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INVITED PAPER

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Received May 2010 Accepted June 2010

Environmental sustainability in the third-party logistics (3PL) industry

Kristin J. Lieb
Emerson College, Boston, Massachusetts, USA, and

Robert C. Lieb
Northeastern University, Boston, Massachusetts, USA
Abstract
Purpose The purpose of this paper is to document the extent to which large third-party logistics (3PL) companies have committed themselves to environmental sustainability goals. It also aims to examine the sustainability initiatives undertaken by those companies and the impact of those initiatives on the 3PL and their customers. Finally, the research seeks to examine the impact of the global recession of 2008-2009 not only on the commitment of the 3PL to their sustainability goals but also on how the recession impacted 3PL customer interest in such goals. Design/methodology/approach The data upon which this paper is based was generated in two annual surveys of the chief executive ofcers of 40 large 3PL companies operating in North America, Europe, and the Asia-Pacic region. These surveys were conducted in 2008 and 2009 and were part of a long-term series of annual surveys that began in 1994. Findings The ndings indicate that nearly all of the companies involved in the surveys have made substantial commitments to environmental sustainability goals during the past several years and that they have launched a broad range of related projects that have had quite positive impacts on those companies. Despite the recession, none of the 3PL scaled back their commitment to those goals; in fact, many launched new sustainability projects during that period. 3PL customers have also shown increasing interest in the environmental sustainability capabilities of the 3PL. Originality/value The paper effort represents the rst large-scale effort to document the commitment of large 3PL to environmental sustainability goals. Keywords Sustainable development, Distribution management, Globalization Paper type Research paper

International Journal of Physical Distribution & Logistics Management Vol. 40 No. 7, 2010 pp. 524-533 q Emerald Group Publishing Limited 0960-0035 DOI 10.1108/09600031011071984

Introduction During the past several years, many articles have appeared in supply chain management publications that have tracked the efforts of manufacturers, retailers, and carriers to pursue environmental sustainability goals (Cooke, 2008) and (Murphy, 2008). However, very little attention has been given to such activity in the context of the third-party logistics (3PL) industry. This paper shows that despite the global recession of 2008-2009, many large 3PL companies increased their respective commitments to building environmental sustainability programs during that period. It also examines the reasons such companies are investing in sustainability at a time when many other corporate initiatives are being cut or postponed.

The data upon which this paper is based was generated in two annual surveys of 40 chief executive ofcers (CEOs) of many of the largest 3PL operating in the North American, European, and Asia-Pacic 3PL markets. The rst survey was conducted in 2008, while the second was conducted in 2009 (Lieb and Lieb, 2008a, b, 2009). All of the CEOs involved in the surveys were directors of the regional 3PL operations of companies ranked in the top 50 global 3PL providers, as measured by gross revenues (Burnson, 2009). Collectively, the companies that participated in the surveys generated in excess of $60 billion in annual logistics service operating revenues in each of the survey years. The surveys were part of an annual series of surveys of the CEOs of large 3PL companies that originated in 1994. While the annual surveys address a wide variety of issues in the industry, considerable attention was devoted to sustainability issues in both the 2008 and the 2009 surveys. Among the sustainability issues examined were the reasons for the CEOs companies involvement with such issues, the extent of that involvement, how that involvement impacted their companies, and the importance of sustainability issues to their customers. The sustainability questions included in the 2009 survey focused on the impact of the global recession on 3PL sustainability initiatives and also sought to determine the level of interest 3PL customers had in such initiatives. While all 40 of the CEOs invited to participate in the two surveys agreed to complete the questionnaires, 39 submitted completed surveys in 2008 and 35 completed the survey in 2009. The same companies and CEOs were participants in both surveys. The 2008 survey Formal sustainability programs and leadership The CEOs were rst asked if their companies had formal environmental sustainability programs in place, and 28 of the 39 respondents said they did. Most of those programs were relatively new, with 16 being established between 2006 and 2008. About 24 CEOs also indicated that their companies had written formal sustainability statements outlining the related goals of the company and the general approach to be taken to realize those goals. It is important to note that even if a CEO reported that his/her company did not have either a formal sustainability program or a formal sustainability statement in place, the company could still be actively involved in responding to environmental issues in other ways. About 20 of the 29 companies with formal sustainability programs in place in 2008 had also established a management position to oversee company efforts in the area. The titles that accorded those individuals varied widely and are shown in the following list: . VP environmental sustainability. . VP environmental affairs. . VP quality assurance. . VP of sustainability. . Senior manager for enterprise sustainability. . Director sustainability. . Chief quality ofcer. . Corporate sustainability manager.

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. . .

