Contract logistics, 3PL, 4PL – call it what you will – continues to be a growing business, but it is changing subtly.
So far at least, the sector does not seem to have suffered from any downturn in the wider economy. While hesitating to call any business recession-proof, the sector”s leading players see new opportunities even in the face of a general downturn. Jeff Anderson, managing director of Wincanton Manufacturing says that while the market appears to be more cautious than before, ”people are beginning to look more at outsourcing and, while many have already done the “easy wins”, they”re starting to take a more holistic approach. We”re certainly taking in additional elements of the supply chain – not just transport and warehousing but things like inbound logistics from China.”
Manufacturers – second tier ones as well – are looking at their supply chains on a pan-European basis, although the day is still some way off when a 3PL would be able to take on a complete supply chain in all parts of Europe. No 3PL yet has a footprint in terms of warehousing and transport in-house in every part of the continent – nor are customers necessarily ready for such an approach, says Anderson. ”A lot of customers would still look to leverage their buying power in each country and they”re not yet pulling together big European tenders.”
That said, major logistics providers like Wincanton have widespread relationships with other providers and can certainly provide a service on a 4PL basis. Wincanton acquired the P&O Trans-European freight business in 2000 which has certainly given it a presence in cross-border transport in many parts of Europe. Being able to offer customers a one-stop shop in this sector of the market, instead of having to manage a lot of smaller subcontractors, could certainly appeal to some customers, believes Anderson.
Wincanton has recently also acquired the UK container haulier Hanbury Davies, giving it a presence in the movement of imported goods from outside Europe, which is emerging as an important piece of many retailers” supply chains. There might also be opportunities in activities such as warehousing in major European ports with direct transport to retailers or retailers” DCs in the UK. ”We can also nibble at the edges of the manufacturing process with activities like co-packing and, looking forward, delivering smaller consignments direct to the high street on a shared user basis.” Mark Parsons development director for retail and consumer UK at DHL says that pan-European distribution is not that common in the retail sector of the market. Many of the European major retailers have set up operations in other countries, it is true – Carrefour or Tesco, for example – but an interesting development is that these ”foreign” operations are increasingly sourcing in their own right and doing their own forecasting rather than feeding off the ”home” country.
Supply chain for E-commerce is still evolving, adds Parsons, and it will be a while before that sub-sector of the retail supply chain reaches maturity. Major players are still debating the best fulfilment model (pick in store or from a DC?) and new service concepts, such as DHL”s dedicated ”At Home” service specifically targeted at home as opposed to business recipients, are still being developed.
The e-commerce segment of the market is still growing very rapidly and even if recession does blunt it somewhat, very high growth rates can still be expected, albeit from a relatively low base compared with conventional retailing. Some retailers may have to address the issue of what their home delivery operations are costing them, though the days may be over when retailers would run such services at a loss, for fear of letting a competitor steal market share.
Underlying most of these trends is a desire by almost all European firms to reduce their carbon footprint – a process which, happily, can cut costs as well. Anderson has seen figures that suggest a potential €8 billion saving in transport costs by more efficient vehicle utilisation or cutting out unnecessary transport movements. Even if that figure is wide of the mark, if only a relatively small proportion of the savings are realisable, it should give contract logisticians plenty to bite on in the next few years.
DHL”s Parsons, says that one effect of the gloomier economic outlook is that business has tended to increase through accretion of existing contracts rather than by customers issuing new invitations to tender. ”Eighteen months ago, major ITTs fell off a cliff and in fact there have been more last month [February 2008] than there had been in the whole of the past year.” ITTs can be expensive to run, and analysing them takes up a lot of management time.
Most of the new ITTs that there have been, moreover, have been focussed on quite specific areas, including e-commerce business or new product lines – for example, the retail grocers” expanded offerings in non-food.
Stewart Oades, chairman of Christian Salvesen, recently acquired by French logistics giant Groupe Norbert Dentressangle (GND), says that the outsourced logistics business is still a growing area. ”We and our competitors are seeing perhaps 10 per cent growth.”
