Third Party Logistics Update: 2004 Annual U.S. User and Provider Surveys

Transcription

1 Third Party Logistics Update: 2004 Annual U.S. Dr. Robert C. Lieb, Northeastern University Brooks A. Bentz, Accenture November 2004

2 Contents The 12th Annual U.S. Fortune 500 Manufacturer User Survey The 11th Annual U.S. 3PL Provider Survey Concluding Observations and Implications 1

3 Contents The 12th Annual U.S. Fortune 500 Manufacturer User Survey The 11th Annual U.S. 3PL Provider Survey Concluding Observations and Implications 2

4 For the eighth year in a row, more than two-thirds of those surveyed indicated they use 3PL services; the reported usage rate has reached over 80% for the second year in a row. Use of 3PL Services 90% 80% 70% Percent of Manufacturers Reporting Use of 3PL Services 60% 50% 40% 30% 20% 10% 0% '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 3 Survey Year

5 Manufacturers current spending on 3PL services and their three year projections have reached record levels. 50% 40% 3PL Percentage of User Logistics Budget 3 year projections 40% 46% Percentage of Logistics Operations Budget 30% 20% 10% 0% Operating Year 4

6 Freight payment, direct transportation and customs brokerage services are used by more than half of the manufacturers, however the usage rate decreased in most categories since last year. 3PL Services Used Direct transportation service Customs brokerage Freight payment Wareho use management Freight fo rwarding Shipment co nso lidatio n Tracking/tracing Carrier selection Order fulfillment Reverse lo gistics M easurement o f carrier perfo rmance Rate negotiation Product returns Co nsulting Services Re-labeling/repackaging Custo mer spare parts M erge in transit Fleet management/o peratio ns Order pro cessing Purchase of Materials Operation of IT systems A ssembly/installatio n Co ntract manufacturing Product Testing Selection of software % 10% 20% 30% 40% 50% 60% 70% 80% Percent of users citing 5 use

7 3PL services yield varying degrees of cost and service improvements. Users indicated that the following 3PL services generated the greatest cost savings: Warehouse management Rate negotiation Shipment consolidation Freight payment Direct transportation No updates Users indicated that the following 3PL services generated the greatest service benefits: Warehouse management Order fulfillment Freight payment Direct transportation Fleet management/operations 6

8 3PL use has generally resulted in positive cost, service and customer satisfaction impacts, however satisfaction is lower this year than in % 3PL Services Impact 2004 and % 60% 70% 70% 55% 40% 20% 0% 2004 Logistics Costs 2003 Logistics Costs 2004 Logistics Service Levels 2003 Logistics Service Levels 2004 Customer Satisfaction 2003 Customer Satisfaction Very Negative Negative No impact Positive Very positive 7

9 Many users are positive towards increasing 3PL use, but the percentage that would increase 3PL use has declined during the past several years, and is on a par with last year s numbers. How respondents would modify their company s use of 3PL services if they were given complete responsibility for the decision, 2004 Substantially increase use 5% Eliminate use 10% Moderately decrease use 10% Moderately increase use 45% Stay the same 30% 8

10 Existing 3PL users offer a wide variety of suggestions to managers in other companies considering the use of 3PL services for the first time. The most frequently offered advice follows: Identify key performance indicators and targets, and incorporate them into the contract Solicit multiple RFPs and check references very closely Develop accurate internal cost estimates before contacting potential service providers Do not give up complete control of your supply chain to your 3PL provider Make sure you understand the technological issues involved in the relationship before signing the contract No updates 9

11 80% of the respondents have international 3PL services requirements, continuing the theme of globalization in recent years. Sales and manufacturing services are the dominant requirements in India and China. 70% Non-US countries where respondents have 3PL services requirements New slide Percentage Responding 60% 50% 40% 30% 20% 10% 3PL Support China India Sales 100% 90% Manufacturing 66% 50% 0% Canada Mexico Latin America Western Europe Eastern Europe Asia (exc China) China India 10

