With retail e-commerce a seemingly unstoppable trend, increased parcel volumes and an uptick in emerging markets, the third party logistics market is poised to grow significantly over the next few years. In the latest Precision Report we look at the opportunities and threats for the market as well as software solutions for 3PLs.
Here’s an interesting figure: a study by Grand View Research projects that the 3PL market will reach USD 1.24 trillion by 2025. That’s quite a jump from the $802 billion the market achieved in 2016. Forecasting, of course, requires research and expertise — but it also is partly an art. After all, who can predict the unpredictable?
There are plenty of opportunities for both the market and individual 3PLs to grow. One of the main driving factors is retail e-commerce. Globally, online sales make up 9 percent of all retail sales currently, but the market is growing by 20 percent every year. To meet customer demands, many retailers are leveraging 3PLs for fulfillment and transportation.
For retailers serving emerging markets or expanding their global reach, using a 3PL with local knowledge and capabilities makes sense. However, it’s not just retailers that are driving growth. Manufacturers and end-use industries in emerging markets often lack logistics and transportation abilities, and they too prefer to outsource those functions to a reliable 3PL partner.
Parcel volumes have increased overall and companies are also spending more on logistics. The 22nd Annual Third-Party Logistics Study — the most recent study — found that total logistics spend is now at 11 percent of sales revenues, up from 10 percent the previous year. What’s more, 3PLs are managing more of shippers’ transportation spend — up to 55 percent from 53 percent the previous year.
Despite these areas of growth, there are challenges which cannot be ignored. These include the high demand for logistics space, worker shortages, rising transportation costs, and the increasing self-reliance of omni-channel retailers.
Perhaps the most important consideration is that retail shippers’ requirements are changing. As retail e-commerce has grown, the expectation of fast and cheap — if not free — delivery has grown concurrently. Unless a retailer is offering unique products, they cannot depend on brand loyalty. Around half of all online shoppers abandon their baskets if they are unhappy with the delivery options. This puts pressure on retailers, who in turn, put pressure on their 3PL partners.
In 2018, many shippers want more than just their orders fulfilled and delivered. Technology for logistics operations has improved, and shippers, understandably, want to leverage these solutions. 3PLs need to add value and offer data that can help their customers improve operations. 3PLs who do not integrate technology to help them fulfill time-sensitive deliveries, maximize throughput and offer data-driven insights risk falling behind because of an “IT gap” in their capabilities.
Across much of the world, demand for warehouse space is outstripping supply. In their Q1 report, commercial real estate company, Cushman & Wakefield found that in the United States, the strong demand for logistics space has resulted in rental rates increases and declining vacancies. They found that e-commerce distribution space has grown from less than 5 percent of US leasing to 22-25 percent of quarterly absorption in just five years. 3PLs and their retailer customers along with manufacturers and food and beverage firms are driving this demand.
Similar trends can be seen across Europe. In Q1, the UK and Poland both experienced record demands for warehouse and logistics space driven by 3PLs, carriers and retailers.
On the plus side, there have been investments in construction. One example is industrial real estate giant, Panattoni Europe’s plan to invest €1.2 billion (about $1.39 billion) in city logistics spaces dedicated to last mile deliveries. Panattoni has construction projects earmarked in the UK, Germany and the Czech Republic as well as four sites under development in Poland.
The lack of space is not just a problem in the US and Europe. Logistics space is the fastest growing real estate asset in India. This is the result of a growing middle-class, prompting a surge in retail e-commerce.
Trade deals — or the lack thereof — plus political manoeuvres and even peace agreements impact the way many industries conduct business. Few could change the way global 3PLs work more than the chance of normalized relations on the Korean peninsula.
South Korea has the world’s highest e-commerce penetration rate, where 18 percent of all sales are made online. E-commerce is forecast to hit more than 30 percent of all sales by 2021. South Korea is also the fourth largest 3PL market in Asia Pacific. With an annual growth rate of 7.8 percent, the market is growing faster than Japan, Australia and Singapore.
Despite this trend, there has been little investment in logistics space until recently. Foreign investors have created a construction boom, such as the nine projects under development by China’s E-Shang Redwood Ltd.
This investment seems to have an eye on long-term potential. It may be some time until there is peace in Korea, but the possibility is there. North Korea’s Kim Jong-un and South Korea’s President Moon Jae-in both appear committed to April’s Panmunjom Declaration for Peace, Prosperity and Unification of the Korean Peninsula. Reunification — or a meaningful truce — could be a long way off. Analysts have suggested that if the recent thawing of relations continues, the peninsula could become an important logistics corridor, perhaps linking up with China’s US$900 billion “One Belt One Road” infrastructure initiative.
Retailers are some of 3PLs busiest and most demanding customers because every year the turnaround between order and delivery is tightening for retailers.
The recent Future of Fulfillment Vision Study conducted by Zebra Technologies found that 78 percent of logistics companies expect that same-day delivery will be standard by 2023 and 40 percent expect that packages will be delivered with two hours by 2028.
It’s hardly surprising that 3PLs expect lightening fast turnaround to become standard. If 3PLs don’t meet these demands, omni-channel retail shippers have the option of using their stores as fulfillment centers.
The same study found that most of the retailers they surveyed use store inventory to fulfill online orders when they can. To meet customer expectations, some retailers are retrofitting stores to double as online fulfillment centers.