But with more companies having now outsourced, particularly in mature markets like the UK, the trend has perhaps slowed a little. On the other hand, the number of 3PLs in the market has reduced through acquisition – GND and Christian Salvesen being a case in point, along with Deutsche Post Group”s decade long buying spree.
There is also some switching of contracts between different 3PLs and of course existing contracts are also growing in many cases.
If a recession or economic slowdown is on the way – not that Oades has seen any evidence of one so far – ”it could be a positive for outsourcing” as firms try to cut the cost of running their supply chain. But realistically, there is also the chance that it could drive some customers out of business, so 3PL may not entirely be a recession-proof industry.
The green agenda is ”a fundamental part” of Christian Salvesen”s own corporate strategy and there are a lot of services it can offer, including reverse logistics or the new service recently launched in conjunction with CarbonView to help customers reduce their own carbon footprint.
Christian Salvesen already handles a lot of products coming out of retailers like Asda and Tesco stores in the UK, such as packaging and food waste, empty roll cages or reusable plastic packaging. ”It all helps the retailer eliminate landfill and it”s a big growth area for us – not only in the UK but, with our acquisition by GND, in some continental countries – particularly France and the Latin countries.”
Oades adds that around half Norbert Dentressangle”s business now comes from logistics and it is the number four player in Europe in this field.
That said, there is perhaps more potential for contract logistics work to grow in continental Europe, where the concept is maybe a little less advanced, than in the UK, which is now quite a mature market.
Michael Lainas, managing director at Cert Octavian says that 3PL can ”without a doubt” make a difference in cutting customers” carbon footprints. ”There are a multitude of different areas that can contribute to reducing a company”s carbon footprint and we believe that it is absolutely critical that environmental initiatives span the entire operation and are approached from a strategic standpoint, not just focused on one element.” To be truly effective, this requires a joined up approach from the 3PL, the haulier, the client and the retailer – a vertical environmental policy that spans the supply chain surrounding the logistics provider.
This might mean operating sites optimally placed for end deliveries, ensuring that the correct vehicle is used, and helping customers to take advantage of delivery consolidation across the Cert network – or in some timed deliveries for small orders, flexibility of booking times at RDCs, set delivery dates for certain post codes, off peak deliveries in London and electronic payment systems. ”By creating a dialogue and understanding how our actions impact upon others in the supply chain, we can all continue to move in the right direction.”
At DHL, Mark Parsons sees new concepts in shared user distribution being developed, particularly to more outlying regions. However, it may take a while before the concept is universally accepted, mainly because it will be necessary to persuade retail store managers that the gains in terms of cost or environmental benefit are worth sacrificing a longstanding, cherished delivery time. ”There is a bit of frustration – we all know that it”s the right thing to do but it is still very challenging. However, I think we will break the logjam in 2008.”
Shared user has been used in specific operations – for example, the city centre Broadmead delivery centre, retail outlets at airports or the European-wide fashion network – and shared use of facilities like DCs is well-accepted – but the challenge is to extend the concept to new areas including large-scale deliveries to retail stores, particularly those in more remote areas. ”We do have to consider factors such as how many delivery trucks can we send every day to Inverness or Pembrokeshire,” says Parsons.
Outsourcing rate increases
Bryan Jones, business development director at NYK Logistics, doesn”t see any lessening in the number of companies outsourcing their supply chain. ”If anything, the outsourcing rate is greater than ever.”
Companies” margins are tight, and getting tighter in the more difficult economic climate and there is more offshore outsourcing. ”It”s becoming more difficult for companies to manage the whole of their supply chain themselves,” he says. ”Many companies who perhaps haven”t outsourced before, except perhaps tactically for certain commodity flows are now coming to us to do other parts of their supply chain, including things like forecasting or managing call-off, while the more mature customers are continuously evaluating their supply chains.” In fact, many customers value NYK Logistics as much for its ”intellectual” input as its capabilities in transport or warehousing.
