State of the Global Logistics Market: Recapping 2020 Trends in Shipper & 3PL Relationships

Evan Armstrong

The COVID-19 pandemic has caused extreme volatility across global supply chains.

From raw material procurement and inventory management, to international transportation and fulfillment, shippers in all industries were faced with incredible challenges throughout 2020.

In the current environment, supply chain flexibility has become the top priority, and shippers continue turning to their third-party logistics (3PL) providers to increase it.

With increasing digitization and the rise of e-commerce, this trend has been on the rise for decades. Since we started tracking 3PL industry growth at Armstrong & Associates in 1996, the 3PL market has experienced a compounded annual growth rate of 8.8%.

Flexibility has become the top priority, and shippers are looking to their 3PL providers to increase it in their supply chains.

As vaccine distribution ramps up and we start looking to the post-COVID-19 world, we expect that trend to continue.

Understanding the large and diverse 3PL market can help shippers make more strategic decisions when implementing providers in their respective supply chains.

To give you insight, I’m going to:

Give an overview of the global 3PL industry
Discuss key trends in 2020 shipper & 3PL relationships
Forecast trends for dedicated fleet, warehousing, domestic transportation management and international transportation management
Set the table for 2021

Where Shippers Are Spending Their Global Logistics Budgets

Before diving into 2020 logistics trends, it's helpful to examine how shippers are spending on logistics generally — what parts of the supply chain command the most resources?

Global shipper spend on logistics functions in 2020

Trucking, in terms of global logistics costs, is king, at roughly $3.9 trillion in annual costs. The next largest cost bucket is inventory carrying at $2.1 trillion.

Warehousing also represents a significant chunk, at just over $1 trillion; however, trucking and inventory are where shippers spend the most, and therefore, will look to first when trying to reduce costs.

Trucking and inventory spend are intertwined; where shippers deploy goods and how they utilize transportation can reduce the amount of goods needed on hand.

Around the world, shippers spend the most on trucking — by far — followed by inventory carrying.

The 4 Main Segments of the 3PL Market

To perform these services, shippers will outsource logistics services to a variety of 3PLs. These providers will usually specialize in an industry sub-segment, helping their customers with different aspects of their supply chains.

At Armstrong & Associates, we bucket 3PLs into four main categories. Here’s a brief overview of the basic business model of each 3PL segment:

Dedicated Contract Carriage (DCC): Supply shippers with tractors, drivers, and fleet management. Sometimes called “dedicated fleet”.
Domestic Transportation Management (DTM): Provide non-asset based, value-added transportation management services. These deal mainly with shipments originating in and destined to North American points, and services are usually performed in conjunction with freight brokerage.
International Transportation Management (ITM): Provide non-asset based, value-added international transportation management services that are usually performed in conjunction with freight forwarding.
Value-Added Warehousing and Distribution (VAWD): Provide long-term contract warehousing or distribution center operations. These often include a host of other value-added services.

Quick Recap of 2020 Global Logistics Trends

Now that we’ve established generally where shippers are spending on logistics and what types of 3PL providers they work with, let’s take a moment for a quick blow-by-blow of the logistics market throughout the 2020.

The first quarter of 2020 began without much fanfare, but by the end of January, the first impacts of COVID-19 began to creep into global supply chains.

January: the first disruptions began in China as portions of its manufacturing and exporting infrastructure shutdown to contain the virus’s spread.
February: other countries in Asia and Europe began to shut down portions of their economies, increasing the ripple effect across the global supply chain.
March – April: widespread economic shutdowns and stay-at-home orders hit the U.S., creating a surge in some industry sectors (grocery, e-commerce, technology, PPE) and a collapse in others (travel, restaurant). This created an initial spike of panic buying, followed by a deep dive in overall transportation volumes.
May – October: as businesses reopened and economic activity picked up, we observed a significant “bullwhip” effect — volatile demand for domestic transportation as shippers rushed to replenish inventories and fill backorders. Ever since there has been a steady rise in shipper demand.
November – Present: peak season shipping is in full swing, creating chassis availability at ports, rising rates across ocean, air, intermodal and trucking as shippers prepare for record e-commerce shipping.

$924B Industry (and Growing)

A&A’s latest estimates predict a slight decline in overall 2020 3PL revenues and we expect the year to wind up at about $924 billion.

Relative to the severe decline in global economic activity, 3PL performance remained strong, still totaling well above every previous year with the exception of 2018 and 2019.

Heading into the next three years, we expect 3PL usage to continue growing at a compounded annual growth rate of 4.3%, slightly above the past decade rate of 4.1%.