US department store and omni-channel retailer Kohl’s boosted margins doing just this. This Q1, Kohl’s fulfilled 30 percent of their online orders in-store using existing inventory. The company also offers Buy Online Pickup In Store (BOPIS) facilities. BOPIS is a smart strategy at a time when US trucking capacity is at a premium. It lowers shipping costs and ensures customers get their purchases in a timely manner — if they are willing to collect.
Retailers such as Kohl’s believe that their network of stores can process online orders faster and more efficiently than 3PLs. Their customers are increasingly demanding a seamless, faster purchasing journey. That means 3PLs not only have to keep up with retailer shipper demands — they have to add value.
An omni-channel retailer with a network of stores is closer to the end-user than a 3PL working through a number of warehouses or DCs. Fortunately for 3PLs, that does not mean that in-store fulfillment is the best, smartest or least costly way for retailers to meet customers’ demands. What 3PLs have to prove is that they offer value and capabilities that their retail customers do not have in-house.
Drones, virtual reality, warehouse robots, AI and self-driving vehicles dominate the headlines. However, there are less flashy technological solutions that offer the benefits most companies really need. The most compelling technologies of all are the ones that offer insights into the masses of data that shippers generate.
The 22nd Annual Third-Party Logistics Study found that data and data driven decision making is increasingly important to all shippers, including 3PLs. Technology makes it possible to offer faster and more efficient services, provide better visibility and improve safety.
3PL IT capabilities can create value for their customers. The study also found that 91 percent of shippers believe that IT capabilities are a necessary element of 3PL expertise. This, concludes the study, reinforces the importance of investments in this area. Examples include transportation management, shipment visibility and global trade management tools. Areas that are becoming increasingly important include operational analytics, data mining and yard management.
Last year, 65 percent of shippers indicated that they were happy with the IT capabilities of their 3PLs. This year, however only 56 percent of shippers expressed satisfaction. As technology has improved it is likely that shippers’ expectations have risen. Better analytics and business intelligence can drive better decision making, help optimize supply chains, control transportation spend and increase efficiencies. For many 3PLs, their current technology does not support the types of services their customers demand.
Software Solutions for 3PLs: Reduce Risk and Simplify Global Trade
The 3PL business is evolving from an asset-based business. It is no longer just about warehouses and shipping capabilities, but equally about technology, service and expertise. For 3PLs to leverage their expertise in supply chain management they need to offer the technologies and services that truly add value.
3PLs are responding by providing a whole array of services that ease the burden on shippers. These include activities such as kitting and bagging, labeling or even final assembly. However, the greatest growth opportunities lie in services that allow 3PLs to support global trade and e-commerce activities. These services include:
3PLs can differentiate and attract new business by enabling and simplifying global trade and ensuring customer trade flows are minimally impacted by potential disruptions. With the right global trade management solution, 3PLs can effectively manage dynamic trading environments.
PRECISION Global Trade Management software provides visibility into transportation processes as shipments make their way around the globe. Our global trade management software streamlines and centralizes the process. This includes an automatically updated multilingual database of customs and industry reporting documentation. It also offers you a global multi-carrier shipping solution. This ensures that you remain competitive without compromising customer satisfaction.
Global trade compliance is another significant pain point that 3PLs can address as a value-added service. Compliance violations are extremely costly, but with thousands of changes each year to published lists of sanctioned entities — frequently and without warning — compliance is challenging. By offering trade compliance as a value added service, 3PLs can help customers manage risk and reduce their liability.
PRECISION Trade Compliance software delivers automated updates to trusted content from regulatory agencies around the globe in real time. Our trade compliance software tracks every shipment with a fully documented audit trail. As a result, you can prove compliance and performance to customers and regulatory agencies on demand.
In recent years, US regulatory authorities have targeted 3PLs, freight forwarders, consolidators and carriers. The US government sees logistic providers as a last line of defense. A comprehensive trade compliance solution is therefore a crucial investment for US or global 3PLs.
Due to the global nature of e-commerce, being able to connect to a global carrier network is a critical requirement. Moreover, regional carriers often provide local knowledge, different lanes, niche services or specific capabilities. These include cold chain delivery (for medical or life sciences companies) and PUDO point determination (for B2C and service parts logistics).
This requires parcel shipping software that many 3PLs — even those that have handled traditional order fulfillment — may be lacking. E-commerce fulfillment is driven by small package sizes, demand for rapid delivery and the ability to provide up to the minute status on deliveries.
With PRECISION Transportation Execution you can manage your shipments from a centralized system, connect to a truly global carrier network, leverage automatic routing guides, consolidate shipments, and choose the costs and service levels you need. Whether you operate locally or globally — across Asia Pacific, Europe, the Middle East, Africa, North, Central and South America — PRECISION extends your capability to utilize multiple carriers while monitoring spend and performance against contractual commitments.
Precision Software, a division of QAD Inc., provides industry-leading global trade management, transportation execution and multi carrier shipping software solutions from a single, integrated platform. Preeminent industry leaders in every region of the world rely on our global support centers to leverage thousands of carriers and manage millions of shipping transactions every day. The PRECISION solution’s open architecture allows for easy integration with leading Enterprise Resource Planning (ERP), Warehouse Management Systems (WMS) and existing legacy solutions. An ISO-certified company, Precision Software assists companies around the world to minimize shipping costs, optimize first mile and last mile deliveries, avoid compliance delays and mitigate the risks associated with dynamic trading environments. Precision Software’s customers span multiple industries including banking and finance, life sciences, high technology, retail, industrial, automotive, higher education and public sector as well as logistics providers. For more information about Precision Software, visit www.precisionsoftware.com.