The Future 3PL Stars: Where Does Technology Fit?

This is part of a series of articles based on panel discussions held during the 2019 Harris Williams Transportation & Logistics 3PL Conference. The conference explored key trends in the space and the opportunities they are creating for 3PL companies and their prospective buyers. Note that the panel participant opinions expressed in this article do not necessarily reflect the views of Harris Williams.

Technology is making serious inroads across the 3PL landscape, as more companies apply leading-edge tools to help them become more efficient, intelligent and responsive. Leading the charge in many ways are the emerging digital freight brokers, which are pioneering the use of innovative technologies to power their operations and interactions with shippers and carriers.

In this panel discussion at the 2019 Harris Williams Third-Party Logistics Conference, 3PL executives discussed the growing role of technology in managed transportation services, how technology is generating competitive advantage, and the impact digital freight brokers are having on the broader 3PL market.

Moderator: Evan Armstrong, Armstrong and Associates
Panelists: Andrew Grieve, Bain & Co.; Andrew Leto, Emerge; Drew McElroy, Transfix; and Gabriel Ruz, Magaya

Key Takeaways

  • There remain many areas of the 3PL industry that are ripe for advancement via technology, including automation of key processes and better business intelligence.
  • One technology attracting attention among 3PLs is artificial intelligence (AI) and its subset, machine learning (ML).
  • While panelists agreed that digital brokers are forcing established brokers to digitize more quickly, they are not convinced these new players are truly disrupting the 3PL market.

Technology Innovation: Impact and Change

There’s been a significant amount of technological innovation in supply chain management in the past few years. Where has there been the greatest change—and which innovations are having the largest impact?

For one panelist, the answer is a matter of penetration. While there’s been a massive infusion of capital into the space, technology adoption is still in the early stages. The one difference in logistics, he noted, is telematics and the Internet of Things, which are further along in trucking than in most industries. “Regulatory created electronic logging devices (ELDs), which jump-started the use of telematics and the data that application generates, so trucking is much more advanced than a lot of industries that are considering broader fleet initiatives.”

20193pl-6.jpgOverall, panelists agreed that despite the progress to date, there are still many areas of the industry that are ripe for automation. For instance, many operational processes a 3PL handles between a shipper and carrier are prime candidates for streamlining with technology. Business intelligence is another key area. But even bigger is creating the connectivity that provides greater visibility into the business. “People want real-time information, and there are a lot of emerging applications that satisfy that need,” noted one panelist.

Another panelist indicated his business looks at applying technology in two different ways. One way is to reduce or eliminate the processing costs associated with “pushing paper and data around.” Mobile technology, in particular, has been important in that regard. “Every truck driver has a smartphone,” he said. “You can now talk to them, and you can gather data from and about them in an automated way, which 10 years ago you couldn’t.”  

The other way is to cut the waste that exists in the physical world (e.g., dwell time and empty mileage). “If you can apply modern data science to use the data you take in to create an optimized solution at a network level, that benefits everybody,” he noted. “The ability to take vast quantities of information in real-time, and create optimized solutions on the fly, is massively valuable for not only our business but for shippers and carriers as well.”

When it comes to determining which technologies provide the greatest opportunities to generate growth and competitive advantage, it all depends on the business—what it is and what it wants to be. But the consensus was, technology is critical to all 3PLs and will become even more so in the future. “The supply chain historically has been a very fiscal and real-world business—we move widgets from point A to point B,” said one panelist. “But as our businesses collectively mature, being able to compete increasingly hinges on our ability to harmonize the digital and the physical worlds.”

And, panelists cautioned, it’s vital for a 3PL to be in control of its digital world, which means building its own technology team to develop its technology instead of relying solely on off-the-shelf packages or external developers. “If you don’t have control of your digital reality, which ultimately is what’s going to continue to drive your business forward, you’ll be in a very precarious position for the long term,” one panelist suggested. “I don’t see how you can truly compete over the next 10, 15 or 20 years if you’re not in direct control of your own platform.”

On the other hand, as another panelist pointed out, there’s still a massive opportunity to digitize the 10,000 or more freight brokers that don’t have the internal resources to build their own applications as the top 30 or 40 companies do.

AI and Machine Learning: Buzzwords or Value Generators?

One technology that’s attracting a lot of attention among 3PLs is AI and its subset, machine learning (ML). Panelists noted there are myriad areas within the typical 3PL where AI and ML can make a big impact.

There’s no question that, if designed properly, systems and machines are much better than people at ingesting vast quantities of data and making decisions from that data. Similarly, it’s true that people are highly adept at building and nurturing relationships. Thus, a company can create significant value if it uses both technologies and people in ways that play to their respective strengths.