12 Expansion of the EU will lead to opportunities as users grow manufacturing and sales infrastructure and rely on their 3PL providers to support their efforts. 29% of users anticipate significant growth within the new EU countries 55% of whom will establish new manufacturing operations 55% of whom indicate a significant restructuring of their companies logistics operations 100% indicated that 3PLs would be important in supporting their logistics strategies including: Distribution Services Warehousing Direct Transportation Customs Brokerage 85% intend to use their existing 3PL providers for this support New slide 11

13 Service considerations rank highest amongst the criteria for renewing 3PL contracts with the decision generally being made by committee. New slide User perception of the most important criteria used to renew 3PL contracts Decision Forum Factor Number of users ranking #1 Number of users ranking #2 Number of users ranking #3 Individual 26% Service Considerations Cost Considerations IT Capabilities Committee 74% Reliability

14 Interest in RFID is growing in the manufacturing community, however none of the respondents gave the indication that they expected RFID services to be provided by a 3PL. Two thirds of those surveyed indicated current or future use of RFID: 33% of respondents are currently committed to using RFID technology : 50% of these are conducting pilot studies: Most require no services from a 3PL beyond the ability to scan incoming/outgoing shipments 33% of users are actively considering the use of RFID in the future New slide 13

15 The 12th Annual U.S. Fortune 500 Manufacturer User Survey The 11th Annual U.S. 3PL Provider Survey Concluding Observations and Implications 14

16 CEOs of 23 of the largest 3PLs operating in the United States participated in the survey. For the first time respondents were asked to break down their responses by region*, where they had a major presence. Year PL Provider Survey Participants APL Logistics Cardinal Logistics Caterpillar Logistics C.H. Robinson Co. DSC Logistics Eagle Global Logistics Exel Logistics GeoLogistics Kuene & Nagel Logistics Inc. Landstar Menlo Logistics *Regions: North America (NA), Asia Pacific (APAC) and Europe (EU) NYK Logistics Panalpina, Inc. Penske Logistics Ryder Schenker Schneider Logistics Sirva Logistics Tibbet and Britten Group, North America TNT Logistics, North America Transplace.com UPS Supply Chain Solutions USF Logistics, Inc. 15

17 Operating revenues in North America continue to grow despite the economic slowdown of the past several years. Average NA 3PL Company Revenue 860 $846 M Operating Revenue ($M) $752 M $823 M '01 '02 '03 Operating year 16

18 Operating revenues in APAC continue to grow despite the economic slowdown of the past several years. Average APAC 3PL Company Revenue New slide Operating Revenue ($M) $425 M $367 M $298 M '01 '02 '03 Operating year 17

19 Except in APAC, most regional CEO respondents indicated that they had not exceeded their growth projections for revenues. Growth Objectives of APAC CEOs 50% exceeded projections for growth 40% met growth projections 10% failed to meet growth projections New slide Growth Objectives of NA CEOs 21% exceeded projections for growth 37% met growth projections 42% failed to meet growth projections Growth Objectives of EU CEOs 17% exceeded projections for growth 58% met growth projections 25% failed to meet growth projections 18

20 This year s NA industry dynamics again highlight pricing pressures, the demand for broader 3PL services and globalization pressures. North American 3PL Industry Dynamics Increasing customer expectations with respect to IT support Movement of foreign 3PL providers into U.S. Increased pressure to internationalize Large-scale 3PL mergers Growing interest in outsourcing broader array of services Continued downward pressure on pricing Total points 19

21 The APAC industry dynamics highlight pricing pressures and the continued growth of the Chinese economy. APAC 3PL Industry Dynamics New slide Increasing customer expectations with respect to IT support Formation of business alliances to broaden service offerings Customer interest in outsourcing a broader array of logistics activities Growing expectations for IT support Continued downward pressure on pricing Continued growth of the Chinese economy Total points 20

