and
The start-up phase is a strong determinant of how a 3PL relationship will evolve down
the road. Though the 3PL's implementation team is generally responsible for
execution, the customer also plays a critical role in the partnership's initial success.
Lack of Project Implementation strategy will negate advantages of outsourcing.
There must be a detailed project implementation plan also known as road map as well
as periodic reviews also known as mile stones should be in place to make sure
everything is on track. This makes the management of the project easier and guards
against drastic deviation in the scope of the project. Inefficient handling of the project
implementation will lead towards project failure before the take off. The process of
project implementation is a very tricky one. This is the process of translating
thoughts into deeds. This process needs active co-operation and co-ordination of both
the parties. Logistics outsourcing project implementation includes system (IT)
integration, customisation of operating procedures, adapting to the service measures,
understanding the exceptions management process, defining the escalation process
etc. All these activities need precise handling and a dedicated team. Many
outsourcing organisations believe that Contract Logistics Project Management is the
responsibility of the 3PL company. In fact it is a team effort. A project management
team should consist of stake holders from both the organisations. It is an ideal time to
build relationships and establish communication channels to avoid bottlenecks in
future and enable free flow of information. There are several efficient project
implementation methods in use and each 3PL company will have its own
methodology. What is critical is customisation, to suit the specific requirements and
deliver agreed service levels. Twenty nine percent Americans, twenty one percent
Western Europe users and twenty four percent Asia Pacific outsourcing community
believe that the transition during implementation stage was not satisfactory6.
One of the most critical tasks during the start-up phase is developing performance
measurements and reporting methods. The customer must take initiative to design
measurements that support the company's business goals for the outsourcing strategy.
Absence of efficient Performance Measurement system will also directly contribute to
the downfall of outsourcing initiatives. The five studies published by the Council of
Logistics Management on the subject of performance measurement in logistics had
three significant findings in common. 1. Most firms do not comprehensively measure
logistics performance, 2. Even the best performing firms fail to realize their
productivity and service potential available from logistics performance measurement,
and 3. Logistics competency will increasingly be viewed as a competitive
differentiator and a key strategic resource for the firm.
10.0 Conclusion
With this optimistic note I would like to conclude this article. Before I do that, let me
mention the preaching of Mr. Tom Peters, U.S. management guru on outsourcing, ‘Do
what you do best and outsource the rest.’
17
The Third Party Logistics Market in China, By Opportunities and Challenges Mark Kadar, Vice-
President, Diana Huang, Principal, September 30, 2002
18
2004 logistics & distribution industry report, Vol. 3, issue 1.