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Third Party
Logistics Services:
Views from the
Customers
Results and Findings
of the1999 Fourth
Annual Study
E f f e c t i v e n e s s
D i f f e r e n t i a t i o n
E f f i c i e n c y
As conditions, markets, and capabilities change,
the opportunities, risks, and benefits associated with
outsourcing will change as well….The best third-party
providers understand the strategic importance of
supply chain management, and they are positioning
themselves to provide more and better services that
overcome their clients’ concerns about relinquishing
control of a key (if not core) competency.
Supercharging Supply Chains:
New Ways to Increase Value
Through Global Operational Excellence
Gene R. Tyndall, Chris Gopal, et al
John Wiley & Sons, 1998
Third Party Logistics Services:
Views from the Customers
Results and Findings of the 1999 Fourth Annual Study
T A B L E O F C O N T E N T S
2 Study Objectives and Methodology
4 Summary of Key Findings
6 Logistics Outsourcing Practices in Profile
10 Management and Relationship Issues
14 The Rise of Information Technology
16 Customer Value Outlook
20 In Conclusion
2 University of Tennessee Exel Logistics Ernst & Young
Study Objectives and Methodology
DURING THE SPRING AND SUMMER OF 1999, The University of Tennessee’s Center
for Logistics Research conducted a comprehensive study of the use of third party logistics
(3PL) services in the United States. This is the fourth annual research study to examine
critical trends and issues among customers of logistics service providers (LSPs).
The objectives of this study are as follows:
✗✗ Measure the development and growth of
LSPs across major industry markets
✗✗ Deepen the knowledge of the services
they provide
✗✗ Evaluate the rapid emergence of informa-
tion technology
✗✗ Understand customer buying and man-
agement processes
✗✗ Measure overall satisfaction and dissatis-
faction with LSPs
✗✗ Examine customer priorities relating to
the use of 3PL services
The principal vehicle for gathering logistics
customer perspectives was a survey sent to
the chief logistics executive at prominent
companies in the following industries:
✗✗ Automotive
✗✗ Chemical
✗✗ Computers and Peripherals
✗✗ Consumer Products
✗✗ Medical Supplies and Devices
✗✗ Retail
These industries have been selected because
they view logistics as strategically important
and are making purposeful moves toward
integrated supply chain management. The
total number of surveys sent to companies
in these industries was 1,182. Of the 1,182
surveys sent, a total of 277 usable responses
were received, for an overall response rate
of 24%. Statistical tests to control for non-
response bias were utilized.
The industries selected
for this study view
logistics as strategi-
cally important and
are making purposeful
moves toward
integrated supply
chain management.
1999 Fourth Annual
3PL Services Study
The University of Tennessee,
Exel Logistics, and
Ernst & Young
A Note on Terminology
To distinguish between logistics outsourcing companies and the services they provide, this study adopts the
following convention: The companies are referred to as logistics service providers (LSPs). The services are
referred to as third party logistics (3PL) services.
Third Party Logistics Services: Views from the Customers 3
The respondents representing the 277
companies have the following characteristics:
✗✗ Their companies represent a relatively
broad cross-section of industry. Most
respondents are from the manufacturing
sectors, with 65% indicating they manu-
facture finished product, and 10% indicat-
ing they manufacture components or
ingredients. Also, the respondents included
retailers (13%), wholesalers (4%), raw
materials suppliers (1%), and “other” (7%).
✗✗ Close to one-half (46%) of the responding
companies anticipate 1999 sales revenues
in excess of $1 billion. Another 19% are
in the range of $500 million to $1 billion,
27% are in the $100–$500 million range,
and 8% are less than or equal to $100
million.
✗✗ Principal factors affecting the respondents’
industries include pressure to reduce cost
(79%), emphasis on improved supply
chain management (66%), implementation
of new information technologies (56%),
rapidly-accelerating new product introduc-
tions (51%), significant pressures to
enhance logistics customer service (49%),
and globalization (46%). These findings
are very consistent with those reported
by respondents last year.
✗✗ The respondents attach great importance
to logistics processes and supply chain
issues. For example, 76% indicate agree-
ment with the statement that “logistics
represents a strategic, competitive advan-
tage for our company” (an increase from
the previous year’s study in which 72%
agreed with the statement). Also, 85%
are in agreement that “our customers
are placing greater emphasis on logistics
customer service,” and 62% that “we view
our LSPs as important to the improvement
of shareholder value.”
These characteristics reinforce the relevance
and applicability of the study findings.
This study was funded jointly by a grant from Exel Logistics and Ernst & Young. The structure and
content of the study benefits significantly from suggestions made by executives of these firms and
other professionals who are customers of third party logistics (3PL) services. The editorial content
and key methodological decisions, however, are the responsibility of The University of Tennessee
research team. Plans exist for the study to continue on an annual basis in order to examine further
and document key trends and issues regarding logistics service providers (LSPs) and the marketplace
for third party logistics services (3PL).
T h e A u t h o r s
A few words about
the authors of this
study:
C. John Langley Jr.,
Ph.D. is the John H.
Dove Distinguished
Professor of Logistics
and Transportation,
The University of
Tennessee, Knoxville.
Brian F. Newton is
Director of Strategic
Development for
Exel Logistics
Americas.
Gene R. Tyndall is
a senior partner
and leader in the
Ernst & Young man-
agement consulting
global supply chain
practice.
