As 3PLs expand their value proposition through mergers and more comprehensive offerings, many shippers still continue to treat them as commodities, sabotaging both parties' chances for success.
Adrian Gonzalez is the president of Adelante SCM, a peer-to-peer learning, networking, and research community for supply chain and logistics professionals.
Last year, I wrote in this space about the convergence taking place in the third-party logistics (3PL) industry—that is, the convergence of fragmented logistics services with integrated logistics solutions, as well as the convergence of business models, specifically the business models of service providers, technology companies, and consulting firms.
We are halfway through 2015 and it's clear that this convergence is not only still happening, it's accelerating.
These deals suggest that there is plenty of interest in executing more such big-ticket transactions in the weeks and months ahead.
What does this series of deals mean? For one thing, it means that investors are bullish on the 3PL industry's future growth opportunities—driven by e-commerce, global trade, companies in underserved industries (such as oil and gas) looking to move up the supply chain maturity curve, and other factors.
It also means, I believe, that the 3PL industry is becoming "barbell-shaped," with small, niche providers growing and thriving at one end; very large, global providers growing and thriving at the other end; and everybody else getting squeezed out in the middle. If you're a 3PL in the middle, the question for you now is, which end of the barbell will you race toward?
The convergence of business models is also accelerating, as these recent announcements demonstrate:
Ryder Introduces TranSync™, a Patent Pending, Automated Technology Tool Used to Provide Dynamic Transportation Planning
C.H. Robinson Introduces Freightview, a TMS for Small and Midsized Businesses
enVista Launches New Business Entity, Enspire Commerce, Offering Enterprise Commerce Management (ECM) software platform
Simply put, the lines between 3PLs, consulting firms, and software vendors continue to blur. The Ryder and C.H. Robinson announcements, for example, underscore a point I made last year in Putting Software Vendors and 3PLs in a Box: That the answers to "What is a third-party logistics provider?" and "What is a transportation management system?" don't fit so neatly in a box any more. The boxes and labels of yesterday are giving way to a single amorphous category: "Providers of Supply Chain Software and Services."
A troubling trend
As all of this convergence accelerates, so does a troubling trend that is negatively affecting 3PL-customer relationships: Procurement organizations are looking to shift more and more risk onto logistics service providers—while also demanding lower costs, of course. To put it bluntly, many shippers still don't get it. There is no incentive for 3PLs to be innovative and creative if your objective is to beat them down on cost, shift all the risk to them, and then put the business out to bid again in one to three years. Procuring logistics services is not the same as buying paper clips, yet that's how many procurement organizations approach it.
In the paper we argue that the 3PL industry is suffering from Gresham's Law, an economic principle that states bad money will drive good money out of circulation. In this context, good logistics service providers are being driven away as global shippers and consignees (GSCs) seek extreme commoditization of transportation and logistics services and also apply bad contracting practices to them.
Phil Coughlin, president of global geographies and operations at the 3PL Expeditors, shares this example, recounted by Kate Vitasek in her blog: a customer who was demanding liability terms that equated to 500 years' worth of Expeditors' revenue for a lost shipment. These types of terms and conditions put 3PLs in a very difficult position. The question for 3PLs, Coughlin said, becomes, "Do I sign the contract and hope like hell a risk does not come to fruition? Or do I walk away from a $20 million account?"
You can find the answer in the failed business relationship between Apple and GT Advanced Technologies (GTAT). Like so many companies, Apple took a "what's in it for me?" approach, where negotiations are viewed as a zero-sum game with a clear winner and loser, and the goal is to always be the winner. Meanwhile, GTAT accepted a bad agreement because it lacked the discipline to say no and walk away from a marquee customer dangling a very large revenue opportunity in front of it (emphasis on revenue, not profitability). GTAT subsequently filed for bankruptcy in late 2014. Although this was not an outsourced logistics example, it does show the costly consequences of taking a one-sided approach to supplier negotiations.
As we state in the white paper, far too many GSCs fail to recognize a fundamental flaw in their procurement practices: A "what's in it for me?" strategy is simply counterproductive. You can't convert a fundamentally weak, under-resourced, under-capitalized, unaware, or irresponsible 3PL into a responsible supplier through price concessions and shifting risk. Moreover, putting pressure on even good and credible 3PLs will simply speed up the "death spiral," running them out of business.
Be bold and different
In light of this growing trend in logistics outsourcing procurement, I have three recommendations for manufacturers and retailers: First, clearly define your desired supply chain and logistics outcomes. Second, when it's time to find the right partner to help you achieve those outcomes, recognize that you have a diversity of options today, beyond the traditional labels of 3PL, software vendor, and consultant. The best partner is the one that can provide the right combination of technology, services, and advice to help you achieve your desired outcomes. And finally, when you sit down with your 3PL partner to negotiate, be bold and different. Instead of viewing your 3PL as a "commodity" supplier and trying to squeeze every penny and shift as much risk as possible onto it, aim for something different: a relationship where the risks and rewards are shared in a fair and balanced manner; a relationship that is built on trust for the long term instead of the next bidding cycle; and a relationship that is guided by a shared vision statement focused on the end customer.
Be bold and different: That is my simple advice for shippers and 3PLs that seek profitable growth in the years ahead. Otherwise, you might find yourself caught in the middle, or in a failed relationship, with nowhere to go.
“ExxonMobil is uniquely placed to understand the biggest opportunities in improving energy supply chains, from more accurate sales and operations planning, increased agility in field operations, effective management of enormous transportation networks and adapting quickly to complex regulatory environments,” John Sicard, Kinaxis CEO, said in a release.
Specifically, Kinaxis and ExxonMobil said they will focus on a supply and demand planning solution for the complicated fuel commodities market which has no industry-wide standard and which relies heavily on spreadsheets and other manual methods. The solution will enable integrated refinery-to-customer planning with timely data for the most accurate supply/demand planning, balancing and signaling.
The benefits of that approach could include automated data visibility, improved inventory management and terminal replenishment, and enhanced supply scenario planning that are expected to enable arbitrage opportunities and decrease supply costs.
And in the chemicals and lubricants space, the companies are developing an advanced planning solution that provides manufacturing and logistics constraints management coupled with scenario modeling and evaluation.
“Last year, we brought together all ExxonMobil supply chain activities and expertise into one centralized organization, creating one of the largest supply chain operations in the world, and through this identified critical solution gaps to enable our businesses to capture additional value,” said Staale Gjervik, supply chain president, ExxonMobil Global Services Company. “Collaborating with Kinaxis, a leading supply chain technology provider, is instrumental in providing solutions for a large and complex business like ours.”
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
The North American robotics market saw a decline in both units ordered (down 7.9% to 15,705 units) and revenue (down 6.8% to $982.83 million) during the first half of 2024 compared to the same period in 2023, as North American manufacturers faced ongoing economic headwinds, according to a report from the Association for Advancing Automation (A3).
“Rising inflation and borrowing costs have dampened spending on robotics, with many companies opting to delay major investments,” said Jeff Burnstein, president, A3. “Despite these challenges, the push for operational efficiency and workforce augmentation continues to drive demand for robotics in industries such as food and consumer goods and life sciences, among others. As companies navigate labor shortages and increased production costs, the role of automation is becoming ever more critical in maintaining global competitiveness.”
The downward trend was led by weakness in automotive manufacturing, which traditionally leads the charge in buying robots. In the first half of 2024, automotive OEMs ordered 4,159 units (up 14.4%) but generated revenue of $259.96 million (down 12.0%). The Automotive Components sector was even worse, orders 3,574 units (down 38.8%) for $191.93 million in revenue (down 27.3%). Declines also happened in the Semiconductor & Electronics/Photonics sector and the Plastics & Rubber sector.
On the positive side, Food & Consumer Goods companies ordered 1,173 units (up 85.6%) for $62.84 million in revenue (up 56.2%). This growth reflects the increasing reliance on robotics for efficiency in food processing and packaging as companies seek to address labor shortages and rising costs, A3 said. And the Life Sciences industry ordered 1,007 units (up 47.9%) for revenue of $47.29 million (up 86.7%) as it continued its reliance on robotics for efficiency and precision.
The warm waters of the Gulf of Mexico are brewing up another massive storm this week that is on track to smash into the western coast of Florida by Wednesday morning, bringing a consecutive round of storm surge and damaging winds to the storm-weary state.
Before reaching the U.S., Hurricane Milton will rake the northern coast of Mexico’s Yucatan Peninsula with dangerous weather. But hurricane watches are already in effect for parts of Florida, which could see heavy rainfall, flash and urban flooding, and moderate to major river floods, according to forecasts from the National Oceanic and Atmospheric Administration (NOAA).
As it revs its massive engines with fuel from the historically warm Gulf of Mexico, Hurricane Milton could possibly hit Tampa as a Category 5 storm, according to the FEWSION Project at Northern Arizona University, which tracks supply chains throughout the country.
With that much power, Milton could shut down the port and seriously disrupt the fuel supply into western and central Florida, which could then hinder recovery efforts. That’s because fuel supplies for much of Florida, especially central Florida, arrive from Texas and Louisiana through the Port of Tampa. That means that anyone who depends on generators or fuel for critical functions should plan for an extended period without access to fuel. And recovery crews and logisticians should consider bringing their own fuel when responding to the storm, FEWSION said.
One of those disaster recovery efforts will be led by nonprofit group the American Logistics Aid Network (ALAN), which is already mobilizing its forces for Hurricane Milton, even as it devotes other energy to the Hurricane Helene response. “In an ideal world we’d have plenty of time to focus all of our efforts on Hurricane Helene clean-up and recovery,” Kathy Fulton, ALAN’s Executive Director, said in a release. “But in the real world, major hurricanes don’t always wait for their turn. As a result, we are officially activating for Hurricane Milton.”
In the meantime, many weary residents of the region are thinking of moving to another part of the country instead of getting hit by vicious storms several times a year. Nearly one-third (32%) of U.S. residents aged 18-34 say they’re reconsidering where they want to move in the future after seeing or hearing about the damage caused by Hurricane Helene, according to a survey commissioned by real estate brokerage Redfin.
“Scores of Americans flocked to the Sun Belt during the pandemic because remote work allowed them to take advantage of the region’s relatively low cost of living. Some thought Appalachia was insulated from hurricane risk, not realizing that the area is prone to flooding and that hurricanes can sometimes cause flash flooding far away from the ocean,” Redfin Chief Economist Daryl Fairweather said in a release. “Americans are beginning to realize that nowhere is truly immune to the impacts of climate change, and we’re starting to see that impact where people want to live—even people who haven’t experienced a catastrophic weather event firsthand.”
The report is based on a commissioned survey conducted by Ipsos on Oct. 2-3, fielded to 1,005 U.S. adults. After making landfall in Florida in late September, Hurricane Helene wreaked havoc across Appalachia, becoming the deadliest storm to hit mainland America in almost two decades. In North Carolina, the death toll has surpassed 100 and the city of Asheville has been devastated.
Shippers and carriers at ports along the East and Gulf coasts today are working through a backlog of stranded containers stuck on ships at sea, now that dockworkers and port operators have agreed to a tentative deal that ends the dockworkers strike.
In the meantime, U.S. importers and exporters face a mountain of shipping boxes that are now several days behind schedule. By the latest estimate from Everstream Analytics, the number of cargo boxes on ships floating outside affected ports has slightly decreased by 20,000 twenty foot equivalent units (TEUs), dropping to 386,000 from its highpoint of 406,000 yesterday.
To chip away at the problem, some facilities like the Port of Charleston have announced extended daily gate hours to give shippers and carriers more time each day to shuffle through the backlog. And Georgia Ports Authority likewise announced plans to stay open on Saturday and Sunday, saying, “We will be offering weekend gates to help restore your supply chain fluidity.”
But they face a lot of work; the number of container ships waiting outside of U.S. Gulf and East Coast ports on Friday morning had decreased overnight to 54, down from a Thursday peak of 59. Overall, with each day of strike roughly needing about one week to clear the backlog, the 3-day all-out strike will likely take minimum three weeks to return to normal operations at U.S. ports, Everstream said.