Death of #3PLs - why indirect Third Party Logistics business model will collapse

According to a 2017 report by Armstrong & Associates, companies using third-party logistics services include 90 percent of Fortune 500 companies. It doesn't surprise me that you either don't take my opinion seriously or you think I'm a little crazy. 

Let's start with a definition of what Third Party Logistics is and its short history. Countless sources are defining third party logistics. The official CSCMP Definition up until HR 4040 was: "A firm which provides multiple logistics services for use by customers. Preferably, these services are integrated, or "bundled" together by the provider. These firms facilitate the movement of parts and materials from suppliers to manufacturers, and finished products from manufacturers to distributors and retailers. Among the services which they provide are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding." Even though it was replaced in 2008 by "A person who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product." I prefer to use this more descriptive older one because it let us think that direct carriers are not included in this group. I can imagine that for some, this definition might be a separate topic to discuss, so let's assume that in this article, I cover indirect 3PLs that means I don't involve direct carriers companies. 

'70s / '80s

While it isn't now clear precisely who minted the term 3PL, its beginnings can be outlined to the 70′s and 80′s as companies outsourced more and more logistics services to 3rd parties. In the United States, the deregulation of the trucking industry via the "Motor Carrier Act of 1980" is perceived as a catalyst allowing to increase the number of trucking carriers, and some warehousing companies expanded their footprint in the whole supply chain and emerged as freight movers. Over time these 3rd party logistics service providers (3PLs) extended their services to cover specific geographies, commodities, modes of transport, and integrated their existing warehousing and transportation services, becoming what we now know today as a "3PL".  

The '90s

The logistics management industry started to take off in the '90s as a result of the demand for these services in emerging economies. Countries like India and China – that had opened their economies for global businesses began attracting the interest of companies looking to take advantage of cheap labor and local resources. As a result, the demand for companies capable of streamlining complex supply chain processes skyrocketed – both domestically and globally. Third-party logistics companies helped businesses penetrate international and domestic markets that could not have been otherwise economically viable.

The 2000s 

The 2000s witnessed an explosive growth of the internet. Other technological innovations (like powerful computers and mobile devices) also unleashed third-party logistics companies, the tools that enable them to streamline complex communications and supply chains.

The global demand for 3PLs capable of handling large-scale inventory management and transportation of goods, efficiently and on time, resulted in the development of advanced software and machines that helped businesses save money on fuel cost and overhead.

The late 2000s / early '10s were all about supply chain visibility and optimization at meta-level. Decreasing packages volume and optimizing the space utilization did result in immediate financial benefits. 3PL providers were able to integrate complex logistics and supply chain management functions (such as inventory management, order processing, and transportation operations) into technology platforms to deliver supply chain visibility to their customers. That had its side effect in hundreds of millions USD burned in the unsuccessful processes of implementation of new systems and leading the change management activities across the organizational structures. It became clear that for big organizations, growth is evolution, not revolution. There are several reasons for that, but I will bring just one that I think plays a critical role, and it is "Risk factor in the decision-making process". Top executives' purpose is to increase profit; it's achieved through improvements, not revolutions that could result in a short term failure. 

Let's bring some examples to the table. There are two epic failures caused by this factor that I would like to highlight: those are #Kodak and #Nokia, of course. To put it as short as possible, Kodak was a nondenial leader of the photo industry, they have invented digital photography, but they perceived their business purely as a chemical film-based game. Kodak executive team has noticed their invention as a massive threat to their core business, and they graved it as deep as possible. This strategic failure was the direct cause of Kodak's decades-long decline as digital photography destroyed its film-based business model. A similar story of Nokia's denial of smartphones at the time of their cellular kingdom primacy has caused their failure. A couple of years after their executive team have still claimed they haven't done anything wrong. There is also one example of the enormous success: Netflix. Not everyone knows that Netflix was established in 1998 and came out with the idea of streaming in 2007 after almost ten years in traditional business, including DVDs. Reed Hastings, CEO of #Netflix has reportedly said that it was initially thought to be a future of online-movie rentals, but it was the TV that Netflix revolutionized. Even though it wasn't fully understood, even by Reed himself, he fully believed in his concept, and he's taken some painful decisions such as excluding all DVD related Board Members of the company from its strategical discussions. You can learn more about its cultural impact in the recent Ben Horovitz book: "What you do is who you are". The most important question for myself is if leading 3PLs are capable of making such bold decisions to follow their deep-seated beliefs, and my conclusion is, no, they are NOT. Why? Because the ownership is not deep enough. My gut feeling guess is that only Mr. Klaus-Michael Kuehne or the Founder of the early challenger could potentially do it. Why only them? Because they have enough ownership that involves a risk of losing everything if missing market disruption. Almost all other companies have their Executive Teams being compensated for short term profits and bonus systems. It's fascinating that in terms of cooperation with customers, there is a Bonus/Malus compensation system that is reasonably popular in the industry, but it's not in use with Top Executives, and actually, they can only benefit from their work.

