The logistics industry is experiencing growth at exponential rates on a global scale. Projected growth rates are highest in Asia-Pacific at approximately 16 percent, followed by North America with approximately 11 percent and Europe with approximately 8 percent*. The high growth regions in China and India are main contributors to the higher growth rate in APAC. What is driving these growth rates? The growth of 3PL can be attributed to three main factors: Re-Shoring, traceability and omni-channel distribution models.
Re-Shoring is the boomerang effect of the Off-Shoring trend that took place in the past few decades. There are several contributing factors to the Re-Shoring that is taking place. The once very attractive wage rates in the regions that were targeted for outsourcing have begun to rise. While this is advantageous for countries exporting to those regions as the consumer buying power has increased, it is making the cost of outsourcing operations to those regions rise. Coupling this with the perceived – and in some cases real drop in quality of goods produced – makes it attractive to bring these operations back closer to home.
A second factor that makes Re-Shoring an option is the instability and political upheavals that have plagued some of the growth regions targeted for past outsourcing. There have also been some very unfortunate natural disasters that have played major roles in the disruption of global supply networks. These factors have also caused operations executives to investigate moving operations closer to home.
One issue with Re-Shoring, however, is that when Off-Shoring took place, a lot of expertise and infrastructure were lost causing some companies interested in Re-Shoring to no longer have facilities, systems and personnel in place to support the operations. This makes turning to a 3PL an option. These 3PL’s have the facilities, systems and personnel in place to perform the operations. In essence, some organizations are Re-Shoring their operations from Off-Shore regions only to outsource them to local 3PL’s.
With the increased focus on regulatory compliance surrounding food traceability, 3PL providers have the opportunity to step in and provide vital services to retailers with operations handling food items. While most retailers and large food growers/manufacturers have systems and processes in place that enable compliance with new regulations, many small and medium operations do not. Implementing these systems and processes can be expensive and time consuming, requiring internal expertise and infrastructure that may be lacking.
A very viable alternative in these instances is to outsource operations to a 3PL that already has the systems, processes and other expertise and infrastructure in place to manage the operations in conjunction with regulatory compliance. Since food traceability initiatives will continue to be a larger focus moving forward, this provides a high growth avenue for 3PL companies in the retail industry.
The growth of omni-channel distribution in retail is also a contributing growth factor to 3PL providers. There have always been distribution center (DC) operations with expertise and focus on providing fulfillment services to their company’s retail stores in a business to business model. Conversely, there are DC operations that have been experts at providing fulfillment services directly to consumers in a business to consumer model. There have not, however, typically been a lot of fulfillment operations that can operate both distribution models, especially in the same DC.
For those companies that are expanding their business models to include fulfillment to retail stores and directly to consumers there are challenges to overcome. Some will be successful at deploying a dual operating model. In reality, however, some companies do not have the facility and system infrastructure or the personnel expertise to provide this dual fulfillment effectively and within cost parameters. 3PL providers have been engaged in direct to consumer fulfillment for years and can assimilate the needs of these new prospective clients into their operations.
With the continued growth in production across the globe, especially in emerging markets such as China, India and Brazil, the need for logistics providers will grow proportionately. The 3PL’s can provide expertise in fulfillment, global trade regulations and optimizing shipping routes and costs. With the vast majority of logistics providers across the globe reporting that they met or exceeded their revenue projections and with more than 40 percent of total logistics expenditures being spent on outsourcing to 3PL’s the prospects for continued and even record growth seem bright**. With roughly 90 percent of shippers naming agile and flexible as critical success factors, 3PL providers will need to remain innovative and competitive, especially as the increase for omni-channel fulfillment continues to be a focus. Distributors for the retail industry that invest in automated data capture solutions to drive maximum productivity and accuracy will be best positioned to provide cost effective fulfillment services to existing clients and attract new clients.
* 18th Annual Survey of Third-Party Logistics Providers, Penske Logistics. Oct. 2013.
** 16th Annual Third-Party Logistics (3PL) Study, Capgemini Consulting. 2013