THE INDUSTRY OF LOGISTICS SERVICE PROVIDERS IN BRAZIL: ANALYZING SERVICE SUPPLY AND DEMAND

The industry of Logistics Service Providers – LSPs in Brazil has been growing rapidly in recent years. Between 2000 and 2003, the total income of the PSLs jumped from R$1,56 billion to R$6,02 billion, in nominal terms, which corresponds to an average growth of 57% per year, or 286% in three years. As a result, the average income of PSLs jumped from R$16 million to R$53 million, equivalent to an average annual growth of 49%, or 231% in three years. On the other hand, the number of PSLs registered as logistics operators grew only 16% in the period, or 5% per year on average. It is interesting to observe that in the last year, that is, between 2002 and 2003, the number of PSLs suffered a reduction, going from 124 to 114. This fact is indicating the beginning of a process of concentration in the sector, a fact already widely observed in the most developed in Europe and North America. In the last 12 months, there were some acquisitions of national PSLs by foreign companies, as well as the closure of operations of national providers, which reinforces the hypothesis of sector concentration.

The development of this industry in Brazil seems to be a phenomenon based on solid foundations. There are several indications in this direction. A recent survey of a sample of 93 Brazilian industrial companies, belonging to the 500 largest, indicated that 45% intend to increase, 48% maintain, and only 7% reduce the share of PSLs in their total logistics expenses. On the other hand, 81% of these same companies say they are satisfied or very satisfied with the decision to hire PSLs. This is a very high percentage, which is at a level equivalent to that of countries with a much greater tradition in logistics outsourcing than ours. Just as an example, it is worth mentioning that the percentage of satisfied or very satisfied with the decision to outsource logistics is 89% in North America, 81% in Europe and 89% in Asia.

In order to better understand the dynamics of this industry in the country, this article proposes to analyze the supply and demand profiles, involving types of service, industrial sectors involved, and information technologies used.

Types of services: comparison between supply and demand

An analysis of the portfolio of services offered by LSPs to the Brazilian market reveals convergences and disagreements when confronted with the needs and priorities of their current and potential customers. The figure above shows the percentage of PSLs that offer a certain type of service.

Examining the figure shows the existence of 15 different types of services offered by more than half of Brazilian PSLs. Nine out of the 15 are offered by 90% or more of providers. Of these, warehousing, inventory control, and distribution and transfer transport activities stand out, offered by almost all providers, and which make up the core of integrated logistics management. Among the items with the lowest supply rate, more sophisticated activities stand out, such as milk run, JIT, intermodal management, reverse logistics and kit assembly. It is noteworthy that 92% of LSPs offer project and solution development service, one of the most sophisticated activities within the logistics services portfolio and still very little outsourced in Brazil.

A comparison with some indicators obtained from the 500 largest companies shows strong indications that there are clear mismatches between supply and demand, that is, the supply of services seems to be excessive when compared with the requirements and needs of shippers. Asked about the relative importance of 13 different criteria used for selecting PSLs, logistics executives considered the variety of services offered the least important of all, with a score of 2,8 on a scale of 1 to 5 as can be seen in the picture below. Among the three criteria considered most important, price, previous experience in the activity to be outsourced, and the technical quality of the PSL staff stand out. This data is indicating that shippers are looking for focused and experienced providers, rather than providers that offer a wide range of services.

A more detailed examination of some activities offered is even more revealing of the mismatch between supply and demand. Let's see for example the activities of assembling kits, and milk run. In the case of kitting, although 90% of PSLs offer this service, only 58% of large shippers have this type of activity. Among those who have this activity, only 18% have already outsourced all of their needs, while 22% have outsourced only part of their needs. Therefore, 18% of the shippers still have this activity, but have not yet decided to outsource it. In the case of milk run, although 69% of PSLs offer this service, only 20% of shippers have this type of activity. Among those who practice milk run, 15% have already outsourced all of their needs, while 3% have outsourced only part of their needs. Therefore, 2% of the shippers remain who, although they have this activity, have not yet decided to outsource it.

Another way to compare supply and demand is to look at its evolution over time. The following figure shows the evolution of demand for certain services over a 5-year period, from 1998 to 2003.

Examining the figure above clearly indicates that the activities that have grown the most in terms of demand are the most sophisticated, such as project development, inventory management, kit assembly and milk run. It is important to remember that although these activities are the ones with the highest growth rate, they still have the lowest outsourcing rates, in the set of all outsourced activities. The most striking example is project development, which, although it has grown by 335%, is outsourced by only 29% of companies, albeit partially. The fact that 92% of PSLs offer this service indicates that supply is ahead of demand.

When examining the evolution of the services offered by the LSPs, it can be seen that the activities that have grown the most are also the most sophisticated, such as reverse logistics, JIT services, kitting and intermodal management, as shown by the data in figure a. follow.

Comparing the evolution of supply with the evolution of demand indicates convergences and divergences. Kitting and intermodal management are classes of services with relevant growth in both demand and supply. On the other hand, warehousing and inventory control saw strong growth in demand, but virtually no growth in supply, as a result of the fact that these services had already been offered for some time by almost all LSPs.

Examining the near future, and taking into account the percentage of companies that intend to outsource or increase the degree of outsourcing of certain activities in the next two years, there are greater opportunities for logistics operators, with regard to the services to be offered . The following table lists the activities that represent the greatest growth prospects for outsourcing over the next two years.

