Third Party Logistics Market: Covid-19 Impact, Analysis and Forecast
Third party logistics is the function by virtue of which a manufacturer can outsource its activities related to logistics and distribution. A 3 PL
company can provide specialized services such as inventory management, cross-docking, door-to-door delivery, and packaging of products. Third party logistics offer wide-range services from production to distribution and aftermarket services. The companies operating in global third party logistics market provide standardized warehousing, transport, and other value-added services in order to form a customized supply chain solution.
Key market segments for third party logistics providers is divided by four modes of transport (railways, roadways, waterways and airways) and by industry (technological, automotive, retailing, healthcare, etc.).
According to Allied Market Research, currently the global third-party logistics (3PL) market was valued at $1,027.71 billion in 2019, and is projected to reach $1,789.94 billion by 2027, registering a CAGR of 7.1% from 2020 to 2027. In 2019, the Asia-Pacific region garnered the highest share in the global 3PL market. advanced IT solutions such as electronic data interchange (EDI) and vendor managed inventory (VMI) is supplementing the growth of the global 3PL market. The market is further poised to witness significant growth during the forecast period, owing to the development of the ecommerce industry along with rise in trade activities around the globe and inclination of manufacturers & retailers toward enhancing their core competencies for profitability.
Factors Impacting the Market
There are several growth drivers for the industry which had led to a tremendous rise in the 3PL industry. In recent times, due to the adoption of multi-modal system vendors have been able to significantly cut down the cost and reduce the lead times. There has been a trend amongst manufacturers and retailer to focus on their core competencies and sub-contracting activities. The goal here is to promote respective specialization in production and distribution. 3PL companies can make better use of transportation assets by balancing the needs of multiple client shippers across transportation and distribution functions, which will result in economies of scale. Coupled with the rise of e-commerce industry, there has been a uptrend in reverse logistics as well. Thus, e-commerce companies outsource their logistics and reverse logistics to their 3PL partners and hence booming the industry.
While the industry has a huge potential for growth in the coming years, but at the same time there are a few challenges that the companies need to pay heed to in order to to successful. Since 3PL service providers are quite critical to the business of the customers, their mistake has the potential to affect the manufacturer’s reputation and relation with customers. By using the 3PL service, the manufacturer lacks direct control and in turn, has to rely on the reliability, competency and honesty of the service provider.
Top Winning Strategies
The key strategies that the top players in the industry have implemented, and which has led to positive synergy and uptick in their business include:
Acquisition: This move is adopted by companies to take ownership stakes of other companies and control it. In addition, it aids to expand owners’ geographical presence and develop its products & services portfolio.
Agreement: This strategy enhances market players’ capabilities and improves market outreach.
Collaboration: This includes two or more companies agreeing to cooperate with each other for a specific purpose or to achieve a common goal.
Business expansion: This strategy is adopted to enhance product portfolios, expand geographical reach, and increase customer base.
Partnership: This strategy is adopted when two or more companies agree to cooperate to develop their
mutual interests.
Product launch: This includes introduction of new and unique products in the market.
Asset Based vs Non-Asset Based 3PLs
Logistics service providers can be basically segmented into two divided into two broad categories: asset and non-asset based providers. These can be further reclassified into:
a) Asset Heavy: Asset heavy 3PLs owns many or all of the assets like trucks, warehouses and DCs, among others. These organization effectively use of their assets to cut cost for their client’s logistics operations. Organizations like FedEx, UPS, Maersk, Union Pacific, J.B. Hunt, Ryder are asset heavy.
b) Asset Light: Asset light firms rely mostly on the technology enabling supply chain solutions for their customer and supports the operations via negotiating contracts with warehouses, trucking companies and distribution centers in order to manage end to end supply chain at the lowest possible cost. non-asset based 3PLs exhibit a flexibility in supply chain solutions that asset based 3PLs do not.
Asset based 3PLs, however, can sometimes encounter a conflict of interest when developing supply chain solutions. Since this type of 3PL has made significant investments in their physical assets, they are tethered to those assets when devising ways to manage your logistics.
Technology enabled organizations like Kuehne-Nagal, DSV, C.H. Robinson, Expeditors, Hub Group, Sinotrans are asset light. Kuehne-Nagal is an asset-light business model and invests only into strategically important locations with high demand for state of the art or industry-specific logistics space. DSV operates with an asset-light model by booking transportation of shipments from trucking, railroad, ocean shipping, and air-freight. CH Robinson has an asset-light model which generates consistent free cash flows, holds profits fairly steady during industry downturns thanks to its variable cost structure, earns great returns on invested capital
Impact of Covid-19 on 3PL Service Providers
Revenue growth has gone substantially higher during Covid time due to heavy demand and focus on logistics as key differentiator. Post 2019, net income is showing a drastic uptick due to operating margin and EBIT getting improved significantly. Profitability metrics like operating margin, net margin has improved as the revenue has increased drastically and COGS (% of sales) remaining constant. Cash Conversion Cycle has increased during Covid, because the Days Sales Outstanding would have increased as the business of customer companies is disrupted leading to delayed payments. ROA, ROIC and ROE have significantly increased post covid indicating better efficiency of the companies.
References:
Allied Market Research: Third-Party Logistics (3PL) Market