One panelist provided an example of how that’s done in his organization, which is integrated with a very large shipper’s transportation management system. The shipper was struggling to effectively navigate the spot market and knowing what it should pay—its planners had to make a decision whether to bypass the routing person or not, on a load-by-load basis, without a lot of data. By deploying an AI-powered solution, the panelist’s company can now quote every truckload in the shipper’s system every hour—which has added up to more than 1 million truckload prices quoted in just the past six months.

That’s something beyond the capacity of a single human. Even if the shipper could apply enough people to handle the problem, the associated labor costs would be untenable. The new solution gives the shipper access to the information that enables them to make highly informed decisions while generating greater volume for the 3PL.

Given AI’s promise and the nature of 3PLs’ work, it’s only a matter of time until AI finds its place in the industry.

“I think the one thing that is almost inevitably true is that the market up and down the supply chain is going to need to become more advanced analytically and more intelligent,” observed one panelist. “If you think about every step in the value chain—how you price a load, how you mark up a load if you’re a broker, how you route your assets—all of that can be optimized by an engine. How long it takes to get to a real AI world is probably a long curve. But I do think that everyone in this space is going to need to have more advanced analytics and intelligence because there’s real value in those.”

Digital Freight Brokers: Disruptive Threats?

The growing digital freight broker segment has attracted considerable attention from shippers and investors alike. But are companies such as Uber Freight and Convoy really a disruptive force? The consensus among panelists: perhaps in the short-term, but not in the long-term.

One reason, panelists said, is that while digital freight brokers aren’t going away, established 3PLs themselves also possess considerable digital capabilities that shouldn’t be overlooked. “I don’t think Convoy or Uber is going to disrupt C.H. Robinson,” one panelist opined. “If you look at them and any of the leading brokers, they all have significant digital capabilities of their own and as much as 20% of their business is digitalized. If a carrier goes on and buys a load from their system without having to talk to someone at the company, and then they track it on a mobile app, isn’t that a digital broker?”  

Another panelist agreed, noting that the word “disruption” is being used too loosely in the 3PL industry. “The car truly disrupted the horse, but in our industry, we still use a truck to pick up and deliver goods,” he said. “We haven’t created a hyperloop or some sort of truly disruptive alternative to the truck.” The challenge, he indicated, is that all the incumbent 3PLs face the potential trap of focusing too narrowly on variable costs and utilization when thinking about technology. For instance, shifting communications from phone calls to apps is beneficial, but is only an incremental improvement to the business that misses the larger picture of what it truly means to digitalize one’s supply chain.

However, this doesn’t mean to suggest 3PLs are content to simply tweak the status quo. “The battle lines are being drawn now,” one panelist said. “There’s a tremendous amount of capital coming into the digital space and tremendous opportunity to grow and compete. And we certainly don’t expect the very large and successful incumbents to just give up control.”

In fact, panelists roundly believe that digital brokers are forcing the established brokers to digitalize faster. They’re a catalyst for driving all players to become more efficient and have less human touch in their fulfillment—and that’s a good thing in the long run for the industry.

Another reason why panelists aren’t convinced that digital brokers are disrupting the market in the long-term is that they see those companies’ current approach—undercutting incumbents on price to gain share—as neither addressing customers’ primary criteria for choosing brokers nor being sustainable.

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“Whenever we talk to shippers about choosing a broker, price is generally not at the top of the list,” one panelist recounted. “It’s usually more about reliability—the trust that you’re going to get your load from point A to point B—or about the fact that the shipper needed somebody outside of its direct relationship that had the geographic coverage it needed.”

And over the longer term, panelists noted, at some point the capital appetite to fund operating losses diminishes. “Uber and Convoy are buying business at cost right now and, consequently, are driving rates down,” said another panelist. “The question is in five years, when they have to put 10% gross profit on top of that shipment, will they be able to compete against the big established brokerages on the same lanes that they previously were trying to buy? I think trying to buy your way in is not the best strategy in truckload brokerage.”

Conclusion

With technology continuing to reshape the 3PL market, there are significant opportunities for investors to create new value—especially those that understand emerging technologies and how to apply them for competitive advantage.

“The 3PL market is fundamentally changing as a result of technology,” said Jason Bass, a managing director in the Harris Williams Transportation & Logistics Group. “Investors, with the resources and expertise to apply technology to traditional logistics platforms and networks, will find a multitude of great investment opportunities in the 3PL sector. These are dynamic times for operators, owners, shippers, and carriers, and long-term value can be created for all stakeholders.”

Read more from the 2019 Harris Williams Transportation & Logistics 3PL Conference: