Logistics Industry Inches Toward IT Relevance

With demands from corporate clients getting louder and logistics firms getting bigger, the heat is on for technology upgrades.
David McCannOctober 3, 2014
Logistics Industry Inches Toward IT Relevance

Editor’s note: this is an expanded version of an article published on on Aug. 14. It incorporates the views of several CFOs at third-party logistics firms regarding technology challenges facing the industry.

Providers of third-party logistics (3PL) services are lifeblood for companies that buy bulk materials and ship products. At the same time, slowdowns or other glitches or inefficiencies in the services are maddening to CFOs of companies that use those services, because they land squarely on the bottom line.

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As it turns out, 3PL-industry finance chiefs have their own hands full, in some part because of corporate customers’ heightening demands for innovative technology and infrastructure solutions for their supply-chain needs. To the extent 3PLs are responding, it puts new pressure on their CFOs to allocate capital wisely.

But while the logistics industry, including both 3PLs and the ground, ocean and air carriers that physically move customers’ freight, is clearly making progress with IT, it has a lot of catching up to do. It has long trailed the technology-development pace of most other industries.

A 2014 study by recruiting firm Korn Ferry, technology consultant Capgemini, Pennsylvania State University and others reports that while 98% of users of 3PL services agree that IT capabilities are a necessary element of the service they expect, only 55% are satisfied with current 3PL capabilities (see chart below). That gap has narrowed over the 12 consecutive years over which the study has been conducted, but it can’t be good when 45% of your clients think you’re not giving them a key element of what they want from you.

Most in demand is the latest technology allowing fully transparent, real-time tracking of shipments — where they are and when they’ll arrive. Providing that requires logistics firms to keep up to date with advancements in GPS and RFID technologies. “If the customer knows the truck is going to be three hours late, it can make adjustments on the production floor, for example,” says Richard Hanks, CFO of BDP international, which specializes in logistics for the transportation of chemicals and other hazardous, highly regulated products and materials.

According to a separate Korn Ferry report featuring input from CFOs of several major logistics firms, also needed are advanced route-modeling and demand-and-capacity forecasting solutions, and global trade management tools for moving goods across borders in the most efficient and effective way possible.

Stuck in the Bad Old Days
There may be a gulf between the technological capabilities of such large 3PLs and the thousands of small and midsized ones that dot the logistics landscape. At least, the big players point to their technology as a competitive advantage. But not all well-positioned observers are buying it.

“The advances haven’t been that great,” says supply-chain consultant Shawn Casemore. “I don’t care what anyone tells you, if you pull the roof off of most 3PLs, you won’t find huge technology investment. A lot of their tracking, quoting and follow-up is manual — a pile of phone calls and emails. They only way they can cover that up is by having a lot of people.”

He offers the example of one corporate client that was using a “massive, globally recognized 3PL.” The client, seeking a price quote on a shipment from Asia to North America, was left waiting for days. Finally, Casemore reached the client’s contact person at the 3PL, who said that another employee had left the firm and that she was “buried in emails,” he says. “And when we finally did get the quote, it was in the form of an email with an Excel spreadsheet pasted in with highlighted columns. This was a major freight forwarder.”

That anecdote is hardly atypical, Casemore says. Another 3PL, which was having a hard time keeping up with its order volume, hired him to find a solution. “When we went to start digging into their response times, we found they were logging call times and names into spreadsheets, and pulling information from them as necessary. No high-end system for automatically redirecting calls. It was very archaic. No wonder they couldn’t handle the volume.”

The problem may be more acute for midsize and smaller 3PL customers. Many large ones have pushed logistics firms to develop solutions customized for their particular needs. That often requires expensive technology or infrastructure development, which can be a tightrope walk for 3PL-industry CFOs.

“We’re talking huge capital expenditures for projects that may have a shelf life of three to five years,” says Beau Lambert, a principal in the financial officers practice at Korn Ferry. “When larger clients want full suites of customized offerings, it becomes a question of whether the [3PL] companies really have the capability to build out that functionality and what the ROI will be. It really pins the decision on their CFOs and CEOs to make sure they’re correctly allocating capital to the technology platforms customers need most.”