22 The EU industry dynamics highlight pricing pressures, consolidation of 3PLs and globalization pressures. EU 3PL Industry Dynamics New slide Formation of business alliances to broaden service offerings Increased CEO/CFO participation in the 3PL decision making process Increased pressure to internationalize Large-scale 3PL mergers Continued downward pressure on pricing Total points 21

23 NA CEOs see the greatest industry opportunities in expansion of integrated supply chain service offerings, further global expansion and further IT supply chain integration. North American 3PL Industry Opportunities Increased customer collaboration Further IT integration Further supply chain integration Expansion of international operations Total points 22

24 Inadequate profitability, staffing issues and the low return on IT investment are the major problems faced by North American 3PLs. North American 3PL Industry Problems Low return on IT investments Finding/keeling talent Continued downward pricing pressure Total points 23

25 NA CEOs project revenue growth for their companies for the next three years, although they are not as optimistic as in prior years. North American CEO Projections of Their Company s Growth Rate 30% 25% Projected growth rate 20% 15% 10% Next year 5% 0% '98 '99 '00 '01 '02 '03 '04 Next three years Survey year 24

26 NA CEOs also project revenue growth for the 3PL industry, but at a lower rate than in previous surveys. North American CEO Projections of Industry Growth Rate 20% 15% Projected growth rate 10% 5% 0% Next year Next three years '98 '99 '00 '01 '02 '03 '04 Survey year 25

27 For the first time we asked CEOs to project company and industry growth rates. Unsurprisingly, given the industry s globalization, their responses are similar to their NA counterparts. APAC and EU CEO Projections of Company and Industry Growth Rate New slide Projection APAC EU 1 year - Company 19% 15% 3 year - Company 17% 19% 1 year - Industry 15% 10% 3 year - Industry 15% 11% 26

28 RFID Technology is taking on a greater significance in terms of the requirements of the CEOs future and current customers. However their estimates of the support required are different from those of the actual customers. 3PL CEOs estimate of the significance of RFID to their customers RFID Significance NA APAC EU Very Significance 15% 13% 7% Significant 70% 63% 86% Insignificant 15% 25% 7% New slide 3PL Support expected by RFID Users: Understanding the technology Ability to implement related systems Warehouse modifications Ability to exchange data Willingness to participate in pilot studies 27

29 Security concerns for EU and APAC CEOs were mostly described as significant except in the EU. 3PL CEOs estimate of the significance of changes to international security regulations New slide Impact of changes to international security regulations APAC EU Very Significance 40% 8% Significant 30% 38% Insignificant 30% 54% Specific regulatory change impacts cited: Increased costs related to automation of and transmission of documents to support security requirements Significant increases in costs related to background checks on employees Higher training costs Infrastructure investments in scanning equipment, material handling equipment, and changes in IT systems Imposition of security surcharges by carriers that reduce company margins Cost increases related to security audits The inability to recover these increased security costs from customers. 28

30 The 12th Annual U.S. Fortune 500 Manufacturer User Survey The 11th Annual U.S. 3PL Provider Survey Concluding Observations and Implications 29

31 Fortune 500 Manufacturers continue to embrace the 3PL services model PL User Survey Observations 80% of Fortune 500 Manufacturers use 3PL services On average users give 40% of their annual logistics operating budgets to 3PLs, and project that to grow to 46% by Both of those numbers are all-time highs in our surveys This is the fourth consecutive year that at least half of the respondents had been using 3PLs for more than five years The reported usage rate decreased in most 3PL service categories during the past year although more categories were cited 80% of the respondents use 3PL services in international markets, and approximately half manufacture and/or sell in China 29% expect to take advantage of the recent expansion of the EU through growth of manufacturing and sales operations 30

32 Fortune 500 Manufacturers continue to embrace the 3PL services model. (continued) PL User Survey Observations (continued) Nearly two-thirds of the companies with international operations use 3PL services in China, up from around one-third last year Most respondents say 3PL use has had a positive impact on logistics cost and service levels. During the past year, the percentage of positive responses decreased in each cost and service level category examined Over half of the users share their primary 3PL provider with their major vendors and customers, and more than two-thirds of them believe this promotes supply chain integration Interest in RFID is growing with over two-thirds of the users showing a current or future interest Service considerations outweigh cost considerations when it comes time to renew 3PL contracts 31