4 University of Tennessee Exel Logistics Ernst & Young
Summary of Key Findings
OVERALL, THE RESULTS OF THIS STUDY help provide a better understanding
of the marketplace for third party logistics (3PL) services and the ways in which
logistics service providers (LSPs) continue to develop and grow. Considering that
the total annual revenues of these companies are currently in the range of $40-$50
billion, the services offered by LSPs consume a significant portion of overall logistics
and supply chain budgets.
✗✗ Given that the market for 3PL services is
growing rapidly (by 18%-22% annually),
the customer landscape is remarkably
stable:
◆ Nearly 90% of customers remain
satisfied with their LSPs
◆ The split between customers (70%) and
non-customers (30%) of 3PL services
remains relatively constant
◆ More than half of non-customers (60%)
continue to report that they have no
intention of using LSPs in the future
Of the industries studied, greater LSP use seems
to occur in the computer and peripherals,
consumer products, and retail industries. Use
among the chemical, medical, and automotive
verticals is somewhat below the average of
68%-70% for all respondents. As reported in the
1999 study, the most prevalent 3PL services
currently being used are outbound transporta-
tion, warehousing, freight bill auditing/ payment,
inbound transportation, freight consolidation/
distribution, selected manufacturing activities,
and product marking, labeling, and packaging.
Future planning focuses on most of these
services, as well as other activities, such as
product returns and repair, cross-docking,
and information technology.
The following points capture the major
findings of this research study:
✗✗ The market for third party logistics (3PL)
services continues to be in transition. At
one time, LSPs were viewed as vendors
for whom the key issues were cost, control,
and service. Now a partnership environ-
ment is emerging and the emphasis is
shifting to value, innovation, and perform-
ance in an increasingly global context.
Although LSPs have become very adept
at creating value within their areas of
expertise, many continue to struggle
to deliver the comprehensive, integrative
solutions that create real supply chain
savings. Considering that customer
demands for performance and sophistica-
tion are accelerating, improvement in
this area is a key imperative for LSPs.
Also evidencing this appetite for more
strategic relationships is the fact that
18% of the respondents think that having
a consultant manage their LSPs is
“worthy of consideration.”
Third Party Logistics Services: Views from the Customers 5
✗✗ Logistics service providers most frequently
create value through the effectiveness
(68%) and efficiency (80%) of their oper-
ations, and by providing services that
allow their customers to differentiate
(27%) themselves in some way. The
respondents were likely thinking of this
when providing responses elsewhere in
the survey indicating the need for LSP
leadership, value-creation, and innovation.
✗✗ There appears to be a shift from the use
of transportation-based LSPs to those
providers which are oriented more
toward warehousing and distribution.
The 1999 study reveals a 46% increase
from the previous year in the use of ware-
housing/distribution-based providers (51%
vs. 36%), while the use of transportation-
based providers shows a decrease from
40% to 24%. While some of this decrease
may be due to the inclusion in the current
study of a new category of LSP, “supply
chain provider,” the survey data suggests
a more fundamental change may be
occurring.
✗✗ Customers for 3PL services are becoming
more knowledgeable and better pre-
pared to effectively utilize the available
range of services. While logistics/trans-
portation executives at customer compa-
nies are intensively involved in all stages of
the buying and management processes,
the 1999 study documents the increased
role of the information technology execu-
tives in the implementation stage of the
third party relationship. Also, a predomi-
nant tendency is for companies to manage
their third party relationships using their
existing logistics organizations.
✗✗ Although customers for 3PL services proj-
ect significant increases in demand for
information systems for e-Commerce and
supply chain planning, the development
and integration of these systems remain
huge challenges for LSPs and industry as
a whole. According to the study results,
information technology continues to be
regarded as a key to the success of third
party operations, and effective utilization
of technology requires meaningful work-
ing relationships between customers and
LSPs. Customers are relying increasingly
on their LSPs for the provision of informa-
tion-based services.
✗✗ Respondents suggest that the use of LSPs
is generally meeting their operationally-
focused objectives. But room for
improvement still exists for achieving
some of the more strategic objectives.
Included on the “to-do” list are objectives
such as facilitating e-Commerce offerings,
improving information technology, facili-
tating the move from “push” to “pull”
logistics, and hastening or improving
the implementation of change. Areas in
which improvement was noted since the
1998 study include the provision of more
specialized logistics expertise, more focus
on core competencies, and integration of
supply chains.
✗✗ As reported last year, the use of an LSP
is not inconsistent with the belief that
logistics and supply chain management
represent key areas of competency and
strategic advantage. While many compa-
nies elect to leverage certain areas of
core competency using internal resources,
the decision to use external suppliers for
certain logistics and supply chain services
is often made to achieve even greater
competitiveness in the marketplace.
✗✗ Future company priorities focus on
increasing the value derived from using
LSPs. They include increased emphasis
on the availability and utilization of infor-
mation systems for logistics and supply
chain processes, increased use of value
creation as a criterion for selecting LSPs,
and more strategic and meaningful use
of 3PL services.
LSPs are developing
innovative services
that are pushing the
bounds of conven-
tional practices, forg-
ing close, mutually
productive alliances
with their customer
partners. Despite these
advances, the profes-
sion still has much
progress to make.
