Third-party logistics (3PL), as a sector within the transportation industry, is growing exponentially as manufacturers try to cut supply chain costs. Food processors and other industries contract 3PL providers to broker transportation and other supply chain management services. As such it is a form of outsourcing supply chain management so that the processor can concentrate on in-plant operations.
The overall logistics spend in the European retail market is set to increase by 10 billion by 2010, Datamonitor forecasts in a report.
"The driver for all industries looking to outsource the movement of their goods is the need to reduce costs in order to increase profitability," said Chris Morgan, Datamonitor logistics analyst and author of the research. "Employing an expert to maintain various stages of its logistical supply chain allows a company to focus on its core competencies and 'stick to the knitting'."
Morgan told FoodProductionDaily.com that all industries are increasingly feeling pressure to at least maintain costs or, better still, reduce them.
"Food manufacturing is no different, and as 3PLs expand services, for example with refrigerated lorries and warehouses, they are now in a better position to match their needs," he said. "Given that in theory 3PLs should be able to save a company money as logistics is its core competency, and the proportion of final cost that logistics makes up for a food manufacturing company, it is no surprise that they are indeed looking more towards outsourcing."
He warned however that the use of 3PL services brings up issues and problems associated with outsourcing, such as less control over the supply chain.
On the whole, the industry is very competitive in terms of pricing, Morgan said in an interview. Given that anyone can start a logistics service with just a van, barriers to entry are low. The largest competitive barrier is the size of the network, as pan-European companies will require a 3PL with a pan-European network.
"However, there are usually enough national companies for national 3PLs to survive," he said. "Plus, larger logistics companies may still use national 3PLs through an alliance if the national player has better local network. As such, prices are fairly steady, although 3PLs are now finding that customers want more for their money year-on-year if the contract is to stay at the same price."
Another trend affecting all sectors of industry is the increasing consolidation within the 3PL market. The question is whether the consolidation will affect pricing and service.
"Consolidation in the industry will continue over the coming year as margins are continually squeezed, which could affect the choice of companies available," he said. "However, this should still not create a monopolistic situation within any sector."
Even after the latest wave of consolidation, the industry is still highly fragmented, and as such prices are still fluid, he said. This is due to the fact that switching costs are usually low for customers.
He noted that making a switch becomes more complicated if there is integration within IT systems or if companies require access to a particular geographic area that other 3PLs may not offer so readily.
However the issue of location and reach is being eased as 3PL providers expand eastwards to match the needs of their customers. Europe's food companies, both the grocery stores and their suppliers, are move eastwards to capture the growing markets there. The grocery sector has been particularly active in expanding into eastern European markets and the Far East.
According to Datamonitor, both of these trends will impact on the complexity of the industry's supply chain.
"Within the consumer grocery sector European companies are shifting their gaze eastwards due to competitive pressures caused by an increase in private labelling and a rise in discounters," Morgan said. "However, as with the retail sector, success in Eastern Europe will largely depend on the available logistics network, which is where 3PLs with the necessary infrastructure could play a significant role."