Our December newsletter was published on Tuesday with two new Supply Chain Metrics That Matter reports. One of the reports takes a look at the financial performance of the third party logistics (3PL) industry. If you'd like to read the report in full, you can find it here.
The 3PL industry plays a critical role in the global supply chain, but occupies a precarious position. Margin is tight, growth has been dampened by the Great Recession and there is limited brand loyalty. Services and contracts are won on lowest cost. There are many reasons for the current state of affairs. International trade and shippers have been around for centuries, but the specific 3PL industry is relatively young. The timeline below illustrates several key dates and development which help to explain the ongoing evolution and maturity of the industry.
Growth has been falling through the past 13 years. Competition has intensified and the Great Recession dealt a staggering blow. The performance of the three 3PL companies profiled in the report are shown below.
The low growth brought about by the Great Recession is likely a new normal and we do not expect a return to double-digit growth levels seen at the beginning of the decade. Companies will have to strategize and differentiate their way out of this. This means more collaborative work with clients and a focus on specialized services to avoid the commoditization of their product.
When it comes to operating margin, the story is not much better. 3PL companies have a lot in common with contract manufacturers. They offer a critical service to clients, but cope with very tight margins. The financial results are shown below.
Operating margin in the latest period is low for companies, regardless of company size or geographical location. That is just how it is. By expanding 3PL services from the nuts and bults operations focus to a more holistic and strategic perspective, companies can hold onto their margin levels. With margins this low, it is a necessity.
In the full report, we offer a more comprehensive look at the industry with focus on the cash-to-cash cycle and revenue per employee metrics. 3PLs need to work to reinvent themselves to ensure stability and resiliency moving forward. I especially enjoyed writing this report as 3PLs are a piece of the supply chain ecosystem I have not spent much time with. Let me know what you think.