C. John Langley Jr.,
Brian F. Newton,
and Gene R. Tyndall
Supply Chain
Management Review
Fall 1999
6 University of Tennessee Exel Logistics Ernst & Young
Logistics Outsourcing Practices in Profile
OVERALL TRENDS
Of the 277 responding executives,186 (68%) indicate that their companies currently use or
are considering the use of third party logistics (3PL) services. This observation is consistent
with the 71% from the 1998 study, 73% from the 1997 study, and 72% from the 1996
study. The remaining 88 (32%) indicate that they are not using or planning to use 3PL
services. Exhibit 1 provides a summary of the use of logistics service providers (LSPs) by
industry. It shows that the most prominent use of 3PL services is in the computer and
peripherals (82.2%) and consumer products (75.9%) industries, followed by retail (71.1%),
chemical (61.4%), medical supplies and devices (56.2%), and automotive (53.8%).
The four years of results on this question sug-
gest that the percentage of companies using
3PL services across all industries is relatively
consistent from year to year. What does fluc-
tuate somewhat, however, is the actual per-
centage of surveyed companies using 3PL
services within each industry vertical.
Although the question was not included in the
1999 survey, results concerning the longevity
of use of 3PL services from the previous three
years are still of interest. When asked how
long they had been using 3PL services,
approximately 60% of the 1996, 1997, and
1998 respondents indicate three years or
more. Correspondingly, approximately 30%
indicate between one and three years of use,
while 10% indicate one year or less.
yrtsu
dnIybesU)sPSL(sredivorPecivreSscitsigoL—1tibihxE
0
20
40
60
53.8%
80
100
Auto
61.4%
Chem
ical
82.2%
Compu
ter
75.9%
Cons
umer
56.2%
Medica
l
71.1%
Retai
l
Percent
Using or
Considering
LSPs
Third Party Logistics Services: Views from the Customers 7
Logistics Activities
Outsourced
Exhibit 2 summarizes the current and projected
utilization of specific logistics services for the
186 respondents who identified themselves as
customers of 3PL services.
Among the activities outsourced most frequently
to LSPs are outbound transportation (62.9%),
warehousing (also 62.9%), freight bill auditing
and payment (53.2%), inbound transportation
(48.9%), freight consolidation/distribution
(38.2%), selected manufacturing activities
(31.7%), and product marking, labeling, and
packaging (30.6%).
These observations are generally consistent
with those of the 1998 study. Of particular
note, however, is the modest increase in per-
cent of companies using warehousing services
(55.3% in 1998 to 62.9% in 1999). Also, the
percent of companies using LSPs for cross-
docking surprisingly declined from a reported
30.9% in 1998 to 23.1% in 1999. This reduces
support for one of the 1998 observations
that the incidence of use of cross-docking
services is increasing significantly. However,
even though the percent reported in 1999 is
smaller than 1998, it still is greater than the
figures reported in 1997 and 1996 (18.8%
and 21.7% respectively).
By contrast, the activities outsourced to LSPs
least frequently are order entry/order process-
ing (3.8%), customer service (6.5%), inventory
management (9.1%), order fulfillment (9.7%),
product assembly/installation (11.8%), and
information technology (12.9%). Looking at
these activities as a group, they appear to
share some common characteristics. Most of
them are strategically and customer focused,
and most involve significant degrees of infor-
mation technology enablement.
Based on future outsourcing plans, the activi-
ties for which companies plan to increase
outsourcing most are freight consolidation/
distribution (19.9%), freight bill auditing/pay-
ment (17.7%), warehousing (16.1%), inbound
transportation (15.6%), traffic management/
fleet operations (15.6%), product returns
and repair (13.4%), cross-docking (12.4%),
Outsourced Services Current Future
Outbound Transportation 62.9% 11.8%
Warehousing 62.9% 16.1%
Freight Bill Auditing/Payment 53.2% 17.7%
Inbound Transportation 48.9% 15.6%
Freight Consolidation/Distribution 38.2% 19.9%
Selected Manufacturing Activities 31.7% 8.6%
Product Marking/Labeling/Packaging 30.6% 10.2%
Cross-Docking 23.1% 12.4%
Traffic Management/Fleet Operations 22.6% 15.6%
Product Returns and Repair 19.4% 13.4%
Information Technology 12.9% 10.8%
Product Assembly/Installation 11.8% 4.3%
Order Fulfillment 9.7% 6.5%
Inventory Management 9.1% 5.4%
Customer Service 6.5% 8.1%
Order Entry/Order Processing 3.8% 6.5%
Exhibit 2 – Outsourced Services: Current vs. Future
8 University of Tennessee Exel Logistics Ernst & Young
and information technology (10.8%). The
presence of cross-docking and information
technology lends support to the notion that
priorities for future outsourcing are related to
current perceptions of the direction in which
supply chain changes are moving.
Respondents were asked about the extent to
which outsourced services are currently “tied
together” or “integrated by your supplier(s)
of third party logistics services.” Exhibit 3
shows their responses in percentages. Sixty-six
(66%) of the customer companies indicate
“significant” or “somewhat,” as opposed to
“very little.” It is notable that this percentage
and the results from the 1998 study (69%) are
up dramatically from the 59% reported in
1997 and the 60% reported in 1996. Still,
more than 30% of the respondents answered
that outsourced logistics activities do not
seem to be integrated or tied together.
