Logistics providers are getting better at making a profit

The 3PL sector in Scandinavia continues to be subject to price pressure, with limited profits available for development and innovation. But there are signs that the Scandinavian 3PL players are becoming more professional and are beginning to work out sustainable responses to the tight situation. These responses include greater and more conscious focus on customer profitability, consolidation and greater sector specialisation.

We asked one of Scandinavias leading researchers in the area of outsourcing and logistics, rni Haldrsson (Ph.D) from Copenhagen Business School: What is happening in terms of outsourcing and logistics activities in Scandinavia?

Dr. Haldrsson emphasises that only very limited studies have been conducted in this area, and his assessment is therefore based more on impressions and conversations than quantitative investigations. It has proven difficult for Scandinavian logistics researchers to extract information from the logistics companies. This is probably due to a mixture of sensitivity to competition issues, lack of time, and possibly also a lack of confidence or failure to appreciate that studies and research can contribute to a general expansion of the sector, he says.

Logistics providers have been under pressure for many years. They are locked into a vicious cycle, where low price margins and tough competition mean they are unable to invest or take risks, with the result that logistics providers are not investing in innovation and are forced to focus on simple services and low costs.

Better customer profitability
However, he sees some indications that the 3PL sector as a whole is in the process of increasing its professionalism. It is my clear impression that logistics providers have become more conscious of customer profitability. They are getting better at demanding more precise information from customers as a basis for price setting. They have also become more selective. It is my impression that providers have begun to say no to customers they feel do not fit their specialties or will be unprofitable. As a result, logistics providers appear to have fewer unprofitable customers and contracts, explains Dr. Haldrsson.

He also sees two other positive trends: The large 3PL players are consolidating and striving to become even bigger, in order to achieve growth in turnover and profits through standardisation and industrialisation. The small and medium-sized players are increasingly specialising in particular niche areas, where they accumulate special knowledge and skills that make them more valuable to their customers, enabling them to improve their profitability.

Globalisation is giving logistics a boost
He also observes that globalisation both strengthens the 3PL sector and puts pressure on it. Globalisation clearly means that the role of logistics, and hence of logistics providers, is getting bigger and more important. But globalisation also means that customer requirements for reliability and product quality are increasing, explains Dr. Haldrsson.

One consequence of globalisation is that global manufacturers and companies increasingly need country-specific management of global products. One example is PC keyboards, which have to be adapted to the alphabet in the various zones. But there are also numerous other products that need a final adjustment to adapt them to local conditions, and 3PL players could play an important role in this area.

Many global companies are developing postponement strategies, where they defer the final configuration of the product to the latest possible stage in the value chain. This achieves greater savings for manufacturers due to a greater degree of standardisation in  production and fewer intermediate inventories. Logistics providers also have great potential to contribute in this area.

The new technology: RFID
RFID (Radio Frequency Identification) is a revolutionary technology with great significance for logistics. RFID can create a whole new level of transparency and control over the flow of goods in a supply chain, says Dr. Haldrsson.

For example, RFID makes it much easier to access information about what is inside a given container, without having to physically open it. You can follow products much more closely. You can read what impacts (temperature, shock, etc.) the product has been exposed to on its journey along the supply chain, etc.

All in all, RFID paves the way for better and cheaper product traceability and good opportunities to streamline processes. The barrier at the moment is the development of universal standards for RFID tags to be placed on products. The Wal-Mart and Metro supermarket giants are leading the charge in spreading the use of RFID, and it is primarily these two companies, together with military organisations, that are driving the development of RFID.

RFID technology is still in its infancy, but Dr. Haldrsson has no doubt that it will have a great impact on future logistics. RFID is boosting IT development within logistics, and it is important that the 3PL players are alert in this field so they get opportunities to influence the direction. There is a clear opportunity here to gain influence, and now is the time to act.

Return logistics growing
Dr. Haldrsson also highlights return logistics as a clear trend for the 3PL market. He says, Return logistics have not played a major role; but that is beginning to change, and there is a great need here for a more systematic approach.

One can talk about two types of return logistics. Commercial returns where the buyer is not satisfied with the product for some reason and returns it. In the area of e-business, companies are experiencing a dramatic increase in the number of return items. Return rates of 15-20 per cent are quite normal for e-businesses. Secondly, there are old discarded products which must be returned and managed under the manufacturers responsibility, for environmental reasons. The EU WEEE directive on Manufacturer responsibility for electrical and electronic equipment is presumably only the beginning of such legislation. Manufacturer responsibility is likely to spread to other sectors in the future, increasing the need to get return logistics under control.