NYK Logistics has come up with several ways of helping customers keep supply chain costs within bounds while improving service. That might be consolidation of part-loads in the Far East in order to share seafreight capacity or, in continental Europe, putting pharmaceutical manufacturers together for the movement of primary products. In the UK, it has helped many retailers bypass the ”conventional” supply chain by moving direct from port to DC or, in some cases, direct to retail store without intermediate warehousing.
Customers also look to NYK to cut down on their buffer stocks, not only to achieve a one-off inventory saving but also because storage and warehousing in western Europe has become one of industry”s most significant costs. Often, a service provider will be able to bring best practice from one industry to another sector and will also be able to give dispassionate advice on IT systems and technology.
While there will always be a ”premier league” in supply chain knowledge/performance, companies in all industries are constantly striving to raise their game, says Jones.
Lainas at Cert Octavian agrees that outsourcing third party logistics is a continuing trend, especially as so many companies are forecasting a period of challenging market conditions. ”They are looking to effectively manage costs and logistics is so often an area that is not a core area of expertise, and one with very high fixed costs. If you have a warehouse that is not fully used all year round, it makes sense to translate this fixed cost into a variable cost by storing with a third party. And although it”s not always about cost, many companies are outsourcing to a 3PL to benefit from specialist expertise in a certain sector, helping them to gain competitive advantage – attractive at any time, but especially during turbulent market conditions.”
However, there are 3PLs and 3PLs, he adds. They must, Lainas says ”be crystal clear on their positioning.” With the darkening economic outlook, ”the generalists will find it more difficult to weather the storm than those perceived as specialists in a niche area.”
Contract logistics has made an impact in most private industry sectors – with the notable exception of the construction industry, says TDG strategy and maketing director, David Hindson. All the arguments for getting a grip on the supply chain apply here, just as much as they do in food retailing or car manufacture but, despite the existence of some big companies, no one has yet grasped the nettle.
Hindson comments: ”Not only is there a lot of wastage of product in construction, but also of associated manpower and, ultimately, finance.” A lot of tradesmen”s time is wasted waiting for material, tools or components to arrive.
There have been a few attempts to set up consolidation centres and, for major projects like the Olympic construction or Terminal Five, off site assembly areas, but these are not really analogous to DCs in other industries, Hindson argues. With more pressure on the industry to cut waste and reduce transport, good supply chain practices may start to be adopted, though it would need a thorough change in attitudes, one suspects.
Logistics experts tend to pigeonhole companies into those that handle their supply chain in-house or those that subcontract it to third-party logistics providers but the reality is often more mixed. Take Premier Farnell plc, for instance, a leading supplier of high-quality electronic components to designers and to the MRO market. It contracts out a large part of its distribution, including deliveries to customers in the UK and Europe to UPS. It is in fact UPS”s biggest single customer in the UK and the fifth-largest in Europe. It also uses other carriers such as DHL for some shipments. But it also runs many of its DCs, for example in Leeds, where the company has its roots, but not in China, say, where the DC is run by a third party.
Mark Blackburn, European freight manager has no particular view on whether it is better to insource or outsource DC operation. ”As Farnell, we”ve been in Leeds since the 1930s and we”ve no plans to oursource, and when we set up our continental base in Liege, we also decided to keep it in-house. But in Shanghai, we outsourced to UPS, and we”ll probably do the same in India.”
In Europe, Premier Farnell has a lot of expertise in-house, which a 3PL could find difficult – though not impossible – to replicate. Many customers still rely on the company”s technical experts for advice on what product to select, and not all orders are via the Internet yet, although around 50 per cent are and the target is 70 per cent.
Blackburn says that UPS gives it a pretty good service, with an on-time delivery rate worldwide of 98.5 per cent. l”Eighteen months ago, major ITTs fell off a cliff and in fact there have been more last month [February] than there had been in the whole of the past year”
”As Farnell, we”ve been in Leeds since the 1930s and we”ve no plans to oursource. But in Shanghai, we outsourced to UPS, and we”ll probably do the same in India”
While there will always be a ”premier league” in SC knowledge, companies are constantly striving to raise their game
The generalists [3pls] will find it more difficult to weather the storm than those seen as specialists in a niche area