Considering that the integration of multiple
logistics services is a common objective for
many companies which utilize the services of
LSPs, this finding continues to be somewhat
disappointing. Of the six industries surveyed,
respondents from the computer and peripherals
industry are the only ones with a higher than
average percent of respondents (76.2%) indi-
cating that the services received from LSPs are
integrated or tied together. By contrast, only
53.8% of the automotive industry respondents
indicate their 3PL services are integrated or
tied together.
)sPS
L(
sredivorPecivreSscitsigoLybnoitargetnIecivreSfotnetxE—3tibihxE
0
10
20
30
40
50
60
70
80
60%
1996
40%
59%
1997
41%
69%
1998
31%
66%
1999
34%
Very Little
Significant
Percent of
Respondents
desU
)sPSL(
sredivorPecivreSscitsigoLfosepyT—4tibihxE
0
10
20
30
51%
40
50
Wareho
using
/Dist
ributi
on
9%
Supp
ly Ch
ain Pr
ovide
r
2%
Shipp
er/Man
agem
ent
7%
Forw
arder/
Broker
7%
Expr
ess L
ogist
ics
19%
Truck
load
5%
Less
-Than
Truc
kload
Percent of
Respondents
Third Party Logistics Services: Views from the Customers 9
A concluding issue on service offerings
regards how customers feel that suppliers
should position themselves strategically in
relation to the depth vs. breadth of 3PL
services. Overall, and consistent with earlier
study findings, this year’s respondents indicate
significant agreement with the statement that
“third party suppliers should provide a broad,
comprehensive set of service offerings” and
disagreement with the statement that “third
party suppliers should focus on a limited
range of service offerings.” Thus, the general
preference is for LSPs to broaden their prod-
uct lines, rather than to limit the range of
choices available to customers.
Outsourcing by Type
of Service Provider
As indicated in Exhibit 4, the 1999 study
results suggest that the most prevalent type
of LSPs used are warehouse/distribution-
based (51%). This represents a significant
increase over the 36% reported in the
1998 study. Other interesting comparisons
between the 1998 and 1999 studies
include a decreased utilization of truckload-
transportation based LSPs (from 23% to
19%), and also a decreased use of less-than-
truckload based LSPs (from 17% to 5%).
While some of this latter decrease might be
due to the addition of “supply chain provider”
as an LSP type in the 1999 study, the survey
suggests somewhat of a decline in the use of
transportation-based LSPs.
VIEWS OF NON-CUSTOMERS
To be thorough, the survey asked companies which are not LSP
customers for the reasons they do not use or consider using 3PL
services. Exhibit 5 profiles their responses. While the primary rea-
son for non-use is “concerned about control,” it is interesting to
note that many satisfied customers indicate that their use of a
third party has actually helped them gain control over some
aspects of their logistics operations.
Other non-customers feel that costs would not be reduced, that
logistics is a core competency, that they had more expertise,
that service level commitments would not be met, or that logistics
is too important to outsource. Looking at the responses from
customers of LSPs, however, there are numerous instances where
the decision to utilize their services is being made for many of
these same reasons. In other words, the same reasons that non-
customers report for not using LSPs are often used by others as
justification for using them.
Of those companies which currently do not choose to use 3PL
services, approximately 69% indicate having no future plans to do
so. By contrast, 22% suggest that they are studying the possibility,
and 9% indicate having made a decision to move in this direction.
Exhibit 5–Non-Customers: Rationale for Not Using Third Party Logistics (3PL) Services
0
10
20
30
51
40
50
60
Conc
erned
abou
t Con
trol
49
Costs
Wou
ld Not
be Re
duce
d
43
Logis
tics i
s a
Core
Compe
tency
39
We Hav
e More
Expe
rtise
38
Servi
ce Co
mmitmen
ts
Wou
ld Not
be M
et
38
Logis
tics t
oo Im
porta
nt
to O
utsou
rce
Number of
Respondents
10 University of Tennessee Exel Logistics Ernst & Young
Management and Relationship Issues
MANAGING RELATIONSHIPS WITH LSPs
Exhibits 6 and 7 provide a perspective on the wide range of executives involved with logistics
service provider (LSP) issues. Exhibit 6 shows the extent to which senior management recog-
nizes a need for third party logistics (3PL) services. Although the logistics/transportation
executive is clearly the most frequently aware of need, 1999 study results indicate substantial
awareness of a need by the president or CEO and finance executives as well. In addition,
executives in the manufacturing, human resources, marketing, and information systems
areas are also aware of a need for 3PL services, but to a lesser degree. These findings are
consistent with the results of the 1998 study.
?dee
Nehtsezi
ngoceRohW:gnicruostuOnitnemevlovnI—6tibihxE
0
20
40
60
90
80
100
120
140
Pres
ident/
CEO
65
Finan
ce
122
Logis
tics/T
rans.
41
Manufa
cturin
g
21
3442
Human
Reso
urce
s
Inform
ation
Syste
ms
Marketi
ng
Number of
Respondents
Exhibit 7 helps to document the active
involvement of key executives in implementing
relationships with LSPs. As might be expected,
senior logistics/transportation executives tend
to become very involved in the implementa-
tion process, while the president or CEO and
finance executives tend to be less involved.
