CapGemini, Panalpina & Oracle on 'The Hidden Opportunities of Economic Crisis - Findings from the 14th Annual Third-Party Logistics Study

Results and Findings of the 14th Annual Study

The State of Logistics Outsourcing

2009 Third-Party Logistics

Copyright 2009 C. John Langley Jr., Ph.D. and Capgemini U.S. LLC. All rights reserved.

Contents

� About the Study

� Current State of the 3PL Market

� Economic Volatility


� Supply Chain Orchestration

� IT Capability Gap

� Strategic Assessment

2

Expanded Focus in 2009 to Include 3PL Users and Providers

About the Study


3

� E-Mail Survey of Executives from 3PL user and provider firms

• User survey targeted VP, Director, Manager of Logistics or Supply Chain Management

• Provider survey targeted CEO’s and Executives

This year’s 3PL study incorporated three majorresearch thrusts


� Focus Interviews with Executives and Industry Observers

• Interviews pertained directly to “special” topics included in 2009 study

� Capgemini Accelerated Solutions Environment® (ASE) Facilitated Workshop Session

• Chicago, USA and Utrecht, Netherlands

• Workshop in Singapore

4

Survey respondents represented range of geographiesand industries

Shipper respondents

Industry %

1. High-Tech / Electronics 14

2. Consumer Products 12

3. Food and Beverage 10

4. Life Sciences and Pharma / Healthcare 10

5. Automotive and Transport Equipment 10

6. Industrial Manufacturing 8

North America(248)32%

Latin America

Europe(250)33%

Asia-Pacific(155)20%


5

+ 279 Survey respondents from 3PL provider firms.

6. Industrial Manufacturing 8

7. Retail 6

8. Chemical 6

Additional Industries (13) 13

Other 11

Latin America(103)13%

Other(16)2%

3PLs and Shippers – Different Perspectives to Ongoing Issues

Current State of the 3PL Market


6

Shippers currently outsource a wide variety oflogistics services

Outsourced Logistics Services% Users

All Regions

Domestic Transportation 86

International Transportation 84

Customs Brokerage 71

Outsourced Logistics Services% Users

All Regions

Freight Bill Auditing and Payment 33

Transportation Planningand Management

32

Information Technology (IT) Services 30


Warehousing 68

Forwarding 65

Cross-Docking 39

Product Labeling, Packaging, Assembly, Kitting

38

Reverse Logistics(defective, repair, return)

38

Fleet Management 22

Supply Chain Consultancy Services Provided by 3PLs

21

Customer Service 13

Order Entry, Processingand Fulfillment

13

LLP / 4PL Services 12

7

Shippers and 3PLs have similar evaluations of success of their relationships

64%

25%

51%45%

30%

45%

60%

75%


8

Note: 3PL users and 3PLs were asked to rate success on a five-point scale, with “somewhat successful” and “extremely successful” representing the two mostpositive categories

1%1%

9%

1%3%0%

15%

Extremelysuccessful

Somewhatsuccessful

Neither successful nor unsuccessful

Somewhatunsuccessful

Extremelyunsuccessful

3PL Users 3PL Providers

Top “Seven” continuing problemsPercentages

reported by shippers

Lack of continuous, ongoing improvements and achievements in offerings 46%

Service level commitments not realized 46%

Information technology capabilities not sufficient 43%

Shippers report a number of continuing problems with 3PL services


Cost reductions not realized 36%

Lack of project management skills 35%

Unsatisfactory transition during implementation stage 31%

Lack of global capabilities 30%

9

There continue to be significant opportunities for outsourcing of IT-based services

Transp Mgt (Execution)

WH-DC Mgt

Global Trade Mgt

Yard Management

Transportation Sourcing

Transp Mgt (Planning)

EDI

Web Portals


10

0 20 40 60 80 100

Bar Coding

SC Network Opt

SC Event Mgt

RFID

Customer Order Mgt

SC Planning

Web Portals

Visibility

Currently use 3PL Internally managed

Shippers Thinking Both Short- and Long-Term

Economic Volatility


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Unpredictable demand is the most difficult challenge to managing a supply chain in an economic downturn

45%

46%

46%

47%

71%

Fuel price volatility

Unpredictable demand

Supplier financial risk

Currency exchange rate volatility

Excessive inventory in supply chain


12

4%

11%

19%

23%

30%

45%

0% 20% 40% 60% 80%

Difficulty securing capital tofund improvement initiatives

Commodity price volatility(other than fuel prices)

Supplier financial risk

Loss of key supply chainskills due to corporate downsizing

Labor rate volatility

Other

In response, companies use different strategies, where for some they need the help of a 3PL

