Market Update: Shippers are Outsourcing Transportation Management

Why are Logistics Costs Rising?

According to the 26th Annual State of Logistics Report, the cost of logistics for U.S. businesses in 2014 rose 3.1 percent to just under $1.45 trillion. The total cost of logistics is equal to about 8.3 percent of the nation’s gross domestic product (GDP), a value that, by itself, is not alarming; however, all signs indicate that this number will rise significantly in the coming years.

There are a number of factors driving the rise of logistics costs: the ongoing driver shortage, limited capacity because of fewer trucks, a healthy economy and increasing interest rates. According to the ATA, the industry is currently short 25,000 drivers.  There are just enough drivers to meet demand. But, this shortage is expected to get worse. The driver shortage is predicted to grow to a deficit of 239,000 drivers by 2022.

The driver shortage is a major issue facing shippers and carriers and is compounded by the fact that the economy is picking up. Since shipment volumes are increasing, it’s difficult for carriers to provide adequate capacity. Carriers will increase rates by 10% or more.

Interest rates will also encourage higher logistics costs. The Federal Reserve is anticipated to increase the benchmark interest rate for the first time since 2006, however, it is unclear when or by how much. If this occurs, it will also increase the costs of logistics operations.

Logistics costs will rise slowly in the next two years and then spike upward, according to Rosalyn Wilson, who has helped prepare the State of Logistics Report since 1994.  The surge in prices will likely begin with one major carrier implementing huge rate increases, then the rest of the industry following suit.

What do Rising Costs Mean for Shippers?

In 2014, Wilson said shippers were able to negotiate rate increases from highs of 6 to 8 percent down to around 2 percent.  This will not be possible anymore.  Transportation, due to the driver shortage and many other factors, will become expensive and difficult to manage. 

The Boston Consulting Group (BCG) and the Grocery Manufacturers Association released a report about logistics challenges facing consumer packaged goods (CPG) companies. The results showed that more than 80 percent of respondents said transportation is their main obstacle. Other obstacles cited include capacity shortages, escalating costs and inconsistent service levels. Shippers who participated in the report said all recent efforts of cost-savings in the supply chain have been offset by transportation costs.

Everything from procurement to packaging is going to be more expensive for shippers, which means shippers have to react now to mitigate the oncoming rise in logistics costs.

Why are Shippers Outsourcing Transportation Management?

There’s little doubt that third-party logistics (3PLs) companies have the capability to provide logistics services shippers need, and outsourcing transportation and supply chain management is rapidly growing in popularity. An estimated 80 percent of Fortune 500 companies and 96 percent of Fortune 100 companies use 3PL services in some way.

To ease the impact of existing challenges in the logistics industry, the two most valuable services a 3PL provides are reliable capacity and flexibility in service.

Most 3PLs offer scalable freight solutions, allowing a shipper to pay for the service they use.  This means a more flexible pricing structure, letting shippers scale their volume of service up or down based on shipments, which is especially helpful in times of turmoil.

In addition, 3PLs offer custom solutions for moving freight.  Many 3PLs will give shippers custom reports, supply chain consulting and TMS solutions.  3PLs utilize their carrier network to obtain lower rates. As experts, 3PLs leverage their wealth of industry knowledge to find the best carriers, routes, and schedules.  The level of service a 3PL is capable of providing is not possible through in-house transportation management.

Insufficient capacity is a scary reality for shippers – resulting in unsustainably high shipping prices or, worse, inability to move products out of distribution centers.

Some 3PLs have tens of thousands of carriers under contract that can move any type of freight, even at a moment’s notice, which can help a shipper avoid capacity problems. Also, 3PLs will help shippers improve their shipping facilities and procedures to help them become a preferred shipper of carriers. If a shipper is carrier-friendly and has good standing relationships with multiple carriers, finding the capacity to ship freight won’t be difficult.

How Can A Shipper Ensure Successful Outsourcing?

Outsourcing transportation reveals long-term success for shippers; according to the 2014 3PL study from Capgemini Consulting, about 70 percent of shippers are satisfied with their current 3PL relationships. But, that still leaves about 30 percent of shippers who are unsatisfied with their outsourced transportation management.

When outsourcing transportation, the relationship between the shipper and the 3PL is important. Collaboration and communication must flow freely both ways to help build a mutually beneficial relationship, which is the key to successful outsourcing.

But, the question remains: how can a shipper establish and build a good working relationship with a 3PL?

These three areas will help shippers develop meaningful 3PL partnerships:

  • Communication – Improper communication is a common reason for failure in outsourcing.  3PLs should be viewed as a partner, not as a commodity.
    • Set a timeline and method of communication with a 3PL. It could be a daily email, weekly call or monthly meeting; whatever works best for both companies. Keeping an open line of communication is the first step in developing an effective partnership.
    • Once a line of communication is open, a shipper must dedicate resources to manage the entire relationship in general. The goal of managing communication is to ensure both companies are strategically collaborating on projects and are happy with the results.
  • Transparency – Transparency creates high quality, informative and effective decision making for both parties.
    • A 3PL should be knowledgeable of a shipper’s long term business strategies. Business intelligence and insight empowers a 3PL to plan for the future and provide the detailed, custom service a shipper needs.
    • In addition to long-term strategy, a 3PL should be involved in solutions across the entire supply chain. This doesn’t mean a shipper needs to consult a 3PL on every supply chain decision. However, if a 3PL understands how a shipper’s logistics processes fit into the puzzle of the larger supply chain, they will be able to apply more creative and more effective logistics solutions.
  • Trust – When a shipper takes a strategic approach to outsourcing, communicating and collaborating with a 3PL, they have to have trust that the 3PL will produce results.
    • A shipper must set realistic expectations when outsourcing logistics. Just because 3PLs are logistics experts does not mean they will be able to instantly fix every problem. It may take some time, working with carriers and analyzing shipping patterns, before a 3PL can come up with an impactful solution.
    • A shipper should try to work with a 3PL for a long period of time. This will give a 3PL time to come up with a unique, all-encompassing solution for logistics obstacles. Contractual agreements typically last 2 to 3 years.  3PLs need time to come up with innovative processes that fit a shipper’s specific needs.

 

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