33 Conclusions and implications Assuming a continued, modest, economic recovery, we expect: 1) Fortune 500 Manufacturers will continue to expand their 3PL use 2) This will stimulate 3PL provider revenue growth, with more companies likely to realize revenue growth projections 3) Large providers will continue to expand service offerings and geographical coverage, but at a more modest pace than in the pre-recession period 4) Many of these companies will be pressured to follow large accounts into China, but that will trigger important staffing and capital investment issues. We favor a low-capital cost approach to market entry in China, and heavy reliance upon alliance partners 32

34 Conclusions and implications (continued) Assuming a modest economic recovery, we expect: 5) 3PL providers will continue to stress quality in assessing the desirability of existing customers, and many contracts will not be renewed unless they are renegotiated 6) As those companies re-assess their sales/marketing strategies, they should seriously consider aggressively selling along the supply chains of their high quality customers 7) Developing relationships with the vendors and customers of existing clients would obviously promote further supply chain integration 33

35 Conclusions and implications (continued) Assuming a modest economic recovery, we expect: 8) During the next several years, the consolidation movement will continue, but at a much slower pace. But, we would not be surprised to see a few blockbuster deals occur 9) Industry profitability should improve in this slower growth environment, with greater emphasis being placed upon developing longer-term relationships with customers who buy into the partnership model 10) Large 3PL providers will need to adjust to the newer, slower growth environment, and develop strategies that are appropriate for that environment 34

36 Appendix Prior year conclusions 35

37 Fortune 500 Manufacturers continue to embrace the 3PL services model PL User Survey Observations More than 80% of Fortune 500 Manufacturers use 3PL services On average users give 33% of their annual logistics operating budgets to 3PLs, and project that to grow to 40% by Both of those numbers are all-time highs in our surveys Nearly two-thirds of the users have used 3PL services for more than five years The reported usage rate increased in most 3PL service categories during the past year More than 80% of the respondents use 3PL services in international markets, and approximately half manufacture and/or sell in China 36

38 Fortune 500 Manufacturers continue to embrace the 3PL services model. (continued) PL User Survey Observations (continued) However, only slightly more than one-third of those companies use 3PL services in China Most users say 3PL use has had a positive impact on logistics cost and service levels. During the past year, the percentage of positive responses increased in each cost and service level category examined Approximately half of the users share their primary 3PL provider with their major vendors and customers, and more than two-thirds of them believe this promotes supply chain integration But, only approximately one-third of those users believe their 3PL providers are important in providing IT linkages with their supply chain partners Most users believe the 3PL industry is least moderately profitable 37

39 3PL providers will seek to enhance profitability through increased specialization and emphasis on customer quality. These companies have continued to broaden their service offerings Eight of the 19 companies examined did not meet revenue growth projections last year The pace of merger and acquisition activity involving these companies has declined significantly Increasingly these companies focus their attention on a limited number of industry verticals Customer selectivity is also increasing as the providers also focus on account quality These companies continue to expand their international operations, and more than half provide 3PL services in China These Chinese operations are quite limited in scope, but they are projected to grow PL CEO Survey Observations 38

40 3PL providers will seek to enhance profitability through increased specialization and emphasis on customer quality. (continued) The CEOs identified continued pricing pressures, increased customer interest in outsourcing a broader range of logistics activities, and continued globalization pressure as the major 3PL industry dynamics Expansion of integrated supply chain services, continued globalization, and further IT integration were selected by the CEOs as the most important 3PL industry opportunities Inadequate profitability, staffing problems, and difficulties delivering on promises to customers were identified as the industry s most pressing problems The CEOs continue to project strong revenue growth rates for their companies in the one and three year time frames, but those projections are much lower than last year CEO projections of industry revenue growth are also substantially lower than PL CEO Survey Observations (continued) last year for both time frames 39