Third-party logistics companies expect to see more revenue growth in 2017, but that positive outlook is tempered by concerns about new competitors, technology, and the Trump administration's policies.
Dr. Robert C. Lieb is Professor of Supply Chain Management at Northeastern University and author of a long-running study of the third-party logistics industry.
For the major players in the third-party logistics (3PL) industry, 2016 was a year of modest growth. This year could turn out better for them: Participants in my 2016 survey of 3PL chief executive officers (CEOs) were generally optimistic about prospects for 2017, forecasting an average revenue growth rate of 7.85 percent for the year. The experience of many of those companies in the first quarter of 2017 was quite positive and on track with those projections. Some were inclined to increase their projections based on their expectations that post-election corporate tax cuts and major increases in infrastructure spending would trigger greater economic growth. However, those initiatives have yet to gain traction in Washington.
Despite that positive outlook, 3PLs currently face a range of concerns, including the growing need for costly new technology, the advent of new competition, uncertainty surrounding U.S. political developments, and cybersecurity challenges, among others. How they prepare for and respond to these challenges will affect their success in the near term and beyond.
Confronting constant change
Many large 3PLs are increasingly devoting resources to keeping up with the rapid pace of technological change, not only in terms of their desire for greater operating efficiencies, but also in response to customer demands. The marketplace wants to see improvements in areas such as visibility technology, mobile applications, cloud-based solutions, and digital freight-matching services. At the same time, some 3PLs are considering more extensive use of robotics and warehouse automation in their facilities to remain competitive. They are also increasingly using data analytics, not only to support their own initiatives, but also to assist customers in seeking supply chain efficiencies. Unfortunately, the cost of keeping pace with rapidly changing technology is substantial, and many 3PLs are hard-pressed to finance these technology upgrades. The larger competitors are investing heavily in technology to differentiate their services, and this is steadily raising the capital threshold to participate in this market segment.
While most 3PLs tend to focus on a limited number of industry verticals that typically include electronics, automotive, and fast-moving consumer goods, the explosive growth of e-commerce has made that sector an increasingly important part of their revenue base. In my 2016 3PL CEO survey, the respondents reported that, on average, e-commerce accounted for 14 percent of their revenue base, and that those revenues had grown by an average of 18.5 percent in the previous year.
However, the pace at which the e-commerce market is changing and the magnitude of the investments that are necessary to meet customer requirements pose serious challenges to 3PLs. Retailers continue to focus on shortening the last-mile delivery cycle while expanding free shipping and free returns programs. That has resulted in a dramatic increase in the cost of fulfillment, not only for the retailers, but also for the 3PLs servicing that market. It's difficult, though, for 3PLs to recover those added costs. The expenses incurred by these omnichannel retailers have reduced or, in many cases, eliminated their margins. In turn, that has led them to resist price increases by carriers and 3PLs.
Amazon.com Inc. continues to be the main driver of e-commerce, but other large retailers, such as Wal-Mart Stores Inc., are responding to Amazon's market challenge. The overall retail marketplace will continue to be chaotic as e-commerce volume grows, brick-and-mortar retailers struggle to right-size their store networks and develop omnichannel strategies, and many large retailers fail. While all this is occurring, Amazon has been opening convenience stores, bookstores, and grocery stores—and even announced its acquisition of grocer Whole Foods Market. Meanwhile, third-party logistics companies that are intent on expanding their share of the e-commerce market can anticipate significant challenges, particularly as the last-mile delivery segment, which some 3PLs covet, is becoming increasingly crowded with new entrants ranging from small, niche players to Amazon, Google, Uber Technologies Inc., and Lyft Inc.
Uncertainties abound
The 3PLs that made major acquisitions during the 2014-2016 period are now in the process of integrating the acquired companies into their organizations. That is typically a difficult and costly process. The end result of such acquisitions often includes an expansion of the acquiring companies' service offerings and geographical coverage, accompanied by a reduction in competition in certain markets impacted by those acquisitions. While the pace of acquisitions has slowed somewhat, more are likely this year. CEVA Group Plc, which has a substantial debt load, has been put on the block by its owner, the private equity firm Apollo Global Management LLC, and is attracting interest from several possible suitors. Several other large 3PLs are rumored to be in play. However, there appear to be no bargains in the current marketplace.