Global Logistics Trends by Industry Segment

Let’s take a closer look at market trends across each of the four main 3PL segments.

3PL revenues by industry segment

Dedicated Contract Carriage (DCC)

Within the asset-heavy Dedicated Contract Carriage 3PL market segment, we observed:

Gross revenue declined by 3% in the first half of 2020, versus the first half of 2019
Slight decline in net revenue
Though there was a decline in shipment volumes, the overall impact was cushioned by the longer-term nature of DCC customer agreements

As 2020 wraps up, we anticipate continued COVID-19 economic volatility, as well as an increased demand for domestic transportation — both of which will positively impact DCC growth as shippers seek a safe haven for capacity.

Value-Added Warehousing and Distribution (VAWD)

Within the Value-Added Warehousing and Distribution 3PL market segment, we observed:

Significant growth in business-to-consumer (B2C) e-commerce fulfillment activity during the first half of 2020, driven by stay-at-home orders
Waning business-to-business (B2B) activity

Overall, VAWD 3PLs continue to benefit from growth in retail e-commerce, making it the fastest-growing domestic 3PL segment.

This year, increased competition from Amazon for labor and warehouse space dramatically impacted warehouse employee wages and lease rates in key distribution areas (i.e. Plainfield, Indiana, and California’s Inland Empire).

In response to these trends, VAWD 3PLs are expressing significant interest in warehouse automation and autonomous robotic solutions.

Over the next three years:
We estimate the VAWD segment to grow at a compounded annual growth rate of 4.1%, slightly above the past decade of 4.0%.

Domestic Transportation Management (DTM)

Within the Domestic Transportation Management (DTM) 3PL market segment, we observed:

Gross revenue decline of 8% in the first half of 2020, versus the same period in 2019.
Net revenue decline of 16% as shipment volumes dropped off across all modes.
Industry verticals most heavily impacted by this decline: Automotive, Industrial, Building/Construction, and Elements/Raw Materials.
Reefer and Dry Van Truckload fared better than Flatbed, which is construction dependent.

When the economy began to recover, DTM demand shot back up as shippers scrambled to rebuild inventories.

As 2020 wraps ups, DTM should continue to do well through the remainder of the year, as carrier capacity remains tight.

Taking a longer view at the non-asset-based DTM market segment, 3PLs are under constant pressure to evolve. To keep up with competitors (and remain relevant), DTM 3PLs must adopt strategies centered on automation and digitalization.

Leaders in the space are heavily focused on automating their workflows, optimizing digital platforms and improving the overall user experience for their carriers and customers.

Over the next three years:
We estimate the TM segment, which includes both DTM and DCC globally, to grow at a compound annual growth rate of 4.9%.

Though this will likely be the fastest growing of the industry segments, it will likely slow down from the past decade’s growth rate of 6.3%.

International Transportation Management (ITM)

Within the International Transportation Management (ITM) 3PL market segment (which includes air and ocean freight forwarding) we observed:

Gross revenue growth of 3.8% in the first half of 2020, as opposed to a 5.2% decline (to $58.7 billion) in 2019.
Decline in air and ocean volumes through the first half, but also tight capacity

Due to COVID-19 shutdowns, commercial airline belly space — which accounts for approximately 40% of total capacity — disappeared, while ocean carrier capacity tightened with cancelled sailings out of Asia.

Both of these led to significant rate increases, which drove up gross revenue for this market segment.

As 2020 wraps up, our expectation is that the ITM market will stay strong as carrier capacity remains tight.

Over the next three years:
We estimate the ITM segment to grow at a compound annual growth rate of 3.5%, well above the past decade of 1.2% growth.

What This Means for Supply Chain Professionals

Every year, shippers rely more and more on their 3PL providers. In 2019, 92% of Fortune 500 companies worked with at least one 3PL, which represents a 100% increase from our initial tracking in 2001.

If the pandemic has taught us one thing, it’s the importance of digital capabilities. Look to 3PLs that put an emphasis on visibility and process automation across functions such as digital freight matching, freight bill audit, and payment.

There are several great applications in the market that can help you digitalize to create better plans, handle processes more efficiently and conduct continuous improvement exercises.

Whether it’s a transactional brokered domestic truckload shipment, or a multi-year fully outsourced warehousing and fulfillment contract, 3PLs are a critical component of global supply chains — especially in a post-COVID-19 world where flexibility is at a premium.

With a better understanding of the 3PL market, you are more empowered to make strategic decisions when adding providers to your network.