MHI Solutions Improving Supply Chain Performance
Industry Focus
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The third-party logistics (3PL) industry is a complex and varied one that includes a wide range of operators. 3PLs serve as crucial partners in the supply chain for manufacturers who opt to outsource some, or all, of their logistics operations, such as warehousing, fulfillment and distribution. The role of 3PLs can differ greatly, but the industry as a whole has only grown in importance as the supply chain has grown increasingly intricate, specialized and sophisticated.
“As these global supply chains get more and more complex, customers are turning to us to figure out how to make sense of them,” said Adrian Kumar, global head of operations science and analytics at DHL Supply Chain. The COVID-19 pandemic trained a bright spotlight on the unique demands of today’s supply chain, and 3PL representatives say that it also prompted companies to lean on third-party logistics providers more than ever to help navigate everything from customers’ growing embrace of e-commerce to disruptive shipping delays that challenged even the most prepared and well-resourced supply chain operations.
Here is a look at the 3PL industry today and some of the trends and advancements that are shaping it.
Industry scope
Jason Minghini, group vice president, operations, for Kenco, said the 3PL industry includes a mix of regional, mid-sized and national players.
“The industry went through consolidation about 10 years ago, and a lot of regional players got eaten by mid-sized and larger players,” Minghini said. “It’s changed a lot over the last 10 to 15 years. The number of players has actually gone down because of the market consolidation that has happened, but the number of mid-sized and large players is basically the same.”
Kumar noted, “We’ve certainly seen a lot of private equity moving in and purchasing some of the larger 3PLs, so I think there’s been a lot of investment in the 3PL industry and companies diversifying their portfolios with mergers and acquisitions.”
Bryan Jensen, chairperson and executive vice president for MHI member St. Onge Company, said 3PLs range from full-service providers, offering the entire logistics service capabilities, to focused-service providers, specializing in an area or areas of the supply chain. Brian Fish, senior project manager with St. Onge Company, noted that many large 3PLs have a historic focus on one component of the supply chain that traces to their roots, but they have added more capabilities over the years to help build market share.
Kumar said large shippers might work with numerous 3PL-type suppliers across a wide geography, and those 3PLs could serve a range of purposes related to the supply chain—such as data analysis, global strategy, customer service, inventory management, forecasting, replenishment services or just running a particular warehouse.
Kumar said the 3PL industry is a diverse one.
“There are 3PLs that might just be cold storage companies, and there are other 3PLs that may be focused on returns or focused on micro fulfillment or servicing customers in a small geographic radius, or focusing on a particular type of market vertical,” Kumar said. “There are 3PLs that only take on contracts that are complementary to the rest of their business. So, if their primary business is freight forwarding, then their warehousing services might just be geared to customers that are importing and exporting. There really are a lot of different kinds of 3PLs out there.”
Fish said 30 years ago when he started in the field, 3PLs largely operated in niche areas. However, shippers have increasingly wanted 3PLs that can provide all the logistics services that they need, and more 3PLs have expanded to meet that market demand, leading to many more full-service providers on the market.
“This trend to a single-source provider of all things warehousing and transportation means that [shippers]now have that option,” Fish said.
The pandemic and 3PLs
As supply chain costs and disruptions surged during the pandemic, Minghini said manufacturers showed renewed motivation to seek outside help with the management of their supply chains, typically from 3PLs. That outside, expert guidance allows manufacturers to devote their focus to making and marketing their products rather than how to get them where they need to go. A 3PL can essentially help take the supply chain off a manufacturer’s hands.
“You’re seeing a big shift in terms of [original equipment manufacturers]not wanting to do their own distribution,” Minghini said. “That’s really the trend that we’re seeing in the 3PL supply chain space right now.”
Minghini said two basic reasons stand out for shippers who look to 3PLs for help.
“It really comes down to cost and service,” Minghini said. “I think those have always been there, but the pandemic elevated them to a new level than before.”
Kumar said a major push to e-fulfillment, which accelerated during the pandemic, has put pressure on manufacturers and retailers to strengthen their capabilities in that area. E-fulfillment, he noted, “has a different level of intensity to it—the orders are a lot smaller, and they’re more challenging to pick.”
Jensen agreed the increased interest in 3PLs during the pandemic owed a lot to e-commerce fulfillment and the pressing need many companies faced to build their operations in that area. It was natural that they would turn to outside experts to build their operations quickly and effectively to survive and thrive in the new conditions that they now encountered.
“The third-party market in the U.S. has grown significantly over the last 10 to 15 years, and even more significantly in the last two, especially in warehousing due to COVID, because there was a need for a vertical increase in the amount of distribution capacity available for companies, and building it and managing it themselves was just too arduous for them when there were third parties out there that already knew how to do it,” Jensen said.