One of the most significant findings from
both the 1998 and 1999 studies, however, is
the increasing role that information systems
executives seem to play with regard to imple-
mentation of a 3PL service relationship. This
finding should not be surprising, considering
the key role of information technology in
many of today’s logistics processes. (This
important topic is discussed in greater depth
in the section, “The Rise of Information
Technology.”) Responses to questions
regarding who selects the supplier and who
Third Party Logistics Services: Views from the Customers 11
“champions” logistics outsourcing suggest
that logistics/transportation executives are
those who are most involved.
Exhibit 8 (see page 12) offers some insight
into the organizational responsibility for man-
aging the provision of 3PL services. The find-
ings, which continue to be of interest, are
from the 1998 study. (The question was not
asked of respondents in 1999.) Although the
question allowed for multiple responses, the
largest portion of customers indicate that
responsibility for managing LSP relationships is
internal to their existing logistics organization.
Of particular note is that approximately half
this number look to the providers themselves
to manage and control their activities. Less
popular alternatives include having a separate
department or division manage these services,
or looking to an external party—consultant or
“comprehensive provider of services”—to help
manage the provided services.
?noit
atne
melpmIrofelbisnopseRs'ohW:gnicruostuOnitnemevlovnI
—7tibihxE
0
20
40
60
15
80
100
120
140
Pres
ident/
CEO
49
Finan
ce
139
Logis
tics/T
rans.
37
Manufa
cturin
g
14 13
60
Human
Reso
urce
s
Inform
ation
Syste
ms
Marketi
ng
Number of
Respondents
If you’re a buyer of logistics services, you’re…looking
for transparency, for flexibility in your contract, and
for quality performance and bottom-line impact.
Peter Bendor-Samuel
Outsourcing Journal
April 1999
12 University of Tennessee Exel Logistics Ernst & Young
seciv
re
S)LP3(scitsigoLytraPdrihTseganaMohW—8tibihxE
0
20
40
60
8680
100
Logis
tics O
rganiz
ation
10
Sepa
rate D
epart
ment
43
Prov
iders
Them
selve
s
6
Exter
nal P
arty
Number of
Respondents
A series of questions on the role of manage-
ment consultants offers some interesting
perspectives on how consultants may be able
to help companies who are using or consider-
ing using LSPs. Overall, 46% of the customers
believe that a valuable role could be played
by consultants as companies document and
assess the need for 3PL services. Approximately
40% believe that the consultant could provide
significant value as a “trouble-shooter” during
the selection and implementation stages of an
LSP relationship, and to help manage the LSP
selection process. Finally, about 30% indicate
a significant interest in having a management
consultant provide a comprehensive range of
services for managing relationships with LSPs.
The response to this last question suggests the
existence of an increasing market opportunity
for management consultants.
Logistics Service Provider
Buying Process1
Among customers of 3PL services, previous
studies show that 90% have a preference for
utilizing a bid process, in contrast to negotiating
with individual suppliers on a sole-source
basis. Almost 70% prefer a formal, written
contract, with respondents about evenly split
between preferring a “fixed term” versus an
“evergreen” or “rolling” contract. Overall,
respondents indicate a preference for limiting
the scope of involvement at first, followed by
more intense utilization of the LSP based on
growing experience and satisfaction.
Flat-rate pricing (53.%) and transaction-based
fees (64.%) are the most common forms of
compensating LSPs. While cost-plus (22%)
and percentage-of-savings (17%) are used
to a lesser extent, the percentage-of-savings
approach indicates the most growth, increasing
from 12% in the 1996 survey.
1 The content of this section is based on information from the 1997 3PL services survey. In 1998 and 1999, it was
decided, for reasons of length and content, to temporarily exclude a few questions. Although the discussion is
based on results from the earlier survey, the findings still have relevance to those interested in the 3PL services
buying process.
Source: 1998 Third Party Logistics Services Survey
data, University of Tennessee, Exel Logistics, and
Ernst & Young.
Third Party Logistics Services: Views from the Customers 13
Respondents were asked about specific issues
which are addressed in their contract or
agreement for 3PL services. Among those
addressed most frequently are the following:
✗✗ Service standards and performance meas-
urement
✗✗ Process for termination or dissolution of
agreement
✗✗ Key performance indicators
Among those addressed least frequently are
the following:
✗✗ Potential collaboration with other third
party service providers
✗✗ Gain-sharing/performance incentives
✗✗ Specific goals related to continuous
improvement
✗✗ Procedures for conflict resolution
a wide range of executives
has become involved in the
decision to use third-party
logistics [and this] growing
interest...directly relates to
the expanding scope of supply
chain solutions now being
offered by some service
providers.
C. John Langley Jr., Brian F. Newton,
and Gene R. Tyndall
Supply Chain Management Review
Fall 1999
14 University of Tennessee Exel Logistics Ernst & Young
The Rise of Information Technology
THE 1999 SURVEY SIGNIFICANTLY ENHANCES the inquiry into third party logistics
(3PL) services in relation to information systems. Exhibit 9 shows the results of the data
provided by the 186 respondents who use 3PL services. More than half (101) of these
respondents report the provision of some form of e-Commerce services, followed closely by
systems for warehouse/distribution center management (94) and transportation management
(76). Looking at future plans, it is apparent that responding companies expect significant
increases in the use of logistics service providers (LSPs) in these three areas. While respon-
dents report somewhat less use of information technology (IT) for other purposes (i.e., sup-
ply chain planning, supplier management systems, customer systems, and export/import),
it is clear that the provision of systems for these purposes also is expected to increase.
