Global 3PL Management: Factors to keep top of mind

Global third-party logistics providers (3PLs) are not a dime a dozen; in fact, there are only a few truly global supply chain managers—and they are a part of large, diverse global transportation networks. Most of the major players, such as UPS, FedEx, DHL, and DB Schenker, all have IT platforms interfacing with their customers to provide global visibility from origins to destinations; they’re experts at customs clearance around the globe; and they’re active in all transportation modes and regularly adjust between ocean, air, trucking and same-day delivery to best accommodate individual orders. 

However, global shippers need to keep in mind that supply chain management capabilities—even those managed by the most expansive global 3PLs—vary greatly between countries. The biggest challenge almost always falls into managing expectations within a region’s physical limitations, including infrastructure, carrier service levels and information flow and control.

Managing geographical expectations

Advanced economies generally have better highways, ports and railways as well as better communication systems and technology. Political changes can especially complicate matters, but those issues are normally limited to emerging market and developing economy countries.

As a general rule, logistics costs as a percent of gross domestic product (GDP) are lower in advanced economies and higher in emerging market/developing countries. Not surprisingly, the countries with the largest economies dominate infrastructure statistics.

The United States has the most miles of highways, railways and pipelines. Meanwhile, China, with the second largest economy, has the third largest amount of highways and railways. India is second in the total miles of roadways; however, only 2% to 3% of India’s roadways are modern highways. Even some of these, like Highway 9 from Mumbai to Pune, have uneven surfaces and transportation obstacles.

In a related example, Brazil’s railway system operates with different gauges, making railcar and locomotive interchanges impossible. As a result, the rail and intermodal abilities are compromised. In contrast, some small countries and regions like Singapore, Hong Kong and the Netherlands have high-quality infrastructure for all transportation modes—and as such serve as key crossroad locations for global trade, transportation and storage.

These persistent infrastructure challenges create opportunities for modern, sophisticated 3PLs. In turn, major international shippers often find it expedient to let one of the truly global service providers address the problems and offer uniform solutions across the globe.

Logistics costs as a consideration

As mentioned above, modern industrially developed and post-industrial countries have the lowest relative logistics costs as a percent of GDP. For example, for 2013, North America’s logistics cost as a percent of GDP was 8.8% and Europe’s was 9.2%. Asia Pacific’s estimate was 12.8% and South America’s was 12.3%.

These results are the function of logistics (road/rail/port) infrastructure, the lifecycle deployment of leading logistics practices and the influence of ongoing process improvements including eliminating unnecessary governmental and bureaucratic obstacles.

Globally, trucking is the largest logistics cost component. Its $3.8 trillion spend represents 43.7% of total global logistics costs. Rail, domestic water‐based transportation and airfreight are all important specializations within many countries, but secondary to trucking in general. For comparison, railroad logistics costs are $274.2 billion globally, representing only 3.2% of total logistics costs. Combined, airfreight, ocean/waterway and freight forwarding account for 12.5% of global logistics costs.

For the most part, major shippers have direct contracts for ocean vessel capacity with container shipping lines. However, they often use international transportation managers or freight forwarders to provide transportation management for inland movements from factory to port and port to destination.

These major international transportation managers have significant domestic transportation operations to manage inland ocean container movements, and this management often even applies to containers for which they’re serving as traditional NVOCCs/freight forwarders. This business also tends to produce better operating margins than container-yard-to-container-yard ocean moves.

After trucking, inventory carrying costs, at $1.9 trillion, are the second highest individual global logistics costs category and represent 22.4% of total logistics costs. The constant challenge for global logisticians is to use transportation and warehousing location/efficiency to satisfy customers while minimizing inventory costs.

Global shippers who seek to succeed in today’s landscape should remember the following: Even when a global supply chain is managed by an experienced and expansive global 3PL, many regions and countries have limitations such as infrastructure, technology and carrier service levels. It’s important to manage expectations based on your areas of operation and seek out “true” global 3PLs that understand the various logistics costs in different regions and know the lay of the land.