Despite a strengthening economy, signs of instability are beginning to appear in the third-party logistics industry. It's a good time for both 3PLs and their customers to reevaluate their relationships and their contracts.
The third-party logistics (3PL) marketplace is a lot like an ocean: what you see on the surface is not necessarily indicative of all that's happening below. For instance, by many indications the 3PL industry has never been stronger—the economy has started to bounce back, the United States has become a place to build (and, therefore, ship) things again, the Internet is opening up whole new ways of selling and shipping, and in the oil fields, the advent of hydraulic fracturing, or "fracking," offers the promise of lower-cost energy down the road.
But beneath the surface of that positive outlook lie some potentially disturbing undercurrents that could affect both 3PLs and their customers in the future. One of the places we look for such signs of trouble is our proprietary AlixPartners Early Warning Model, which tracks the financial health of companies across many sectors, including third-party logistics. Over the years, this model has proved to be a highly accurate predictor of corporate distress (insolvency, bankruptcy, and so forth).
Article Figures
[Figure 1] AlixPartners early warning model - U.S. 3PL companiesEnlarge this image
As seen in Figure 1, our model shows that the probability of distress for the logistics service provider side of the industry (taken as a group) is less than 10 percent. That may seem low ... until you consider that the rate has almost quadrupled in the past year and a half, and has risen by about 30 percent since the beginning of this year alone. For 3PL customers, that's what we'd call a warning sign.
Here are some other warning signs derived from our (highly quantitative) model:
Nearly half of all third-party logistics providers in the U.S. market have seen their revenues decline in the past five years, by a total of US $43 billion.
Over the last five years, the combined revenues generated by the top 25 third-party logistics providers in the U.S. market have declined by more than $50 billion. This suggests that shippers have been "insourcing" a lot of services they previously had farmed out to 3PLs.
Twenty percent of the third-party providers are new entrants in the U.S. market within the last five years or so, and they account for 24 percent of the industry's total revenue. This suggests that established players are being attacked from two directions—shippers are switching to competitors as well as engaging in more insourcing.
A good time to reevaluate
Do those storm signals mean 3PL customers can look forward to a buyer's market, and perhaps lower prices?
Not necessarily. One reason is that a weakened supply base (in any industry, including logistics) can weaken the main customer as well. Weak 3PLs, for instance, could cause their shipper clients to provide skimpy service and unreliable shipping to their own customers. That, in turn, could cause the clients to lose business, and even contribute to the ultimate nightmare: a shipper "disappears" overnight due to financial problems, leaving the customers that depended on its products in the lurch.
Despite that risk, the increased competition we are seeing in the marketplace today suggests that buyers of third-party logistics services should be able to negotiate more favorable agreements in line with market conditions. In fact, now is a smart time for 3PL users to review all of their logistics activities, including whether or not their insourcing and outsourcing decisions are still the right ones given current conditions and future plans. One important area to consider is the service-level agreement (SLA), including whether its terms still make sense or should be renegotiated when it expires.
Providers of logistics services, meanwhile, should reexamine what they offer, and at what price. It will not pay for them to wait for customers to propose renegotiating their SLAs. If they do, they may find out too late that their customers have switched to another provider that has taken a more aggressive posture toward partnering.
Trends for the future
What's on the horizon for 3PL customers and providers? A wide range of service offerings will become more important in the near future. A few examples include:
Dynamic routing optimization, which takes advantage of customized software and management of direct-store-delivery (DSD) routing on a daily, dynamic basis. These capabilities are especially attractive to sectors like the food and restaurant business, where perishability is a big factor. In the future, though, almost all industries will need more dynamic delivery to meet the needs of an ever-faster-moving world.
Energy- and space-efficient use of warehouses, zoning them by type of product and handling characteristics (such as frozen and chilled foods) for optimum efficiency. This will be especially critical for 3PLs that are directly or indirectly responsible for the facilities' utility costs.
Site selection and geographic network design, where users and providers alike look at better placement of facilities along with better customer-to-facility alignment. This will help to drive significant cost reductions and improve delivery performance to end customers.
All these innovations make it increasingly difficult to determine "what lies beneath" the current state of the third-party logistics industry in terms of costs and services, especially since many of the services have been unbundled, insourced, or parceled out over various external and internal providers. However, the good news is that in the ever-evolving 3PL marketplace, tools (such as business intelligence and applied analytics) are available to help companies make responsible and competitively advantageous decisions. To be effective, however, those tools must be coupled with the right kind of experience and insight.
It's tempting to think that relatively "calm seas" today portend the same thing for tomorrow. But for both 3PL providers and their customers, the best way to make sure they remain successful in the future is to take proactive measures today.
Benefits for Amazon's customers--who include marketplace retailers and logistics services customers, as well as companies who use its Amazon Web Services (AWS) platform and the e-commerce shoppers who buy goods on the website--will include generative AI (Gen AI) solutions that offer real-world value, the company said.