)sPS
L(
srediv
orPecivreSscitsigoLybdeilppuSsmetsySnoitamrofnI
—9tibihxE
0
10
20
30
40
50
60
70
e-Com
merce
Supp
ly Ch
ain Pl
annin
g
Trans
porta
tion M
anag
emen
t
Wareho
use/D
C Man
agem
ent
Supp
lier M
anag
emen
t Syst
ems
Custo
mer Sy
stems
Expo
rt/Im
port
Percent of
Respondents
Future
Current
69.9%
15.6%
53.2%
65.1%
25.2%
40.9%
17.2%
Exhibit 10 provides further detail about use
of LSPs for e-Commerce services. Currently,
these services consist largely of EDI and ship-
ment tracking and tracing. The 1999 survey
data indicates significant projected use of
LSPs for other purposes, such as Internet
ordering, customer linkages, supplier linkages,
and linkages with supply chain partners.
For those respondents indicating the use of
LSPs for “improved information technology,”
the study solicited information as to what
specific areas of need are most critical. The
results suggest that information systems are
needed to help customers succeed in a highly-
competitive, information-intensive business
environment. The need for competency in areas
such as real-time delivery flows, Internet capa-
bilities, and real-time supply chain information
and visibility reinforce this observation.
Third Party Logistics Services: Views from the Customers 15
sme
tsySnoit
amrofnIecremmoC-eerutuF/tnerruCtakooLresolCA
—01tibihxE
0
10
20
30
40
50
60
70
Intern
et Ord
ering ED
I
Shipm
ent T
rackin
g/Trac
ing
Custo
mer Lin
kage
s
Supp
lier L
inkag
es
Other S
upply
Chain
Partn
ers
Percent of
Respondents
Future
Current
36.0%
68.3%69.9%
31.2%
28.0%
23.1%
If it is looked at positively, planned for carefully, and during
implementation, is monitored and supervised effectively,
outsourcing can be a tremendous help in managing
information technology.
Professor Robert Klepper
Southern Illinois University
Respondents were also asked about areas in
which they had experienced any problems
with LSPs. Forty percent (40%) indicate that
there had been a problem due to a lack of
information technology advances. Explaining
their concerns more fully, customers report
that the LSP was responsible in about 46%
of these instances, that it was resolved in a
timely manner only about 15% of the time,
and that improvements were made in only
38% of the cases. The clear conclusion is
that the area of IT services offers significant
opportunities for improvement.
In particular, the study indicates that the areas
most in need of improvement are:
✗✗ Real-time delivery information flows
✗✗ Systems integration
✗✗ EDI
✗✗ Internet capabilities (e-Commerce)
✗✗ Cost effectiveness
✗✗ Real-time supply chain information/
visibility
16 University of Tennessee Exel Logistics Ernst & Young
Customer Value Outlook
CUSTOMER SATISFACTION INDICATORS
Exhibit 11 indicates that over the four years during which this study has been conducted,
respondents have been relatively satisfied with their use of logistics service providers (LSPs).
The 1999 finding that 88% finds their use to be either extremely or somewhat successful is
consistent with levels from earlier years. On a sector by sector basis, the highest levels of
customer satisfaction are reported by customers in the chemical (95%), medical (92%), and
consumer products (89%) industries.
Exhibit 12 provides further detail as to the rela-
tive importance of cost, value creation, and
performance as determining factors for evalu-
ating and selecting LSPs. While cost and per-
formance appear to be the most important
factors for evaluation and selection, the data
suggests that, in the future, company selection
processes will increasingly emphasize value
creation. This increasing emphasis on value
creation suggests that customers of third party
logistics (3PL) services are moving beyond
criteria that offer easy measurability and are
increasingly interested in assessing the overall
value derived from their logistics outsourcing.
)sno
sirapmoCylraeY(gnicruostuOfonoitaulavEre
motsuC—11tibihxE
50
60
70
80
90%90
100
1996
83%
1997
86%
1998
88%
1999
Percent
Satisfied
)sPS
L(sr
edivorPecivreSscitsigoLgnitceleSdnagnitaulavErof
srotcaF—2
1tibih x E
Selec
ting
Evalu
ating
Futur
e Sele
cting
Value Creation
Performance
Cost
38%
22%
40%
34%
22%
44% 45%
36%
19%
Percent of
Respondents
0
10
20
30
40
50
Third Party Logistics Services: Views from the Customers 17
Exhibits 13 and 14 provide information con-
cerning the extent to which customer business
objectives are being met through involvement
of an LSP. The survey question was structured
so that respondents first identified what busi-
ness objectives they are seeking to meet by
using an LSP and then whether those objec-
tives are being met. The results, presented
in Exhibit 13, show that several objectives
are in fact being met by nearly 100% of the
respondents. Those objectives include asset
reduction; strategic/operational flexibility;
reduction in employee base; insulation from
restrictive labor environment; and expansion
of geographic coverage (domestic U.S. and/
or global). Notably, 92.9% of respondents
who identify supply chain integration as a
desired objective saw that objective met.
Coupled with the reported fulfillment of
strategic/operational flexibility objectives,
this supports the contention that the use of
LSPs is contributing to the achievement of
the high-level, strategic goals.
By contrast, Exhibit 14 identifies several areas
where business objectives are not being met
as frequently. Included here are objectives
such as facilitating the move to an e-Commerce
offering, improved information technology,
facilitating the move from “push” to “pull”
logistics, and faster/better implementation
of change. These represent key areas where
LSPs need to focus their attention.
On the positive side, comparison of 1999 and
1998 survey results suggests that the use of
LSPs has led to improvement in at least three
key areas: focusing on core competencies,
supply chain integration, and more specialized
logistics expertise. Inclusion of this last factor
is a positive finding for LSPs. A negative finding
would have suggested that LSPs are failing to
be the source of specialized knowledge and
expertise which they promote themselves to be.
Exhibit 13– Are You Getting What You Are Paying For? (Answer = Yes)
Business Percent Objective Experiencing
Improvement
Asset Reduction 99.0%
Strategic/Operational Flexibility 99.0%
Reduction in Employee Base 99.0%
Insulation from Restrictive Labor Environment 99.0%
Expand Geographic Coverage 99.0%
Specialized Services 94.1%
Supply Chain Integration 92.9%
Reduced Cycle Time 90.8%
Improved Logistics Service 90.2%
Operational Cost Reduction 90.2%
Exhibit 14– Are You Getting What You Paid For? (Answer = Not as Much)
Business Percent Objective Experiencing
Improvement
Facilitate Move to e-Commerce Offering 43.8%
Improved Information Technology 56.7%
Facilitate Move from “Push” to “Pull” Logistics 70.8%
Faster/Better Implementation of Change 72.7%
The logistics out-
sourcing marketplace
is now exploding
because [it enables
companies to] take
advantage of increased
economies of scale and
more sophisticated
process expertise,
which enables them to
release scarce capital
for more productive
uses elsewhere.
Editors
Outsourcing Journal
April 1999
18 University of Tennessee Exel Logistics Ernst & Young
Respondents to the 1999 study report experi-
encing a number of problems. Categorically,
their responses tend to focus on several key
areas of concern:
✗✗ Service level commitments are not being
realized
✗✗ Unsatisfactory transition is experienced
during implementation
✗✗ Information technology advances are not
occurring
✗✗ Time/effort spent on logistics is not
decreasing
✗✗ Performance measurements by LSP are
not being made
✗✗ Control over outsourced functions is
diminishing
When asked about the responsiveness of the
LSPs to problems they are involved in, respon-
dents provide a somewhat checkered report
card. For example, for the problems where the
LSP is responsible, only 32% of the respondents
indicate that they were resolved in a timely
manner. Mitigating this negative finding to
some degree is that improvement is reported to
have occurred (at least eventually) in approxi-
mately 65% percent of the cases. At the same
time, this leaves 35% of the problems without
an acceptable level of improvement.
On a more positive note, respondents were
asked about the types of improvements which
are being experienced as a result of using an
LSP. The following averages are calculated
based on individual responses:
✗✗ Logistics costs reduced by 11.8%
✗✗ Logistics assets reduced by 24.6%
✗✗ Order cycle length reduced from 7.1 to
3.9 days
✗✗ Overall inventories reduced by 8.2%
Finally, customers were asked what types of
value creation using an LSP had helped provide.
Overall, 80% indicate using an LSP contributed
to efficiency, 68% to effectiveness, and 27%
to differentiation or uniqueness. When asked
how the use of an LSP results in differentiation,
respondents offer the following major
differentiators:
✗✗ Flexibility/special services
✗✗ Unique delivery capability
✗✗ Improved customer service
✗✗ Improved reaction time to opportunities
✗✗ Use of the latest technology by LSPs
✗✗ LSPs take responsibility for supply chain
management
)sPSL(sredivorPecivreSscitsigoLweiVstnednopseR
woH—51tibihxE
0
10
20
30
40
50
60
70
80
Orches
trator
Supp
ly Ch
ain St
rateg
ist
Distrib
ution
Strat
egist
Prob
lem So
lver
Reso
urce
Man
ager
Reso
urce
Prov
ider
Percent of
Respondents
23.7%
90
15.6% 12.9%
82.3%
35.5%37.6%
Third Party Logistics Services: Views from the Customers 19
Logistics’ Strategic Value
and the Role of LSPs
Of the 186 companies using 3PL services,
approximately 76% indicate that logistics rep-
resents a “strategic, competitive advantage”
for their company, and 62% that their LSPs
are viewed as “important in the improvement
of shareholder value.” As suggested in all of
the earlier studies, these figures imply that the
use of 3PL services is not necessarily inconsis-
tent with logistics being an area of strategic
importance to the company. Thus, it is appar-
ent that there are a significant number of
companies which view logistics as a core
competency and a source of competitive
advantage, but have also elected to outsource
certain portions of the logistics process.
The 1999 survey also includes a question
regarding how the respondents think of
LSPs. As shown in Exhibit 15, most customers
(82.3%) think of their LSP as a “resource
provider,” while 35.5% indicate they also
view the provider as a “resource manager”
or as a “problem solver” (37.6%.) While some
third party relationships may be considerably
deeper and more strategically focused than
these characterizations would suggest, it
appears that opportunities exist for LSPs to
be regarded more in the roles of “distribution
strategist,” “supply chain strategist,” or
“orchestrator.”
COMPANY VIEWS ON THE ROLE, VALUE,
AND FUTURE OF 3PL SERVICES
Respondents were asked to agree or disagree with a series of
key statements about the role, value, and future of 3PL services.
Their responses show that companies using 3PL services are in
general agreement that:
◆ Customers are placing more emphasis on logistics
customer service
◆ LSPs should provide a broad range of service offerings
◆ Logistics represents a strategic, competitive advantage
for their company
At the same time, respondents feel somewhat certain that:
◆ They are willing to participate in “cost-sharing” with
LSPs as part of a commitment to “gain-sharing”
◆ They can measure the value of LSP involvement in
financial terms
◆ LSPs are important to the creation of shareholder value
◆ LSPs will be able to keep pace with the challenges of
global supply chain integration
Alternatively, there is an element of uncertainty expressed
by customers as to whether:
◆ LSPs offer new and innovative ways to improve logistics
effectiveness
◆ They rely on LSPs for leadership in information technology
◆ They are moving to rationalize or reduce the number of
LSPs they use
20 University of Tennessee Exel Logistics Ernst & Young
In Conclusion
TRENDS WHICH THE STUDY IDENTIFIES in the marketplace for 3PL services are con-
sistent with larger trends in the business environment. The growth of e-Commerce, which is
particularly dramatic at a business-to-business level, is reflected in growing company interest
As the business world
embraces the new millennium,
the third-party logistics
profession is changing
significantly and is moving
in new directions. These
dynamics are most evident
in certain key areas: business
growth and evolving
core competencies, global
strategic and operational
alliances, and the integra-
tion/leveraging of informa-
tion technologies.
C. John Langley Jr., Brian F. Newton,
and Gene R. Tyndall
Supply Chain Management Review
Fall 1999
in using 3PL services for e-Commerce-
related purposes. The widespread prevalence
of new forms of collaboration among busi-
nesses and their suppliers is reflected in the
growing desire of many companies for closer
and more comprehensive involvement with
their LSPs. The growing focus by companies
on generating shareholder value is reflected
in their increased interest in using 3PL
services for value creation. Overall, the
1999 study suggests that LSPs are in the
mainstream and, in some cases, at the
forefront of the rapid changes that mark
the new economy.
The Study Sponsors
THE UNIVERSITY OF TENNESSEE
The internationally recognized logistics program at The University of Tennessee, Knoxville, is
one of the most comprehensive and contemporary programs in the nation. The university is a
major research entity. The faculty publishes widely on current topics of industry concern and
explores future trends through research and studies. It has been ranked as the top school in
the country for educating logistics/distribution managers and its Logistics and Transportation
Program ranked as the best program of its kind in the United States. The University of Tennessee
Department of Marketing, Logistics, and Transportation can be found on the Web at
www.bus.utk.edu/public/mlt/mlt.nsf
EXEL LOGISTICS
Exel Logistics is one of the world's leading providers of logistics services with over 700
strategic operating locations in the Americas, Asia Pacific, and Europe. Exel Logistics partners
with world-class customers, helping them lower operating costs, improve asset utilization, and
create competitive advantages by improving supply chain efficiency and developing more
effective routes to market. A pioneer in industry-focused logistics, Exel Logistics is dedicated
to the automotive, chemical, healthcare, grocery manufacturing, electronics, and retail sectors
worldwide. The company offers a wide range of services, including integrated warehousing
and distribution, freight management, JIT distribution, and home delivery. Exel Logistics is a divi-
sion of NFC plc, one of the largest logistics companies in the world. NFC is publicly traded on
The London Stock Exchange and The American Stock Exchange. Exel Logistics Americas is head-
quartered in Columbus, Ohio, and has operations in the United States, Canada, Mexico, and in
Brazil. In addition to its logistics business, Exel Logistics Americas offers home delivery of furni-
ture, appliances, and electronics in North America for retailers and manufacturers. Exel Logistics
Americas has over 8,100 associates based in more than 330 operating sites. Exel Logistics can be
found on the Web at www.exel.com
ERNST & YOUNG
Ernst & Young is a global leader in providing companies with management consulting and
professional services. The firm employs more than 30,000 people in 87 cities throughout the
United States. Ernst & Young supply chain specialists have the functional skills and specialized
industry experience to provide business solutions tailored to client needs. Our integrated supply
chain services take companies from strategy development through implementation to results
and help managers create supply chain operational excellence for the maximization of shareholder
value. Ernst & Young LLP is the U.S. member of Ernst & Young International, an organization
whose member firms include more than 85,000 people in 132 countries around the globe.
Ernst & Young can be found on the Web at www.ey.com/consulting/sc/default.asp
For additional copies of this publication or for more
information about the study, please contact:
Brian F. Newton
Director of Strategic Development
Exel Logistics Americas
501 West Schrock Road
Westerville, Ohio 43081
614-890-1730
bnewton@exelna.com
©1999 University of Tennessee. Any reference to, quotation from, or other uses of this document must
provide credit to the University of Tennessee, Exel Logistics, and Ernst & Young.
C. John Langley, Jr., Ph.D.
Dove Distinguished Professor of
Logistics and Transportation
The University of Tennessee
314 Stokely Management Center
Knoxville, TN 37996-0530
423-974-1646
johnlangley@utk.edu
Glenn A. Dalhart
Partner, Leader of North American
Supply Chain Practice
Ernst & Young
Sears Tower
233 South Wacker Drive
Chicago, IL 60606-6301
312-879-5305
glenn.dalhart@ey.com
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