Contract Logistics 2025: The Future of Value-Added Warehousing in the E-commerce World

Key Takeaways

  • Consumer demand for faster delivery across a range of items continues to increase, creating opportunities for national same-day delivery providers and economically viable approaches to on-demand delivery.
  • This trend is also enabling innovative 3PLs to add value in new ways, from order and inventory management to product configuration to e-commerce enablement.
  • Labor and real estate continue to challenge 3PLs, spurring interest in automation and in new uses for existing facilities.

In the past 20 years, the role of contract logistics within the supply chain has evolved greatly along with the explosion in e-commerce and other technology innovations. So much has changed since the dawning of the dot-com era—much of it driven by Amazon. The e-commerce juggernaut has fundamentally altered what consumers think of and expect from retailers—from product selection, convenience, and delivery to the overall customer experience—putting pressure on incumbent retailers and their logistics providers to keep pace or be left behind.

In a panel discussion at the 2018 Harris Williams Transportation & Logistics 3PL Conference, leaders in the contract logistics industry offered their perspectives on the impact of e-commerce on their industry, how they see the industry continuing to evolve, and the new opportunities these changes present for their business. 

Demanding Delivery

The overarching trend according to panelists is the growing interest among consumers for ever-shorter delivery times—and, ultimately, delivery on demand.

Retailers everywhere are looking to gain a competitive edge by getting orders to their customers at minimum overnight, and on the same day whenever possible. Same-day delivery may initially be only viable in a certain number of metro areas with sufficient density. However, panelists expect companies to continue to invest in same-day delivery because consumer demand for it is so strong.

That said, currently no national same-day delivery company exists, so companies looking to provide it have to begin on a regional basis. Even Amazon is relegated to using regional players to support same-day delivery. Ultimately, panelists believe a national same-day delivery company will emerge, as the demand exists and promising solutions currently are evolving.

While consumers want on-demand delivery, it’s not currently economically viable.

But what about on-demand delivery? Is this something we will soon see? The consensus among panelists was while consumers want it, it is not economically viable under current models. That is evident in the fact that Amazon and other major retailers are subsidizing their efforts to find the best on-demand model.

The fact is, basic economics say the cost per delivery has to relate to what a customer pays for the product. Take toilet paper as an example. Will it ever be economically feasible to deliver toilet paper on demand to a consumer’s house? Theoretically, it is possible if there is sufficient density in the route—i.e., the truck stops at multiple houses in the delivery area.

Practically, however, that is not likely. It is a very expensive and difficult model to master, even with the technology that exists today. It is possible that, with predictive analytics, a company could anticipate which people in a given zip code would buy certain items and then proactively position those products as close as possible for dynamic routing. Yet managing disparate inventory across multiple sites is complex and costly. “Uberizing” the model is another potential solution, but panelists believed that marshalling enough independent contractors to provide same-day delivery to meet demand would be very difficult.

Panelists agreed that a solution to the delivery dilemma likely will be found at the intersection of price and delivery. This will involve giving consumers more choice in what they pay and when they want products delivered. For instance, there are times when there is considerable value in having a product delivered on the same day, and times when it does not have to be there that quickly. In the case of the former, the consumer should be willing to pay more to offset the retailer’s shipping cost. In the case of the latter, in which the consumer enables the retailer to delay shipping to optimize its fulfillment cost, the retailer should share the savings by giving the consumer a discount off the product’s price.

Ultimately, panelists believed that if retailers can get consumers to be more flexible in both when they want the product and the price they are willing to pay, they can create more favorable economics for everyone.

New Dynamics, New Services

While demand for compressed shipping times as well as other dynamics in the B2C world are creating challenges for shippers, they are also opening up opportunities for logistics providers to do more—and different—things for shippers.

Handling order and inventory management

Distributed inventory—moving the inventory closer to the point of consumption—is essential to same-day delivery. That is why retailers are beginning to explore how they can use their brick-and-mortar stores—which tend to closer to consumers’ homes—as distribution points for e-commerce orders. Retailers believe moving to such a regional network is necessary in light of the lack of a national player that can handle same-day delivery.

Yet, as mentioned, managing distributed inventory is very complicated and costly. A company has to decide which facilities to ship from, how to transfer goods from point A to point B as demand shifts, and how to manage inbound transportation and dynamically make changes in terms of where incoming goods are headed. This is especially difficult for established manufacturers and retailers, which already have a distribution approach and infrastructure they cannot easily change.

This creates significant opportunity for 3PLs, which can offer the inventory management flexibility that shippers increasingly need. One panelist acknowledged as much, indicating his company has been increasing its investments in its inventory management capabilities to be able to handle more same-day deliveries. That company now has 120 facilities in 20 locations that can offer shippers, at minimum, next-day delivery to most of the areas the shipper serves.

Another panelist envisions a world in which a retailer can simply plug into a network that allows a 3PL to manage the entire flow of products, from inbound to outbound, providing a single, uninterrupted chain of custody of freight and cargo and unparalleled visibility into the entire fulfillment operation.

Configuring products before delivery

Another opportunity for 3PLs is to configure products before delivery to help shippers most effectively drive demand across an increasingly complex array of distribution channels.

Traditionally, logistics providers have focused on receiving and moving full pallet loads of cartons. Now, they are being asked to remove the shrink wrap from the pallet, open the primary packaging, and reconfigure and repack the products for the channel to which they are being shipped—for example, warehouse and club stores, traditional retail, and direct to consumer—each of which has unique requirements for consumers who use them.

In many cases, the scale of these efforts can be considerable. One panelist noted that for one retailer, his company handles 1,000 pallets a day, each of which contains 150 units—meaning 15,000 products must be reconfigured every day.

One 3PL reconfigures 15,000 products every day.

Of course, reconfiguring products before delivery represents a major change in traditional distribution practices and has many implications for 3PLs. At minimum, facilities must be designed differently and more employees are needed to accommodate those activities.

Arguably more significantly, the expectations for service levels and accompanying scrutiny are higher. When shipping to stores or distribution centers, 99.5 percent order accuracy is considered very good. When dealing with consumers, however, that rate still means one in 200 people will get the wrong product (and some of those will likely express their dissatisfaction via social media, causing problems for the retailer). Delivering higher service quality and fewer mistakes, in turn, will require the 3PL to hire more-skilled and more-costly labor. And overall, an enormous amount of integration with the retailer is necessary to get it right.

Helping to incubate newer brands

In addition to helping retailers more effectively drive demand, 3PLs can be a resource for helping emerging and growing brands get their products to market. 

Retailers are hungry to get new brands—especially those attractive to the influential millennial crowd—on their shelves. However, the companies that supply them are often very small and lack many of the basic capabilities needed to do business with retailers. 3PLs can step in to fill those gaps and provide additional services to help incubate those brands.

One area in which a number of 3PLs are already offering such assistance is what is known as “click to delivery,” in which a 3PL actually hosts and manages an e-commerce website for companies that otherwise do not have the resources to do so themselves. On the back end is the 3PL’s proprietary software platform, which is seamlessly integrated with the retailer’s branded online store. When a consumer browsing the site selects and orders a product, that click sends the order through the 3PL’s software directly to the 3PL’s DC for fulfillment—thus relieving the retailer of the need to process the order and arrange for delivery. This type of service is attractive to a retailer that either cannot afford to build these capabilities itself or may simply not want to.

Labor and Real Estate Remain Challenges

While demand for their services continues to grow, 3PLs face some challenges. Labor is one of the biggest—particularly, a shortage of labor that makes it difficult for them to staff up for times of peak demand. One panelist indicated that the peaks are getting even higher—raising the stakes for retailers that count on those peaks for the bulk of their revenue for the year—yet labor remains scarce, even if the company is willing to pay more for it. This puts 3PLs in a potentially precarious position.

Technology offers some promise to help fill the labor void. 3PLs are exploring how to increase their use of automation and robotics to take over some of the warehouse roles they have trouble filling with humans. Yet while new advancements have lowered the cost of automation somewhat, such solutions remain capital intensive. Thus, 3PLs likely will continue to pursue a hybrid approach, augmenting human labor with automation, especially during peak periods. This will put a dent in the number of people they will need to hire to keep pace with demand. But the days when fully automated warehouses make economic sense are still far away, according to panelists.

Beyond using more technology, one panelist indicated his company is attacking the labor shortage by simplifying warehouse jobs. Doing so opens those jobs up to a broader range of people who can become productive quickly with very little training.

The entire industry also is dealing with real estate challenges. Because investment by developers in new warehouse facilities has been relatively static for the past decade, space continues to be in short supply and, consequently, costly when it is available.  

Not surprisingly, then, 3PLs are looking for the most-effective space possible. Most prefer new, largely because it makes a better impression on their customers. Yet they also are open to reconfiguring existing space. The key for panelists is that they continue to look for ways to optimize the space they do have, which in many cases involves working closing with their customers to reduce the amount of overstock 3PLs have to carry so they can put that space to higher-value use.

Malls are conveniently located for lower-cost, faster delivery.

One panelist suggested that a solution to the real estate squeeze is to redevelop dying or dead shopping malls into fulfillment centers. In many cases, such conversions are economically quite viable. The malls are conveniently located, often in the middle of high-density communities, which means lower-cost, faster delivery. They also have excellent road access and lots of parking. And conversions are attractive to municipalities looking to increase jobs and tax revenues. Indeed, with mall closings on the rise across the United States, there appear to be plenty of locations where this approach could make sense. Amazon clearly recognizes this: The company recently built two large fulfillment centers on the site of obsolete malls in the Cleveland area. While these projects involved new construction and not conversions of the original facilities, they still illustrate mall sites’ potential.

Conclusion

To say that e-commerce has revolutionized retailing is an understatement. It has fundamentally changed how people buy, and that has had massive ripple effects all the way up the supply chain. 3PLs are in a unique position to capitalize on this revolution by becoming an indispensable partner to retailers—providing both traditional distribution capabilities as well as new services that enable them to adapt and respond to e-commerce. In the process, they can greatly enhance their value to retailers in their ongoing quest to meet the needs of today’s and tomorrow’s consumers.

This article is one in a three-part series capturing key insights from the 2018 Harris Williams Transportation & Logistics 3PL Conference. Read our other features here:

Niche Specialization vs. Integrated Solutions: Two Views of Value Creation

Parcel: From Paleo Meals to Peloton Bikes

Published November 2018