The launch is based on “Amazon Nova,” the company’s new generation of foundation models, the company said in a blog post. Data scientists use foundation models (FMs) to develop machine learning (ML) platforms more quickly than starting from scratch, allowing them to create artificial intelligence applications capable of performing a wide variety of general tasks, since they were trained on a broad spectrum of generalized data, Amazon says.
The new models are integrated with Amazon Bedrock, a managed service that makes FMs from AI companies and Amazon available for use through a single API. Using Amazon Bedrock, customers can experiment with and evaluate Amazon Nova models, as well as other FMs, to determine the best model for an application.
Calling the launch “the next step in our AI journey,” the company says Amazon Nova has the ability to process text, image, and video as prompts, so customers can use Amazon Nova-powered generative AI applications to understand videos, charts, and documents, or to generate videos and other multimedia content.
“Inside Amazon, we have about 1,000 Gen AI applications in motion, and we’ve had a bird’s-eye view of what application builders are still grappling with,” Rohit Prasad, SVP of Amazon Artificial General Intelligence, said in a release. “Our new Amazon Nova models are intended to help with these challenges for internal and external builders, and provide compelling intelligence and content generation while also delivering meaningful progress on latency, cost-effectiveness, customization, information grounding, and agentic capabilities.”
The new Amazon Nova models available in Amazon Bedrock include:
Amazon Nova Micro, a text-only model that delivers the lowest latency responses at very low cost.
Amazon Nova Lite, a very low-cost multimodal model that is lightning fast for processing image, video, and text inputs.
Amazon Nova Pro, a highly capable multimodal model with the best combination of accuracy, speed, and cost for a wide range of tasks.
Amazon Nova Premier, the most capable of Amazon’s multimodal models for complex reasoning tasks and for use as the best teacher for distilling custom models
Amazon Nova Canvas, a state-of-the-art image generation model.
Amazon Nova Reel, a state-of-the-art video generation model that can transform a single image input into a brief video with the prompt: dolly forward.
Economic activity in the logistics industry expanded in November, continuing a steady growth pattern that began earlier this year and signaling a return to seasonality after several years of fluctuating conditions, according to the latest Logistics Managers’ Index report (LMI), released today.
The November LMI registered 58.4, down slightly from October’s reading of 58.9, which was the highest level in two years. The LMI is a monthly gauge of business conditions across warehousing and logistics markets; a reading above 50 indicates growth and a reading below 50 indicates contraction.
“The overall index has been very consistent in the past three months, with readings of 58.6, 58.9, and 58.4,” LMI analyst Zac Rogers, associate professor of supply chain management at Colorado State University, wrote in the November LMI report. “This plateau is slightly higher than a similar plateau of consistency earlier in the year when May to August saw four readings between 55.3 and 56.4. Seasonally speaking, it is consistent that this later year run of readings would be the highest all year.”
Separately, Rogers said the end-of-year growth reflects the return to a healthy holiday peak, which started when inventory levels expanded in late summer and early fall as retailers began stocking up to meet consumer demand. Pandemic-driven shifts in consumer buying behavior, inflation, and economic uncertainty contributed to volatile peak season conditions over the past four years, with the LMI swinging from record-high growth in late 2020 and 2021 to slower growth in 2022 and contraction in 2023.
“The LMI contracted at this time a year ago, so basically [there was] no peak season,” Rogers said, citing inflation as a drag on demand. “To have a normal November … [really] for the first time in five years, justifies what we’ve seen all these companies doing—building up inventory in a sustainable, seasonal way.
“Based on what we’re seeing, a lot of supply chains called it right and were ready for healthy holiday season, so far.”
The LMI has remained in the mid to high 50s range since January—with the exception of April, when the index dipped to 52.9—signaling strong and consistent demand for warehousing and transportation services.
The LMI is a monthly survey of logistics managers from across the country. It tracks industry growth overall and across eight areas: inventory levels and costs; warehousing capacity, utilization, and prices; and transportation capacity, utilization, and prices. The report is released monthly by researchers from Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno, in conjunction with the Council of Supply Chain Management Professionals (CSCMP).
Specifically, 48% of respondents identified rising tariffs and trade barriers as their top concern, followed by supply chain disruptions at 45% and geopolitical instability at 41%. Moreover, tariffs and trade barriers ranked as the priority issue regardless of company size, as respondents at companies with less than 250 employees, 251-500, 501-1,000, 1,001-50,000 and 50,000+ employees all cited it as the most significant issue they are currently facing.
“Evolving tariffs and trade policies are one of a number of complex issues requiring organizations to build more resilience into their supply chains through compliance, technology and strategic planning,” Jackson Wood, Director, Industry Strategy at Descartes, said in a release. “With the potential for the incoming U.S. administration to impose new and additional tariffs on a wide variety of goods and countries of origin, U.S. importers may need to significantly re-engineer their sourcing strategies to mitigate potentially higher costs.”