Strategies used by Shippers Top 3 strategies used by 3PLs

1. Reduce Operating Costs (89%)

2. Expand to New Markets or Offer New Products 59%

3. Renegotiate Supplier Contracts 58%66%

77%

82%

Restructure supply

Renegotiatesupplier contracts

Improve forecasting &inventory management

Reduce operating costs


13

… other coping strategies

� Increasing Control

� Risk / Gain sharing

� Improve Integration with 3PLs

� Horizontal Integration

29%

42%

56%

60%

61%

100%0%

Increase use of contractmanufacturing and BPO

Rationalize productcatalog (SKUs)

Expand to new markets oroffer new products

Reduce order-to-cashcycle time

Restructure supplychain network

50%

It’s significant that 30% of the shippers think they need more 3PL services to help them weather the storm

What is the net effect of current economic uncertainties on your company’s need for 3PL services?


14

Shippers are re-evaluating their 3PL relationships and making changes where required

Strategies used to mitigate risks with 3PLs

Developing internal capabilities tocomplement / replace 3PL provider(s)

24%

Switching 3PL provider(s) 26%

Renegotiating payment terms /contracts with 3PL provider(s)

54%

… But 3PL users in largercompanies are looking to

rationalize the number of 3PLs


15

8%

Investing in 3PL provider(s) 16%

My company does not have aproactive risk mitigation strategydirected toward 3PL provider(s)

20%

Other risk mitigating strategies

rationalize the number of 3PLs and intensify their 3PL partnership

The economic crisis as an inflection point to rethink supply chain /3PL relationships?

The Case for Rethinking Shipper / 3PL Relationships

Supply Chain Orchestration


16

Inventory as a percent of total logistics costs has been rising for almost 5 years

40%

60%

80%

100%

120%


17

� Last 4-5 years inventory as a percent of total has been growing

� Inventory growth is unrelated to the current global economic situation

� Businesses recognize that long thin supply chains may not necessarily be the best answer

� Supply chains today are looking at alternatives to chasing the cheapest labor

20%

TotalTranportationInventory

1986 1990 1995 2000 2005 2007

Source: Council of Supply Chain Management Professionals 19th Annual State of Logistics Report (2008)

Costs associated with global supply chains have proven to be highly volatile and will continue to be unpredictable

� Oil (fuel) 40 USD per barrel, 146 USD per barrel, now approx. 70 USD per barrel

� Floating currencies … USD and China

� Rapidly changing local labor rates … China, Mexico, Thailand, Vietnam, Malaysia


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� Rapidly changing local labor rates … China, Mexico, Thailand, Vietnam, Malaysia

� Supply Chain capacity reductions… Ocean, North Pacific 30% this year, rail 12%, trucking 22%

� Changes coming with expansion of the Panama Canal

Is the current global economic situation a possible inflection point between 3PLs and shippers?

19%

22%

Not sure

59%YesNo


19

� A very high percentage of respondents feel this is the time in which to re-evaluate their relationships with their 3PLs to possibly drive the relationship deeper

� A significant number of respondents are somewhat confused by the current environment as to what it means about their business and 3PLs

YesNo

What is preventing you as a shipper from outsourcing moreto your 3PLs?

38%

56%

My 3PL does not have the business expertise

Supply chain is a core competency


20

� Many businesses still feel they are better at supply chain design and execution than their 3PLs, and they are not asking the 3PL to be anything other than execution focused … However …

40%I want my 3PL to be execution focused

Which of the following critical capabilities would you likeyour 3PL to bring as a strategic partner

60%

64%

Deep business process and IT expertise

Total Landed Cost reporting and analysis


21

� These answers seem to indicate that business is looking closely at possible major changes in sourcing and / or networks, and would welcome a 3PL doing these if they had the skillsand expertise

� None of these services would be typical of 3PL services offered today

46%Supply Chain Network Design

What value do you think you would realize by developing a strategic relationship with your 3PL?

58%

75%

Increase operational flexibilityand become more demand driven

Reduce total landed costs


22

� Research seems to indicate that companies are currently evaluating their processes and capabilities, and clearly see that their businesses could benefit from some non-traditional services being offered by their 3PLs

� However, they need to be shown that the 3PLs they are dealing with have the capabilities and deep business expertise needed to move to the strategic partner level

58%Reduce capital costs, headcount and operational expenses

What is necessary to make strategic relationships work ?

59%22%

19%56%

38%

� Number 1 overall of what is required….Knowledge of the business. If 3PL does not have deep knowledge and expertise, will not become a strategic partner

� Incentives on both sides


23

40%� Joint investment, maybe harmonized IT systems

� Guts to change, willingness to share data

� Executive sponsorship on all levels, both sides

Shippers and 3PLs: Contrasting Perspectives

IT Capability Gap


24

CIOs face daunting challenges …

The IT performance gap, complex architecture, business alignment

0%

20%

40%

60%

80%

100%

2008200720062005200420032002 2009

� Complex applications and technology eco-system dominated by legacy ERP and operational systems that run on mainframes / mid-range systems

� Limited IT budgets predominantly focused on maintenance

� Multiple data silos with duplicate and incorrect data

� How can we ensure that the IT department can respond quickly to the needs of the business?

Challenges / Wish List


25

2008200720062005200420032002 2009

Satisfied with 3PL IT capabilities

IT capabilities necessary element of 3PL expertise

quickly to the needs of the business?

� How can we allocate a higher percentage of resources to innovation versus maintenance projects?

� Shippers

• More than 2/3 of shippers indicated that alignment between business and IT was NOT STRONG and could be BETTER

� 3PLs

• Almost 2/3 of 3PLs indicated that alignment between business and IT was NOT STRONG and could be BETTER

Alignment with the Business

IT demand and supply: What IT services are shippers outsourcing and what IT services are 3PLs offering today …

� 94% of shippers run and operate customer order management internally, only 5% outsource currently and only 5% would like to outsource in the future

� 91% of shippers run and operate supply chain planning applications internally, only 4% outsource currently and only 4% would like to outsource in the future

� 22% outsource EDI transaction processing for orders, ASNs, shipment status updates, and invoicing, 19% would like to do so in the future

Shipper Perspective

3PL Perspective


26

� 75% of 3PLs offer Transportation Mgt. as an offering to shippers today, 14% offer a TMS on a subscription basis today, 4% expect to offer a TMS on a subscription basis in the future

� 81% of 3PLs offer Warehouse Mgt. as an offering to shippers today, 12% offer WMS on a subscription basis today, and 3% expect to offer WMS on a subscription basis in the future

• 71% offer EDI services, visibility to orders, shipments, and inventory

3PL Perspective

� Shippers outsource “execution focused” applications

� TMS and WMS have become standard 3PL IT offerings

� 3PLs are adopting the software-as-a service model!

Shippers face a number of challenges with3PL IT capabilities …

� Multiple operating platforms at 3PLs leading to

• Varied service experience and processes

• Insufficient order / shipment / inventory visibility

36%

50%

Inability to provide sufficientorder / shipment / inventory visibility

Lack of integration amonginternal 3PL systems


27

visibility

� Lack of project management expertise leads to schedule delays, budget overruns,

� Complex integrations result in long lead times to onboard customers

� Incorrect billing driven by disconnected quote-to-cash processes25%

26%

27%

Too much time requiredto onboard customer

Inability to correctly invoicefor services provided

Lack of sufficient project management(PM) processes or trained PM personnel

Integration challenges stymie 3PL – Shipper collaboration

46.5%

48.1%

54.5%

56.5%

57.4%

53.5%

51.9%

45.5%

43.5%

42.6%

Invoicing

Transportation execution (Booking, tendering, document preparation and transportation)

Shipment status updates

Inventory visibility

Purchase order management

Manual and unique integrations, long lead times, differing priorities

Shippers

32.8% 24.6%

32.4% 24.1%

33.1% 21.4%

30.0% 18.1%

27.9% 18.6%


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23.7%

30.0%

32.9%

76.3%

70.0%

67.1%

53.5%

Capacity forecasts and availability

Demand forecasts

Production schedules, transportation schedules

Invoicing

Electronic Data Interchange (EDI) Manual Integration: Fax / phone / email

Unique Integration with each 3PL Standardized integration with every 3PL

18.4%

13.8%

21.3% 11.6%

11.6%

9.9%

� EDI is primarily execution focused – Orders, Inventory, Shipment Status updates are the top EDI transactions

� EDI penetration is < 60% and is much lower for planning and scheduling data

Integration challenges limit 3PL – Shipper collaboration

Manual and unique integrations, long lead times, differing priorities

59.7%

65.8%

66.3%

67.2%

70.3%

40.3%

34.2%

33.7%

32.8%

29.7%

Transportation execution (Booking, tendering, document preparation and transportation)

Shipment status updates

Purchase order management

Invoicing

Inventory visibility47.9% 22.4%

43.6% 23.6%

44.2% 22.1%

38.4% 27.4%

36.2% 23.5%

3PLs


29

43.5%

45.0%

53.9%

56.5%

55.0%

46.1%

40.3%

Capacity forecasts

Demand forecasts

Production schedules, transportation schedules

Manual Integration: Fax / phone / emailElectronic Data Interchange (EDI)

36.7% 17.2%

8.8%36.2%

7.8%35.7%

Unique Integration with each Shipper Standardized integration with every Shipper

� 3PLs focus on supporting Shippers – Inventory visibility, invoice processing, purchase orders are the primary EDI transactions

� EDI penetration is higher than shippers but integrations are predominantly Unique

Bridging the IT Gap: Shipper and 3PL perspectives

70%

71%

75%

Alerts for orders and shipmentsthat deviate from plan

Real-time order and shipment visibility

Timely KPIs and performance data

Shippers would like to see 3PLs provide timely KPI and performance data, order and shipment visibility, accurate billing, real-time inventory status


30

53%

54%

63%

Real-time inventory status – what’scoming inbound, what’s goingoutbound, and what’s on-hand

Timely demand forecasts

Real-time interfaces to shipperorder management systems

3PLs need real-time integration so they have better visibility to demand, timely payments, collaborative planning, and frequent feedback

What shippers and 3PLs want – An open flexible platform to support logistics planning and execution …

Se

rvic

e 1

Se

rvic

e 2

Se

rvic

e 3

Clie

nt 1

Clie

nt 2

Clie

nt 3

Logistics Planning &Execution Platform

� Rationalize and modernize applications, data repositories, and infrastructure

� Link systems using SOA to create a business process platform that drives key processes such as quote-to-cash, procure-to-pay

� Streamline collaboration with customers, partners, suppliers, regulatory


31

Partner Portals, Applications UI, Edge Devices

Enterprise SOA, Workflow Mgt, Event Mgt

Applications, Data Hubs, Infrastructure

partners, suppliers, regulatory authorities through collaboration hubs

� Platform characteristics

• Supports best-of-breed solutions

• Can be configured

• Leverages legacy applications

• Supports industry standards

• Expandable, scalable

A scalable, sustainable, differentiating platform … the technology exists today!

Shippers and 3PLs Adapting to Economic Volatility

Strategic Assessment


32

The recession signaled that the last two decades represented exceptional conditions, unlikely to return

� Previously, unprecedented factors fostered significant commercial growth

• Rapidly multiplying global manufacturing capacity

• Free trade agreements

• Ready access to credit

• Enhanced IT capability

� The economic downturn has severely impacted supply chains globally


33

Shippers are re-evaluating the role 3PLs can play in helping them attain more agile, adaptable and efficient supply chains.

• Diminished consumer demand

• Excess capacity

• Price pressures

• Financing constraints

� Near term, shippers are focused on cost cutting, but longer term, they are seeking to understand and adapt to the “new normal”

To continuously adapt to the “new normal”, shippers and 3PLs need to bridge some fundamental gaps

3PL Capabilities / PositionShipper Perspectives

� Often focus on 3PL execution capabilities

� Some question prospects of deeper business relationships with 3PLs

� Re-evaluating how to leverage 3PLs

� Do not want to be perceived as a “commodity service provider”

� May be able to provide industry specific business expertise


34

� Re-evaluating how to leverage 3PLs to survive (or thrive) in the economic downturn

� Many want price concessions without additional business commitments

� Need improved IT offerings

� Need to promote advanced offerings, particularly total landed cost analysis

� Legacy, business architectures not delivering adequate KPIs, alerts and visibility

Shippers and 3PLs must proactively take steps to maximize their chances to succeed in the new economy

� 3PLs need to reinforce and productize advanced offerings, advertise these to shippers, and reinforce their value by showcasing results

� Shippers need to be open to tapping 3PLs’ internal expertise and to asking for the services they want

� 3PLs should consider new models and a new way of looking at their customer sets

� 3PLs and shippers need to adopt an open standards based logistics planning and execution platform that can be configured to support


35

The time is ideal for shippers to rethink how best to leverage 3PLs and for 3PLs to align their offerings with what shippers really need.

planning and execution platform that can be configured to support multiple services for multiple clients so they reduce the IT complexity, increase adaptability, and increase agility

� 3PLs and shippers need to develop new methods and frameworks for collaboration, including shared key performance indicators, joint brainstorming, longer-term commitments, and models that share both the risks and rewards of innovation

2009 Fourteenth Annual Third Party Logistics Study Team

Thank You!

Check out our website at www.3plstudy.com


� Download copy of 2009 and earlier reports

� Additional information about the 2009 3PL Study

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