An analysis of the table above shows that of the four activities with the greatest growth opportunities for the LSPs, three are sophisticated activities and one is intermediate, ie the storage activity that presents the greatest growth prospects over the next two years.

Dimensioning of potential demand: the most attractive sectors

There are several alternatives for classifying sectors according to their attractiveness based on the size of demand.

A first alternative is to use the percentage of LSPs that provide services to a given sector. According to this alternative, the five most attractive sectors would be: chemical and pre-chemical, automotive, food, hygiene and cleaning, electronics.

A second alternative is to consider the total expense with logistics, that is, the sum of internal expenses with expenses incurred with logistics service providers. According to this criterion, the five main sectors would be chemical and petrochemical, food, automotive, pulp and paper, and steel and metallurgy.

The third alternative, and probably the most objective, is to consider the amount spent on third parties in the execution of logistics activities. Based on this criterion, the most attractive sectors would be chemical and petrochemical, food, automotive, steel and metallurgy, and pulp and paper. The comparison of the 3 criteria indicates a reasonable consistency between them. Chemicals and petrochemicals, food, and automotive appear as the three main sectors regardless of the criterion considered. In addition, the pulp and paper, and steel and metallurgy sectors appear among the largest, in two of the three criteria considered The figure below indicates the industrial sectors that are currently the largest users of PSLs, measured by the percentage of providers that provide services to them. The following table indicates the size of the main sectors, measured both in relation to total expenses with logistics and expenses with Logistics Service Providers.

Analysis of the table above reveals some interesting information. The chemical and petrochemical sector alone accounts for 43% of logistics expenses and 41% of expenses with logistics service providers. Furthermore, it is the sector that has the largest number of PSLs working for it, that is, one in every 3 PSLs provides services to a company in the sector. Together, the chemical and petrochemical, food and automotive sectors are responsible for 77% of total logistics expenses and 76% of expenses with logistics service providers. These data indicate a strong concentration of demand for logistics services in these 3 sectors.

Use of Information Technology, and the contribution of PSLs

According to the international literature, one of the most important contributions of PSLs is the ability to provide modern IT tools aimed at improving their customers' operations. In fact, in more developed countries in Europe and North America, training in IT solutions is considered one of the main requirements for a PSL to remain competitive in the market. In the case of Brazil, the picture seems to be quite different. The vast majority of companies do not see the PSL as a source of training in information technology. Asked about the role of PSLs in relation to IT, 75% of companies answered that they see them as users, 20% as implementers, and only 12% as developers of information technology. As a result, only 30% of shippers have the objective of improving IT use as one of their motivations for hiring a PSL. It is important to highlight that 85% of shippers are motivated by cost reduction.

The low expectation regarding the PSL with regard to the best use of IT seems to be justified by the small contribution it has made over time. The previous table shows the percentage of companies that use certain ITs, as well as who owns / licenses the technologies used. What draws attention, first of all, is the relatively modest degree of use of IT focused on logistics. Among transport tools, vehicle tracking is the most used, with a percentage of only 60%. Routing and freight auditing tools are used by just over half of the surveyed companies. The use of tools aimed at storage management also leaves something to be desired. Radio frequency technology is used by 44% of companies, picking/picking by 54%, bar coding by 56% and addressing by 63%. There are only two exceptions to the limited use of logistics-oriented IT: order processing systems and ERP systems, which are used by 96% and 81% of companies, respectively.

This table is indicating clear opportunities for implementing IT solutions on shippers. These opportunities may be captured by PSLs in the future, as long as they are attentive and prepared for it. However, the data in the previous table indicate that until now these opportunities have been little explored by them. Just look at what's happening with solutions for warehousing activities. In the 62% of cases where IT solutions are used for addressing, in only 13% of the situations does the ownership / license of the technology belong to the PSL. A similar situation occurs for the cases of radio frequency, barcode, and separation/picking. In transport applications the situation is a little different. Although in the case of freight audits and shipment scheduling, the above situation is repeated, the same does not happen for vehicle routing and tracking, where the participation of PSLs is greater than that of shippers.

Conclusions

After a phase of development and rapid growth, the logistics service provider industry in Brazil seems to be moving towards a phase of consolidation. This evolution usually has important implications for market dynamics. Customers become more demanding and selective, PSLs seek focus and market segmentation, margins tend to get tighter, and productivity increases become a necessity. The survey data, shown above, indicate clear needs to adapt the commercial strategies currently used by the PSLs. There is a clear mismatch between supply and demand for services.

While shippers are looking for focused and efficient providers, LSPs are looking to offer a wide range of services to a wide range of sectors.

The use of information technologies still leaves much to be desired, especially when one considers their vital importance for increasing productivity and reducing costs.

The contribution of LSPs to IT implementation is still very limited.

All of this indicates an environment of threats and opportunities for providers of logistics services operating in Brazil. Those who can understand the new demands and are willing to invest in the changes will increase their chance of survival and growth. Those who remained static will run a serious risk of being trampled by market dynamics.
Bibliographic references

Gordon, Benjamin H.; The Changing Face of 3rd Party Logistics. Supply Chain Management Review – March / April 2003, pp 50 – 58

Chapman, Paul; Broken dreams. Logistics Europe – September 2003, pp 34 – 42

Coppead UFRJ – Center for Studies in Logistics; Logistics Overview: Logistics Outsourcing in Brazil – July 2203