'10s – today

Is there anything important that happened since 2010? Yes, there is, but the story begins in 2008 and 2009. There are two more examples that I couldn't miss in describing the way economies work. Yes, you guess right, one of them is Uber, and the other one is AirBnB, why these? Because in the second decade of the 20th-century, marketplaces entered service-based markets for real. It was followed by dozens of different monetization models that sometimes make them profitable and most often don't. Marketplaces caused critical shifts in the economy. After centuries of trading company's dominance, the new winners became Amazon, eBay, Alibaba, and other local heroes like Allegro. In the service industry, it resulted in the same: AirBnB became the most significant hospitality company without a single bed, and Uber the most substantial passenger transport company without a single car. It was also time that new tech-driven logistics companies were born. If you think that they use the marketplace business model, partially you're right because every 3PL does, but mostly you're wrong because neither #Flexport nor #FreightHub has found the way to ignite the viral growth of their business. The closest and still unique in their business model is Xeneta that has successfully engaged thousands of professionals and getting close to breakeven. What's important to mention 3PLs haven't unleashed any news market dynamics that already exist in different industries. In my humble opinion, the reason for that is that only #Xeneta was looking into good dynamics but into the wrong direction.  

The pattern

If any of you think the Logistics Industry is some way magical and creates a distortion reality field the same as Steve Jobs, you are most likely not right (putting it extremely polite). So let's move back to some examples and try to find some patterns that could indicate what will happen. I've already mentioned three cases, are there any similarities? Kodak misunderstood their business and didn't figure it out; it was the photography market. Nokia thought it was all about making calls, not the communication environment. Reed Hastings followed his gut feeling without realizing it was the TV market. Are there any similar examples? Let's try to find some success stories. Why there is the Alphabet as a parent company of Google? Why Amazon created Web Services? Getting back to 3PLs, why have it araised from purely transportation or warehousing services? I think there is a clear pattern within all of those examples and many others, of course. All of those companies were looking for a universal value around their business models. Photography film wasn't a value, recording memories was. It wasn't about calling someone but "connecting People" (Nokia's slogan that's been just in front of their eyes for years). Most often, it was taking a step up in the industry ladder. Xeneta, that I have mentioned before has taken a step at the right ladder, but they went down to a single element of the logistics business that is price. So, what's the 3PLs universal value that would be the step up? It is its capabilities of unleashing benefits hidden in the supply chain. Probably it still sounds like a mystery to you. Let me put some background: there is a fundamental economic process that has been shaping the logistics industry for years. It's called commoditization. It is defined as the process by which goods and services that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic competition to perfect competition. Hence, the key effect of commoditization is that the pricing power of the manufacturer or brand owner is weakened: when products become more similar from a buyer's point of view, they will tend to buy the cheapest. A conversation about USPs (Unique Selling Points) and crafting Value Propositions has been taking place in 3PLs for years. That's why departments like "Customer Solutions", "Lead Logistics Solutions", "You name it" were born. There is a single purpose of their existence: "secure the margin". Of course, there is a mission of helping customers involved in that, but let's be honest 3PLs have always been helping customers because it's a service-based industry. Let me put it clearly: besides "Supply Chain Solutions Consulting" departments, all the rest is or is becoming a commodity. When you think about it, it also includes visibility systems that contain data. If you are industry professional, you probably think that data is still a critical point because it does not exist in a good enough quality, but remember in 1975, there were no memory cards powerful enough to adapt digital cameras to the market, but Kodak should have gone after it anyway. 

What's the real uniqueness of each company then? People, their expertise, and creativity. You must be either mad or laughing out loud now, apologies, but please focus for a minute longer, and shortly, we'll move to the main point. People and capabilities of unleashing hidden values, those seem to be a secret sauce of third party logistics. Would you agree if I say having the right People available to take actions in the right place and the right time no matter if that requires analytical skills, operational skills, niche domain knowledge, economics understanding, etc.?

Raise of #NewDataEconomy

Wait a minute, haven't I just said data is a commodity? Yes, I have, but now we're entering the topic of an autonomously value-driven economy. That's the threat to those companies that you were probably most curious about. I would like to immediately point out that it doesn't threaten you unless you are Klaus-Michael Kuehne (like) person. Summarizing previous paragraphs, indirect third party logistics suppliers business is mostly based on connectivity. Raising of the internet has boosted it up because it allowed connecting their offices across the world. Further technologies advancements have both contributed to its growth as well as created some challenges in deploying them and unifying across the whole organization. Many specialists believe that new technology advancements will support further growth for those that will be able to adopt, but they are wrong. It's a different layer of technology that is upcoming. Let's compare it to Amazon; it is well known for its disruption of well-established industries through technological innovation and mass scale. It's the power of the internet and marketplace business model that has been destroying their competitors, including Barnes & Noble, ToysRUs etc. What could be such a significant shift in technology? I've mentioned people being the biggest assets of 3PLs, so how is it connected?

Some calls it #NewDataEconomy, #NewInternet, #Web3.0, #ConvergenceAlliance #CStack by #OutlierVentures, the name is not essential, what's most important is the fact that it's an internet of value. Further adoption of IoT will cause the commoditization of data that I have mentioned before. It won't be data that has a value but a capability of using this data for business purposes. I guess you would like me to get to the main point. Let's do so then.

Indirect 3PLs business model will lose its value because the data will be available elsewhere, #TradeLens by #Maersk & #IBM is proving it. Some companies like FreightHub are already in. It's a matter of a few years that customers will push all companies to use solutions like TradeLens and will have their data available in a single place or interoperable connected. 

What about People then? Generally speaking, there are three types of employees: extraordinary, average, and bad performers. Each company is strong and sustainable thanks to their average employees. Both extraordinary and bad performs are problematic. Those weakest most often hate what they do and would solely prefer to do something else. In the greatest companies they are fired, in medium, they continuously bring companies down. Outstanding goal achievers hardly find their place in big organizations, there are not so many positions for them, and most often they leave to join another company or sometimes to launch their own business. Why do I mention that? Because we need to understand why and how this #NewDataEconomy will unleash new opportunities for all three types of employees. 

There are two main streams of actions in Supply Chain. Keeping the flow and optimizing the flow. It's as simple and as complicated as that, at the same time. Let's move back to our People. Bed performers will leave, and you want them to go and find their superpowers in another industry, period. How can we match another two types with actions? It's simple, isn't it? Those outstanding most often go an extra mile; that's why they're optimizers while those mediums make it all work; that's why they keep the flow and why they are more critical to 3PLs nowadays.

Let's compare it to the computer environment. No matter if you use Windows, macOS, or Linux, it works the same, with one exception. There is one massive system called an operating system and dozens of different applications that are running separately but are dependent on the operating system. All of the applications have their creators who make money based on the outcome of their applications. The operating system is also profitable for its creators; it's either licensed (windows), hidden in hardware price (macOS) or opensource (Linux). The last example is the most interesting because opensource doesn't mean its creators work for free in the long run. It's proven by recent acquisitions of open source companies such as Magento (by Adobe) and GitHub (by Microsoft). Our optimization stream is the apps in the operating system, while keeping the flow is an operating system itself. But how our employees could be matched with that and what exactly is it? The applications are optimization tools, let's call them autonomous agents because those will be connected with both source of data (TradeLens like distributed ledger databases) and our operating system. Those agents will be created based on the expertise of those outstanding professionals and will also provide them personal income from its deployment. The operating system must be the biggest question mark for you. It's a customer service digital assistant. But not just the usual assistant, it's the assistant capable of outsourcing tasks out of its capabilities to those medium professionals and taking its outcome back as a training data. It means it will continuously improve its capabilities while also attaching an income from the deployment of each ability to the professional that provided training data. You must think it's a Science Fiction, but is it?    

When is Tomorrow

In 1975 Steve Sasson, the Kodak engineer who invented the first digital camera has received a corporate response: "that's cute—but don't tell anyone about it.'. In 1989 together with Robert Hills, they build the first digital camera very similar to those on the market nowadays. Even though Kodak has made billions out of its patent, it filed for bankruptcy protection 37 years later. It took only five years between 2007 when Nokia was dominating the cellular phone market, and when iPhone was announced till 2012 when Nokia business was utterly destroyed, its CEO called off, and even its Head Quarter sold to input some cash. It took only three years for Netflix to put its biggest rival and market leader Blockbuster to the edge of bankruptcy in 2010. So what's the number for 3PLs? You probably think the technology needs to be invented first, but it's already here. Convergence Stack by Outlier Ventures has it all. The autonomous agents are hosted in Fetch.ai that has already some serious pilots, including decentralized metal exchange prepared together with Turkish steelmakers. Sovrin.org can support both the identity and credentials of professionals. The leading customer assistant can be powered by seedtoken.io, while all the sensitive data can be privatized in the fetch ledger. It might be ignited any time, a small percentage of professionals is needed, and US reports show that 80% of fully employed are ready for side jobs, it's enough. 

I wonder who will understand first that the disruption is coming, and dominating this new layer of the industry is a key for growing revenues in the coming years and saving the company from extinction in the long run. When? It's the most difficult to predict. I've already bet on my gut feeling by moving out the regular industry stream, and I think it all comes ~2030, but I won't argue with anyone because it's my gut feeling guess. 

The End

The natural law of inertia:

"Matter will remain at rest or continue in uniform motion in the same straight line unless acted upon by some external force." 

Till the end of the 19th century, personal transportation was mostly connected with horses. It took around 23 years to replace horse-drawn carriages fully. 

In my opinion, it is the only way forward in the age of Artificial Intelligence that is capable of using existing expertise and scaling it up to the whole market. It's going to be organized a similar way to the above example, or there will be a single entity owning those patterns and the world full of unemployed. 

What do you think? Is it going to be faster? Slower? Or maybe won't happen ever?