INTRODUCTION

The use of third party logistics (3PL) services has become an important component of the logistics strategies of many American companies. From an aggregate perspective, it has been estimated that the annual market for such services now exceeds $50 billion per year. The buying process has become more sophisticated, and large buyers seem to have an ever-expanding wish list, while also demanding continuous cost improvement.

On the supply side of the industry, there continues to be a large-scale consolidation of the industry involving many of the major providers. To remain competitive, many large providers have broadened their service offerings, not only in terms of the specific services offered, but also in terms of the geographies they serve. Some have ventured into completely new service areas and now offer financial services and support for purchasing activities. As the 3PL industry continues to evolve, it is important to both 3PL providers and users of their services that industry dynamics be documented to facilitate corporate strategy development. The study that is discussed in this paper provides insight into the user side of the 3PL marketplace.

This paper summarizes the findings of a 2002 survey that was part of an ongoing research effort that annually examines the use of 3PL services by U.S. Fortune 500 manufacturers. The initial survey was conducted in 1991, and annual surveys have been conducted since that time.

A questionnaire was mailed to the chief logistics executive of the 500 largest American manufacturing companies. The questionnaire was developed and administered to gather aggregate data about the use of 3PL services in American industry in 2002 and to provide a basis for comparison with the results of our earlier studies. The annual research effort focuses on the following issues:

1. the extent to which those companies use 3PL services in their operations

2. the specific 3PL services that are used

3. the impact of the use of those services on such issues as logistics cost, service levels, customer satisfaction, and employees

4. and, the future plans of users.

This year questions were added to the survey concerning such matters as:

othe impact of the use of 3PL services on managerial workloads

othe time involved in managing the transition to 3PL outsourcing

ouser expectations concerning the role that 3PL providers might play in providing information technology support to their companies

othe extent of use of 4^th Party Logistics (4PL) and lead logistics providers(LLP)

othe impact of the 3PL consolidation movement on users

othe impact of the September 11^th terrorist attacks on users of 3PL services

o the views of users concerning the most significant 3PL marketplace developments of the past year.

Methodology

A mail survey consisting of a cover letter, questionnaire, and postage-paid return envelope, was sent to the chief logistics executive of each of the 500 largest manufacturers in the United States, based on annual sales revenues, as identified by Fortune magazine and a variety of other sources. The executives included in the survey were primarily selected from the membership Directory of the Council of Logistics Management and phone calls to individual companies. Of the 500 questionnaires distributed, 66 completed questionnaires were returned, and 63 were returned as undeliverable. The effective response rate was 15%.¹

RESULTS

Usage Rates

Forty-three (65%) of the 66 survey respondents indicated that their companies use 3PL services, and, in subsequent sections of this paper they are referred to as users. While the 3PL usage rate was down slightly from that reported in the past few years, this marked the sixth consecutive year that approximately two-thirds or more of the respondents were 3PL users. In 1991 when our initial survey was conducted, the percentage of Fortune 500 manufacturers reporting use of 3PL services was 38%.

Among the users identified in the year 2002 survey, 4% had been using 3PL services for less than one year, 21% had been using 3PL services for 1-3 years (25% last year), 12% for 3-5 years (20% in 2001), and 63% for more than 5 years (55% in 2001).

This was the third consecutive year that at least half of the respondents had used 3PL services for more than five years, and this was the highest percentage ever reported in the 3-5 year category. This is important because the experience of long-term users provides an important database for studying the impact of using 3PL services. Forty-four percent of the users reported using multiple 3PL providers. This has been an interesting issue to track over the past ten years.

When our first Fortune 500 survey was conducted in 1991, 78% of the users identified in the survey reported using more than one 3PL provider. That percentage steadily declined for the next seven years, reaching 40% in 1998. That development appeared to reflect the expressed desire of many users for one-stop shopping, and the expansion of the service offerings of individual providers. However, in our 1999 survey the percentage of users reporting the use of more than one 3PL provider reversed direction, and in our 2001 survey 63% reported using more than one provider. At that point we noted that one possible explanation for that reversal may have been the scale of many recent 3PL contracts. As potential buyers have increased in size through sales growth, mergers and acquisitions and international expansion, the scope of service offerings and geographical coverage involved in many recent 3PL contracts has made it increasingly difficult for one provider to meet those requirements. Providers have responded to this issue with mergers, acquisitions and alliances to broaden both their service offerings and the geographical areas they serve, and this may explain the decrease in the use of multiple 3PL providers reported in this year’s survey. In fact, as discussed later in this paper, some users identified this expansion of single company service offerings as the most significant development to have taken place in the 3PL marketplace during the past year.

3PL Services Used

Fortune 500 manufacturers use a wide variety of 3PL services. The typical user buys multiple logistics services from their provider(s). The range of services used by this year’s users is shown in Table 1. The table also includes similar data from our three most

recent surveys. As shown, respondents indicated that the most frequently outsourced logistics functions in 2002 were: customs brokerage 67%, freight payment 63%, freight forwarding 58%, direct transportation services 56%, carrier selection 52%, shipment consolidation 49%, and rate negotiation 47%. Warehouse management service usage was reported by 42% of users. That was down substantially from the 59% of 3PL users who reported using warehousing services last year. The largest year-to-year percentage gains were registered by customs brokerage and freight forwarding, reflecting the growing international nature of 3PL services.

Use of 3PL Companies to Provide Information Technology Support

In some instances, companies using traditional 3PL services are also interested in having their 3PL company provide information technology (IT) support for their supply chain activities. In this survey, we sought to determine how important specific provider IT capabilities were to companies when they were evaluating potential 3PL service providers. The results are summarized in Table 2.

As shown, in answering each question, those surveyed were asked whether each specific IT capability was a “must have,” an “important but not necessary,” consideration, or was “not important” in the 3PL selection process. Three of the IT capabilities examined were ranked as “must have” considerations by at least 40% of the respondents. They were: the ability to integrate the company’s software and systems with that of other companies involved in the firm’s supply chain (47%); the ability to operate the client’s existing software and systems (42%); and, the ability to implement new software and systems (40%). At the other end of the spectrum, only 2% of the respondents indicated that the ability to redesign their companies’ software and systems was a “must have” 3PL provider capability.

Use of 3PL Provider Financial Services

As we have documented in our previous CEO surveys, a significant number of

large 3PL providers have expanded their service offerings to include a broad range of

financial services. However, only four of the 43 3PL service users identified in this

survey indicated they were using financial services provided by 3PL companies. Three

reported using freight payment services, and one used 3PL services to support purchases

of materials.