Jonathan Sisler, finance chief at Coyote Logistics, a large and fast-growing 3PL firm that recently surpassed the $2 billion revenue mark, acknowledges as much. “I’d be lying if I said we’ve never gone too far with what the customer wanted in light of what the actual return was going to be,” he says.

Making things worse is that at the same time large 3PL clients want more customization, they continue to “beat the logistics industry over the head on price,” says Neil Collins, global sector leader for Korn Ferry’s logistics and transportation services practice. That, he contends, is one reason why the industry has been a technology laggard. “Customers just want to renew their one-year contracts, but for 10% less. It’s such a mixed message: ‘Hey, we want you to innovate, but by the way we’re not going to pay for it.’ ”

Even those large customers that don’t require much customization may be treated to better technology than smaller clients get. Responding to Casemore’s observation about spreadsheet usage, Sisler says, “I’m sure we have some small and medium-sized customers where spreadsheets are still being passed around, but that’s definitely on the down-trend.”

For larger customers, the top logistics firms take bookings and make billings via an electronic data interface (EDI) between the parties’ enterprise resource planning systems. “We push EDI very strongly to most of our large shippers,” says Sisler.

The same is true at BDP, which now is working on establishing EDI with carriers as well. “That will provide for smoother, faster, more accurate transmission of data across the whole supply chain and enable us to scale our business more effectively, because we won’t need as many people to manage data transmissions as we grow,” says Hanks.

Will Little Data Get Big?
Perhaps the most exciting technological angle for logistics-industry CFOs lies in the potential of big data to be a financial game-changer. The key word is “potential.”

“Logistics is more little data than big data right now,” says Scot Hofacker, CFO of DHL Supply Chain Americas, who spent 12 years in retailing before moving into logistics. “Having spent time in other industries, I certainly appreciate how data capture at a very detailed level over multiple years drives predictive analytics. But the 3PL business, where there’s a certain amount of customer churn, has been a little bit slow in making investments in systems to capture that useful historical data. However, that’s changing now.”

Unlike the other logistics firms whose CFOs were interviewed for this article, DHL Supply Chain’s business is not first and foremost brokerage — the process of matching up carriers’ capacity with companies’ shipping needs and arranging for shipments be made in compliance with domestic and international laws and regulations. Its primary focus is hands-on operations, providing warehousing services and ancillary ones like product packaging and distribution.

That makes labor efficiency an enormous financial factor, and predictive analytics using big data could be a key to achieving it. “Knowing the history of consumer trends relating to the products we handle for customers allows us to anticipate the level of warehouse activity, which then allows us to anticipate our labor needs,” Hofacker says. “Being able to match labor to demand and make sure that labor is trained properly before demand peaks is critically vital.” Likewise, analytics can help predict the optimal capacity in terms of facilities allocated to an activity and the amount of equipment for handling a customer’s product.

In similar fashion, big data offers great potential for enhancing almost the full range of 3PLs’ activities, including the transparent shipment tracking that customers crave, according to the study by Korn Ferry, Capgemini and Penn State. But 3PLs are higher on that than their customers are: while 46% of surveyed 3PLs said big data can help them better understand customers’ needs, only 26% of shippers agreed.

Break on Through
What’s the outlook for the 3PL business to finally crack the major leagues of technology? Even Casemore thinks it’s brightening — because it has to. “If you look at the marketplace, no 3PL is sitting still,” he says. “You’re either trying to grow, in many cases by buying out someone else, or somebody is buying you, or you shut down. The acquisitions are making many of these organizations so large that they have no choice but to get up to speed on technologies to support that size.”

BDP’s Hanks mixes realism with an optimism that may harbor just a touch of wistfulness. “The general ecosystem in the way parties in the supply chain are communicating with one another is definitely improving,” he says. “Is it to the level of how financial services companies communicate? Absolutely not. But that’s everybody’s ambition, and I’m very confident that will be the outcome.”