Dr.RobertC.Lieb,NortheasternUniversityBrooksA.Bentz,AccentureChicago,September23,2003TheCouncilofLogisticsManagementThirdPartyLogisticsUpdate:AnnualU.S.UserandProviderSurveysThe11thAnnualU.S.Fortune500ManufacturerUserSurveyThe10thAnnualU.S.3PLProviderSurveyConcludingObservationsandImplications1The11thAnnualU.S.Fortune500ManufacturerUserSurveyThe10thAnnualU.S.3PLProviderSurveyConcludingObservationsandImplications2Fortheseventhyearinarow,morethantwo-thirdsofthosesurveyedindicatedtheyuse3PLservices,andthereportedusageratehasreachedarecordhighof81percent.Useof3PLServicesPercentofManufacturersReportingUseof3PLServicesSurveyYear38%81%3Manufacturers’currentspendingon3PLservicesandtheirthree-yearprojectionshavereachedrecordlevels.3PLPercentageofUserLogisticsBudgetPercentageofLogisticsOperationsBudgetOperatingYear3-yearprojections33%40%4Freightpayment,shipmentconsolidation,directtransportation,customsbrokerage,warehousemanagement,freightforwarding,carrierselection,andtracking/tracingservicesareusedbymorethanhalfofthemanufacturers,andtheusagerateincreasedinmostcategoriessincelastyear.3PLServicesUsedPercentofuserscitinguseContractmanufacturingSelectionofsoftwareCustomersparepartsOrderprocessingFleetmanagement/operationsMergeintransitOperationofITsystemsReverselogisticsProductreturnsOrderfulfillmentRe-labeling/repackagingRatenegotiationMeasurementofcarrierperformanceTracking/tracingCarrierselectionFreightforwardingWarehousemanagementCustomsbrokerageDirecttransportationserviceShipmentconsolidationFreightpayment53PLservicesyieldvaryingdegreesofcostandserviceimprovements.Usersindicatedthatthefollowing3PLservicesgeneratedthegreatestcostsavings:WarehousemanagementRatenegotiationShipmentconsolidationFreightpaymentDirecttransportationUsersindicatedthatthefollowing3PLservicesgeneratedthegreatestservicebenefits:WarehousemanagementOrderfulfillmentFreightpaymentDirecttransportationFleetmanagement/operations6PositiveNoimpactNegative77%Verypositive3PLusehasgenerallyresultedinpositivecost,serviceandcustomersatisfactionimpact,andthepercentageofpositiveresponsesincreasedsubstantiallythisyear.85%65%PositiveNoimpactNegativeVerypositivePositiveNoimpactNegativeVerypositive7Manyvendorsandcustomersofthese3PLusersusethesame3PLprovider,andthispromotessupplychainintegration.ButthoseprovidersplayalimitedroleinprovidingeffectiveITlinkagesbetweenthesupplychainpartners.Forty-ninepercentofthe3PLuserssaidthattheirmajorvendorswerealsoservedbythesame3PLproviderFifty-sevenpercentoftheuserssaidthattheirmajorcustomerswerealsoservedbythesame3PLproviderSixty-eightoftheuserssaidthatthiswasveryimportantorimportantinpromotingintegrationoftheircompanies’supplychainsHowever,lessthanone-thirdoftheuserssaidthattheir3PLproviderplayedaveryimportantorimportantroleinestablishingandmaintainingeffectiveITlinkageswiththeirmajorvendorsorcustomersOnly22%oftheusersrankedtheir3PLprovideras“leadingedge”withrespecttoITexpertiseandcapabilities8Theeconomicslowdowncontinuedtoaffectthevolumeofbusinessgivento3PLprovidersbyusers,butuser/providerrelationshipsarestillstrong.Fourteenpercentsaidthattheyhadincreasedthevolumeofbusinessgiventheir3PLprovidersduringtheslowdown,57%saidtheslowdownhadnoeffectonvolume,and29%saidithadledtolowervolumeHowever,only4%believethattheslowdownhashadanegativeeffectontheirrelationshipwiththeirprimary3PLproviderInfact,one-quarteroftherespondentsbelievethatitstrengthenedtherelationship,andsaidthattheyarecommittedtothe3PL“partnerships”regardlessofeconomicconditions9Withrespectto3PLindustryprofitability,alltheusersidentifiedinthesurveybelievetheindustryisatleastinbreakevencondition.Fourpercentcategorizedtheindustryasveryprofitable,80%saiditwasmoderatelyprofitable,and16%labeledtheindustryasbreakevenintermsofprofitabilityOnly16%expressedconcernsaboutthelong-termviabilityofthe3PLbusinessmodel.Thatwasconsiderablylowerthanthe34%ofrespondentstolastyear’’ssurveywhohadsimilarconcerns10Manyusersarepositivetowardsincreasing3PLuse,butthepercentagethatwouldincrease3PLusehasdeclinedduringthepastseveralyears.Howrespondentswouldmodifytheircompany’’suseof3PLservicesiftheyweregivencompleteresponsibilityforthedecision,2003SubstantiallyincreaseuseModeratelyincreaseuseStaythesameModeratelydecreaseuse34%45%6%13%Eliminateuse2%11Eighty-fourpercentofusersbuy3PLservicesinternationally,andmanyarecurrentlymanufacturingand/orsellinginChina.Fiftypercentofthecompaniesthatuse3PLservicescurrentlymanufactureproductsinChina,withnearlytwo-thirdsofthemdoingsoincompany-ownedfacilitiesSeventy-twopercentofthosecompanieshaveincreasedthevolumeofmanufacturingdoneinChinaduringthepastseveralyears,withmorethanone-thirdofthosecompaniesindicatingthatvolumeincreasehasbeensubstantialSeventypercentofthecompaniesthatuse3PLservicescurrentlysellproductsinChina.Fortypercentselltheirproductsdirectly,30%usemiddlemen,and30%reportedusingbothoptionsHowever,only39%ofthecompaniesmanufacturingand/orsellinginChinause3PLproviderstosupporttheirChineseactivities123PLservicescurrentlyusedinChina.Forthisgroupofcompanies,themostfrequentlyused3PLservicesinChinaaredirecttransportationservices(39%reportuse),warehousing(22%),freightforwardingservices(11%),andvendormanagedinventoryhubs(11%)Two-thirdsoftheusersreportthattheyaresatisfiedorverysatisfiedwiththe3PLservicestheycurrentlyuseinChinaOnly19%saidtherewere3PLservicesthattheywouldliketousethatarenotcurrentlyavailableinChinaSimilarly,lessthanoneinfourindicatedtheyhadanysignificantproblemseitherfindingorusing3PLprovidersinChina13Existing3PLusersofferawidevarietyofsuggestionstomanagersinothercompaniesconsideringtheuseof3PLservicesforthefirsttime.Themostfrequentlyofferedadvicefollows:Identifykeyperformanceindicatorsandtargets,andincorporatethemintothecontractSolicitmultipleRFPsandcheckreferencesverycloselyDevelopaccurateinternalcostestimatesbeforecontactingpotentialserviceprovidersDonotgiveupcompletecontrolofyoursupplychaintoyour3PLproviderMakesureyouunderstandthetechnologicalissuesinvolvedintherelationshipbeforesigningthecontract14The11thAnnualU.S.Fortune500ManufacturerUserSurveyConcludingObservationsandImplications15CEOsof20ofthelargest3PLsoperatingintheUnitedStates

participatedinthesurvey.Year20033PLProviderSurveyParticipantsAPLLogisticsCardinalLogisticsCaterpillarLogisticsC.H.RobinsonCo.DSCLogisticsEagleGlobalLogisticsExelLogisticsGeoLogisticsLandstarMenloLogisticsPenskeLogisticsRyderSchneiderLogisticsSirvaLogisticsTibbetandBrittenGroup,NorthAmericaTNTLogistics,NorthAmericaTUPSSupplyChainSolutionsUSFLogistics,Inc.USCODistributionServices.Inc.16Operatingrevenuescontinuetogrowdespitetheeconomicslowdownofthepastseveralyears.Average3PLCompanyRevenue$1.05B$1.18B$545M$610MOperatingRevenue($millions)Operatingyear$1.38B$1.86B17But,forthesecondstraightyear,many3PLprovidersdidnotmeettheirrevenueprojections.Inrespondingtothisyear’ssurvey,onlythreeCEOsreportedthathiscompanyhadexceededitsyearlyrevenuegrowthprojections(onelastyear)Eightcompaniesmettheirrevenuegrowthprojections(sameaslastyear)Eightcompaniesfailedtomeettheirrevenuegrowthprojections(ninelastyear)Inour2001CEOsurvey,ninecompaniesreportedexceedingtheirrevenuegrowthprojections,tenmettheirprojections,andonlyonefailedtomeettheirprojections18Existingclientsstillaccountforthemajorityofrevenuegrowth.Percentageofrevenuegrowthcomingfromexistingclients58%55%58%68%OperatingYearSourcesofRevenue53%59%19Thepaceofmergerandacquisitionactivitydeclinedsubstantiallyduringtheyear.OnlythreeCEOsindicatedthattheircompaniesmadesignificantacquisitionslastyear(eleveninthe2002survey)Onaverage,overthenextthreeyears,theCEOsonlyexpect15%oftheirrevenuegrowthtobegeneratedbyacquisitionsSixCEOsexpecttogeneratenogrowththroughacquisitionsduringthatperiodSevenoftheCEOsconsidertheircompaniestobeacquisitiontargetsM/Ain3PLIndustry20Most3PLprovidersspecializeinalimitednumberofindustryverticals.Thirteenofthe19CEOswhoansweredthisquestionsaidtheircompaniesdidsoMosttypicallytargetedseveralverticalsTheindustriesmostfrequentlytargetedwere:retailing(8mentions),automotive(7),andelectronics,hightechnology,consumergoodsmanufacturingandhealthcarewithsixeachTheindustryverticalsmostaffectedbytherecessionwerehightechnology,telecommunication,automotive,electronicsandretailingTheindustryverticalsleastaffectedbytherecessionwerehealthcare,automotive,consumergoodsmanufacturing,andfood/tobacco213PLsarebecomingincreasinglycustomerselective.Fifteenofthe19CEOswhoansweredthequestionindicatedthattheircompanieshadfocusedincreasingattentiononthequalityofexistingaccountsEightofthose15saidthatattentionhadintensifiedduringtherecessionThatqualityofaccountfocushasaffectedtheirsales/marketingandcontractrenewalprocesses.Someprovidershaveplacedmoreemphasisontargetedindustries,renegotiatedcontracts,upgradedthequalityofserviceofferedtotheir“improved””customerbase,anddroppedsomeunprofitableaccounts22Theglobalizationofthe3PLindustrycontinues.AllbutthreeofthecompaniesincludedinthesurveygeneraterevenuesoutsidetheU.S.Onaverage,thoseoperatingoutsideoftheU.S.generateslightlylessthanone-thirdoftheirrevenuesinforeignmarketTheCEOsforecastthatpercentagetoriseoverthenextthreeyearsTheCEOsweresplitintermsofthesignificanceoftheexpansionofEUmembership—sevensaiditwassignificantorverysignificanttotheircompanies,andeightsaiditwasnotsignificant23Providerofferingof3PLservicesinChinaElevenoftheproviderscurrentlyoffer3PLservicesinChinaTheoperationsarelimitedinscope,averaging2%oftheproviders’revenuebaseTheCEOsprojectthattodoubleby2005;fourcompaniesexpecttogeneratemorethan10%oftheirannualrevenuesinChinaby2005ThemostcommonmarketentrystrategyusedhasbeenformationofoperatingallianceswithChinesepartners,butjointventuresanddirectinvestmentstrategieshavealsobeenusedSomeofthesecompaniesarelikelytoformwholly-ownedsubsidiariesinChinaasownershipregulationschange24MarketdynamicsandbusinessopportunitiesinChina.AccordingtotheCEOs,themostimportantChinesemarketdynamicsarerelaxationofgovernmenttrade/ownershiprestrictions,thecontinuinggrowthoftheChineseeconomy,theexpansionofChinesemanufacturingcapabilities,transportationinfrastructureimprovements,andthecontinuedWesternizationofbusinesspracticesinChinaTheyidentifiedthefollowingbusinessopportunitiesinChina:oceanfreightforwarding,supportforexistingcustomersdoingbusinessinChina,theemergingautomotivesector,supportformultinationalcompaniesenteringChina,andprovisionofdomesticdistributionservices25Thisyear’sindustrydynamicsagainhighlightedpricingpressures,thedemandfor3PLservices,andglobalizationpressures.Totalpoints3PLIndustryDynamicsMovementofforeign3PLprovidersintoU.S.Large-scale3PLmergersGrowinginterestinoutsourcingbroaderarrayofservicesIncreasedpressuretointernationalizeContinueddownwardpressureonpricing26CEOsseethegreatestindustryopportunitiesinexpansionofintegratedsupplychainserviceofferings,furtherglobalexpansion,andfurtherITsupplychainintegration.3PLIndustryOpportunitiesTotalpointsReducedcustomizationFurtherITsupplychainintegrationContinuedglobalizationExpansionofintegratedsupplychainservices27Inadequateprofitability,staffingissues,anddifficultydeliveringonpromisestocustomersarethemajorproblems.3PLIndustryProblemsTotalpointsLongsellingcycleHighcost/lowreturnontechnologyinvestmentsDeliveringonpromisesFinding/keepingtalentInadequateprofitability28CEOsprojectstrongrevenuegrowthfortheircompaniesforthenextthreeyears.CEOProjectionofTheirCompany’sGrowthRateNextyearNextthreeyearsSurveyyearProjectedgrowthrate25%23%26%24%25%23%23%26%22%18%16%15%29CEOsalsoprojectrevenuegrowthforthe3PLindustry,butatamuchlowerratethaninprevioussurveys.CEOProjectionofIndustryGrowthRateNextyearNextthreeyearsSurveyyearProjectedgrowthrate19%18%17%16%16%17%15%17%11%12%8%10%30ConcludingObservationsandImplications31Fortune500Manufacturerscontinuetoembracethe3PLservicesmodel.Morethan80%ofFortune500Manufacturersuse3PLservicesOnaverageusersgive33%oftheirannuallogisticsoperatingbudgetsto3PLs,andprojectthattogrowto40%by2005.Bothofthosenumbersareall-timehighsinoursurveysNearlytwo-thirdsoftheusershaveused3PLservicesformorethanfiveyearsThereportedusagerateincreasedinmost3PLservicecategoriesduringthepastyearMorethan80%oftherespondentsuse3PLservicesininternationalmarkets,andapproximatelyhalfmanufactureand/orsellinChina20033PLUserSurveyObservations32Fortune500Manufacturerscontinuetoembracethe3PLservicesmodel.(continued)However,onlyslightlymorethanone-thirdofthosecompaniesuse3PLservicesinChinaMostuserssay3PLusehashadapositiveimpactonlogisticscostandservicelevels.Duringthepastyear,thepercentageofpositiveresponsesincreasedineachcostandservicelevelcategoryexaminedApproximatelyhalfoftheuserssharetheirprimary3PLprovideralsowiththeirmajorvendorsandcustomers,andmorethantwo-thirdsofthembelievethispromotessupplychainintegrationBut,onlyapproximatelyone-thirdofthoseusersbelievetheir3PLprovidersareimportantinprovidingITlinkageswiththeirsupplychainpartnersMostusersbelievethe3PLindustryisleastmoderatelyprofitable20033PLUserSurveyObservations(continued)333PLproviderswillseektoenhanceprofitabilitythroughincreasedspecializationandemphasisoncustomerquality.ThesecompanieshavecontinuedtobroadentheirserviceofferingsEightofthe19companiesexamineddidnotmeetrevenuegrowthprojectionslastyearThepaceofmergerandacquisitionactivityinvolvingthesecompanieshasdeclinedsignificantlyIncreasinglythesecompaniesfocustheirattentiononalimitednumberofindustryverticalsCustomerselectivityisalsoincreasingastheprovidersalsofocusonaccountqualityThesecompaniescontinuetoexpandtheirinternationaloperations,andmorethanhalfprovide3PLservicesinChinaTheseChineseoperationsarequitelimitedinscope,buttheyareprojectedtogrow20023PLCEOSurveyObservations343PLproviderswillseektoenhanceprofitabilitythroughincreasedspecializationandemphasisoncustomerquality.(continued)TheCEOsidentifiedcontinuedpricingpressures,increasedcustomerinterestinoutsourcingabroaderrangeoflogisticsactivities,andcontinuedglobalizationpressureasthemajor3PLindustrydynamicsExpansionofintegratedsupplychainservices,continuedglobalization,andfurtherITintegrationwereselectedbytheCEOsasthemostimportant3PLindustryopportunitiesInadequateprofitability,staffingproblems,anddifficultiesdeliveringonpromisestocustomerswereidentifiedastheindustry’’smostpressingproblemsTheCEOscontinuetoprojectstrongrevenuegrowthratesfortheircompaniesintheoneandthreeyeartimeframes,butthoseprojectionsaremuchlowerthanlastyearCEOprojectionsofindustryrevenuegrowtharealsosubstantiallylowerthanlastyearforbothtimeframes20023PLCEOSurveyObservations(conti