Freight transportation providers and maritime port operators are bracing for rough business impacts if the incoming Trump Administration follows through on its pledge to impose a 25% tariff on Mexico and Canada and an additional 10% tariff on China, analysts say.
Industry contacts say they fear that such heavy fees could prompt importers to “pull forward” a massive surge of goods before the new administration is seated on January 20, and then quickly cut back again once the hefty new fees are instituted, according to a report from TD Cowen.
As a measure of the potential economic impact of that uncertain scenario, transport company stocks were mostly trading down yesterday following Donald Trump’s social media post on Monday night announcing the proposed new policy, TD Cowen said in a note to investors.
But an alternative impact of the tariff jump could be that it doesn’t happen at all, but is merely a threat intended to force other nations to the table to strike new deals on trade, immigration, or drug smuggling. “Trump is perfectly comfortable being a policy paradox and pushing competing policies (and people); this ‘chaos premium’ only increases his leverage in negotiations,” the firm said.
However, if that truly is the new administration’s strategy, it could backfire by sparking a tit-for-tat trade war that includes retaliatory tariffs by other countries on U.S. exports, other analysts said. “The additional tariffs on China that the incoming US administration plans to impose will add to restrictions on China-made products, driving up their prices and fueling an already-under-way surge in efforts to beat the tariffs by importing products before the inauguration,” Andrei Quinn-Barabanov, Senior Director – Supplier Risk Management solutions at Moody’s, said in a statement. “The Mexico and Canada tariffs may be an invitation to negotiations with the U.S. on immigration and other issues. If implemented, they would also be challenging to maintain, because the two nations can threaten the U.S. with significant retaliation and because of a likely pressure from the American business community that would be greatly affected by the costs and supply chain obstacles resulting from the tariffs.”
New tariffs could also damage sensitive supply chains by triggering unintended consequences, according to a report by Matt Lekstutis, Director at Efficio, a global procurement and supply chain procurement consultancy. “While ultimate tariff policy will likely be implemented to achieve specific US re-industrialization and other political objectives, the responses of various nations, companies and trading partners is not easily predicted and companies that even have little or no exposure to Mexico, China or Canada could be impacted. New tariffs may disrupt supply chains dependent on just in time deliveries as they adjust to new trade flows. This could affect all industries dependent on distribution and logistics providers and result in supply shortages,” Lekstutis said.
Grocers and retailers are struggling to get their systems back online just before the winter holiday peak, following a software hack that hit the supply chain software provider Blue Yonder this week.
The ransomware attack is snarling inventory distribution patterns because of its impact on systems such as the employee scheduling system for coffee stalwart Starbucks, according to a published report. Scottsdale, Arizona-based Blue Yonder provides a wide range of supply chain software, including warehouse management system (WMS), transportation management system (TMS), order management and commerce, network and control tower, returns management, and others.
Blue Yonder today acknowledged the disruptions, saying they were the result of a ransomware incident affecting its managed services hosted environment. The company has established a dedicated cybersecurity incident update webpage to communicate its recovery progress, but it had not been updated for nearly two days as of Tuesday afternoon. “Since learning of the incident, the Blue Yonder team has been working diligently together with external cybersecurity firms to make progress in their recovery process. We have implemented several defensive and forensic protocols,” a Blue Yonder spokesperson said in an email.
The timing of the attack suggests that hackers may have targeted Blue Yonder in a calculated attack based on the upcoming Thanksgiving break, since many U.S. organizations downsize their security staffing on holidays and weekends, according to a statement from Dan Lattimer, VP of Semperis, a New Jersey-based computer and network security firm.
“While details on the specifics of the Blue Yonder attack are scant, it is yet another reminder how damaging supply chain disruptions become when suppliers are taken offline. Kudos to Blue Yonder for dealing with this cyberattack head on but we still don’t know how far reaching the business disruptions will be in the UK, U.S. and other countries,” Lattimer said. “Now is time for organizations to fight back against threat actors. Deciding whether or not to pay a ransom is a personal decision that each company has to make, but paying emboldens threat actors and throws more fuel onto an already burning inferno. Simply, it doesn’t pay-to-pay,” he said.
The incident closely followed an unrelated cybersecurity issue at the grocery giant Ahold Delhaize, which has been recovering from impacts to the Stop & Shop chain that it across the U.S. Northeast region. In a statement apologizing to customers for the inconvenience of the cybersecurity issue, Netherlands-based Ahold Delhaize said its top priority is the security of its customers, associates and partners, and that the company’s internal IT security staff was working with external cybersecurity experts and law enforcement to speed recovery. “Our teams are taking steps to assess and mitigate the issue. This includes taking some systems offline to help protect them. This issue and subsequent mitigating actions have affected certain Ahold Delhaize USA brands and services including a number of pharmacies and certain e-commerce operations,” the company said.
Editor's note:This article was revised on November 27 to indicate that the cybersecurity issue at Ahold Delhaize was unrelated to the Blue Yonder hack.