Many 3PLs generate substantial revenues from supporting import and export activities and operating in foreign countries, and the "America First" policies of the Trump administration now threaten the stability of that segment of their business. Trump has rejected U.S. participation in the Trans-Pacific Partnership (TPP) free trade agreement, threatened to blow up the North American Free Trade Agreement (NAFTA), wants to renegotiate the provisions of the free trade agreement signed with Korea, and wants "better" trade deals with China and Germany. Many observers fear that this posturing and threatening could trigger a global recession. This climate is particularly troubling to those U.S.-based 3PLs that have already invested substantial funds in Mexico to develop local infrastructure and/or support the projected growth of cross-border traffic. Trump's threats have led some of those 3PLs to at least temporarily limit further investments in that market.
Looking forward, 3PLs should also be concerned about cybersecurity and terrorism. In late June, A.P. Møller-Maersk reported serious disruptions of its operations due to hacking, as did FedEx's TNT Express unit. Such disruptions not only increase costs, but also potentially seriously damage long-term customer relationships. As a result, 3PLs' security and recovery costs are likely to increase substantially in the coming year.
So far the third-party logistics industry has been spared from any significant terrorist activities. However, the fact that terrorists have been using motor vehicles in their attacks should be taken seriously by 3PLs. Many have not focused adequate attention on addressing business-continuity risks such as natural disasters, and the costs of that lack of attention have been substantial. Responses to my 2016 3PL CEO survey indicated that many 3PLs do not consider their companies to be at risk for terrorist attacks. (See Figure 1.) That is not particularly aligned with the realities of today's world, and it should be the cause of great concern.
As we've seen, with 3PLs facing a number of market pressures, political uncertainties, and potential threats to their business models, they're increasingly exposed to financial risk. While opportunities for growth remain significant, clearly this is no easy time to be in the third-party logistics business.
A hefty 42% of procurement leaders say the biggest threat to their future success is supply disruptions—such as natural disasters and transportation issues—a Gartner survey shows.
The survey, conducted from June through July 2024 among 258 sourcing and procurement leaders, was designed to help chief procurement officers (CPOs) understand and prioritize the most significant risks that could impede procurement operations, and what actions can be taken to manage them effectively.
"CPOs’ concerns about supply disruptions reflect the often unpredictable nature and potentially existential impacts of these events," Andrea Greenwald, Senior Director Analyst in Gartner’s Supply Chain practice, said in a release. "They are coming to understand that the reactive measures they have employed to manage risks over the past four years will not be sufficient for the next four.”
Following supply disruptions at #1, the survey showed that the second biggest threat to procurement is seen as macroeconomic factors, which include economic downturns, inflation, and other economic factors. While more predictable, those variables can substantially influence long-term procurement strategies.
And the third-most serious perceived risk was geopolitical issues, including tariffs and regulatory changes, and compliance issues, including regulatory and contractual risks.
In addition, the survey also revealed that “leading organizations” are 2.2 times more likely to view energy availability and cost as a top risk; indicating a focus on future emerging risks. As electrification drives demand for power, brittle grid infrastructure raises concern about whether the energy supply can keep pace. Therefore, leading organizations recognize that access to energy will become a significant future risk.
The market for environmentally friendly logistics services is expected to grow by nearly 8% between now and 2033, reaching a value of $2.8 billion, according to research from Custom Market Insights (CMI), released earlier this year.
The “green logistics services market” encompasses environmentally sustainable logistics practices aimed at reducing carbon emissions, minimizing waste, and improving energy efficiency throughout the supply chain, according to CMI. The market involves the use of eco-friendly transportation methods—such as electric and hybrid vehicles—as well as renewable energy-powered warehouses, and advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI) for optimizing logistics operations.
“Key components include transportation, warehousing, freight management, and supply chain solutions designed to meet regulatory standards and consumer demand for sustainability,” according to the report. “The market is driven by corporate social responsibility, technological advancements, and the increasing emphasis on achieving carbon neutrality in logistics operations.”
Major industry players include DHL Supply Chain, UPS, FedEx Corp., CEVA Logistics, XPO Logistics, Inc., and others focused on developing more sustainable logistics operations, according to the report.
The research measures the current market value of green logistics services at $1.4 billion, which is projected to rise at a compound annual growth rate (CAGR) of 7.8% through 2033.
The report highlights six underlying factors driving growth:
Regulatory Compliance: Governments worldwide are enforcing stricter environmental regulations, compelling companies to adopt green logistics practices to reduce carbon emissions and meet legal requirements.
Technological Advancements: Innovations in technology, such as IoT, AI, and blockchain, enhance the efficiency and sustainability of logistics operations. These technologies enable better tracking, optimization, and reduced energy consumption.
Consumer Demand for Sustainability: Increasing consumer awareness and preference for eco-friendly products drive companies to implement green logistics to align with market expectations and enhance their brand image.
Corporate Social Responsibility (CSR): Companies are prioritizing sustainability in their CSR strategies, leading to investments in green logistics solutions to reduce environmental impact and fulfill stakeholder expectations.
Expansion into Emerging Markets: There is significant potential for growth in emerging markets where the adoption of green logistics practices is still developing. Companies can capitalize on this by introducing sustainable solutions and technologies.
Development of Renewable Energy Solutions: Investing in renewable energy sources, such as solar-powered warehouses and electric vehicle fleets, presents an opportunity for companies to reduce operational costs and enhance sustainability, driving further market growth.
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Peter Weill of MIT tells the audience at the IFS Unleashed user conference about the benefits of being a "real-time business."
These "real-time businesses," according to Weill, use trusted, real-time data to enable people and systems to make real-time decisions. By adopting that strategy, these companies gain three major capabilities:
Increased business agility without needing a change management program to implement it;
Seamless digital customer journeys via self-service, automated, or assisted multiproduct, multichannel experiences; and
Thoughtful employee experiences enabled by technology empowered teams.
The benefits of this real-time focus are significant, according to Weill. In a study with Insight Partners, he found that those companies that were best-in-class at implementing automated processes and real-time decision-making had more than 50% higher revenue growth and net margins than their peers.
Nor is adopting a real-time data stance restricted to just digital or tech-native businesses. Rather, Weill said that it can produce successful results for any companies that can apply the approach better than their immediate competitors.
Weill's remarks came today during a session titled “Becoming a Real-Time Business: Unlocking the Transformative Power of Digital, Data, and AI" at at the “IFS Unleashed” show in Orlando, Florida.
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.
Imports at the nation’s major container ports should continue at elevated levels this month despite the strike, the groups said in their Global Port Tracker report.
To be sure, the strike wasn’t without impacts. NRF found that retailers who brought in cargo early or shifted delivery to the West Coast face added warehousing and transportation costs. But the overall effect of the three-day work stoppage on national economic trends will be fairly muted.
“It was a huge relief for retailers, their customers and the nation’s economy that the strike was short lived,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a release. “It will take the affected ports a couple of weeks to recover, but we can rest assured that all ports across the country will be working hard to meet demand, and no impact on the holiday shopping season is expected.”
Looking at next steps, NRF said the focus now is on bringing the International Longshoremen’s Association (ILA)—the union representing some 45,000 workers—and the United States Maritime Alliance Ltd. (USMX) back to the bargaining table. “The priority now is for both parties to negotiate in good faith and reach a long-term contract before the short-term extension ends in mid-January. We don’t want to face a disruption like this all over again,” Gold said.
By the numbers, the report forecasts that U.S. ports covered by Global Port Tracker will handle 2.12 million twenty-foot equivalent units (TEU) for October, which would be an increase of 3.1% year over year. That is slightly higher than the 2.08 million TEU forecast for October a month ago, and the strike did not appear to affect national totals.
In comparison, the August number was 2.34 million TEU, up 19.3% year over year. The September forecast 2.29 million TEU, up 12.9% year over year, November is forecast at 1.91 million TEU, up 0.9% year over year, and December at 1.88 million TEU, up 0.2%. For the year, that would bring 2024 to 24.9 million TEU, up 12.1% from 2023. The import numbers come as NRF is forecasting that 2024 retail sales – excluding automobile dealers, gasoline stations and restaurants to focus on core retail – will grow between 2.5% and 3.5% over 2023.
Global Port Tracker, which is produced for NRF by Hackett Associates, provides historical data and forecasts for the U.S. ports of Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Port of Virginia, Charleston, Savannah, Port Everglades, Miami and Jacksonville on the East Coast, and Houston on the Gulf Coast.