Global sustainability ofcer. Group environmental ofcer. Senior sustainability manager.

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Reasons for establishing sustainability programs In the 2008 survey, the CEOs were asked to indicate the three most important reasons for establishing their companies sustainability programs. The resulting CEO responses were weighted, with three points given for a most important response, two for a second most important response, and one given for a third most important response. Their collective responses are shown in Table I. As shown, a corporate desire to do the right thing was by far the most important reason, accounting for 85 total weighted points, with 24 of the 39 CEOs indicating that was the most important reason their companies had established sustainability programs. Ranking second, with 57 total weighted points was pressure from customers. Seven respondents also selected this customer pressure as the most important reason for establishing their programs. Rounding out the top ve reasons were a desire to enhance the companys image with 41 points, a desire to attract green customers with 28 points, and competitive pressures with 20 points. Interestingly, most of those responses speak directly to brand maintenance issues. The desire to do the right thing speaks to a companys wish to position itself and be a responsible member of an industry, of the world marketplace, and of the society. These dimensions of a brand become more important in situations where brands offer more or less the same services and seek a legitimate basis for differentiation. This is particularly applicable in the 3PL industry in which there is broad concern about the possible commoditization of the industrys service offerings (Lieb and Lieb, Supply Chain Management Review, 2008a, b). Steps taken to address sustainability issues The CEOs were also asked to identify any steps taken by their companies to support their sustainability goals. About 28 CEOs responded to that question and the activities mentioned might be clustered into four categories: administrative, analytical, transportation-related, and a rather broadly dened other category. Among the administrative steps were: setting specic sustainability goals for individual operating units (mentioned by seven respondents), establishing committees to oversee company sustainability efforts, developing a formal sustainability statement for a company, establishing pilot programs directed at reducing emission levels, and instituting a 4 10-hour work week for members of a companys administrative staff.
Reason Corporate desire to do the right thing Pressure from customers Corporate desire to enhance company image Corporate desire to attract green customers Competitive pressures Note: aNumber of most important mentions are provided in parentheses Total weighted pointsa 85 (24) 57 (7) 41 28 20

Table I. Most important reasons for establishing sustainability program

Many CEOs indicated that their companies had approached sustainability goals from an analytical standpoint. Those analytical steps included: investing in evaluation software, improving control of a companys service providers through the use of environmental checklists, benchmarking a companys carbon footprint against other 3PL, developing environmental key performance indicators to be monitored on a regular basis, reconsideration of a companys network design, and measuring the carbon impact of various network designs and transportation strategies. A wide range of transportation-related steps were cited by those surveyed as important components of their commitment to sustainability goals. These included: . experimenting with alternative fuels (mentioned by three CEOs); . purchasing more fuel-efcient vehicles; . reducing vehicle mileage operated; . participating in government-sponsored programs such as the Environmental Protection Agency (EPA)s SmartWay Program in the trucking industry; . promoting freight consolidation initiatives within the companies; . retro-tting a companys aircraft with more fuel-efcient engines; . shifting freight to more fuel-efcient modes; . limiting the speeds at which company equipment is operated; . qualifying eet operators based upon their equipment and performance; . sharing vehicles across multiple customers; and . reducing vehicle idling time. The other category contained a number of interesting initiatives, including efforts to reduce company-printed materials, recycle ofce supplies and packaging materials, install solar panels in warehouses, promote company use of leadership in energy and environmental design warehouses this involves third-party certication of buildings in a program sponsored by the US Green Building Council install more energy-efcient lighting and motion sensors in company facilities, develop new initiatives in recycling company waste materials, and use windmills at distribution centers (DCs) for electric power generation. Impact of the sustainability steps taken by the companies The CEOs were also asked to evaluate the impact of the sustainability steps their companies had taken. About 25 CEOs responded to that question, and their responses were overwhelmingly positive. Nine CEOs cited positive impacts on company employees who have helped to foster a green culture within their organizations. Interestingly, eight respondents indicated that company sustainability efforts had reduced operating expenses, with several highlighting substantial savings in fuel costs. One CEO noted that company sustainability efforts had reduced fuel costs by 40 percent! Another cited savings of 15 percent of direct costs, and in some places up to 23 percent. Another said that the sustainability efforts had produced satisfaction and fun for the staff. These documented cost savings related to 3PL sustainability initiatives are quite interesting in that generally the discussion of potential sustainability initiatives focuses on possible cost increases rather than cost savings.

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The fact that some sustainability initiatives may lead to cost reductions makes such actions more salable at the board and investor levels. Six CEOs reported that company sustainability efforts led to increased business not only with existing customers but also with new customers. Improvements in company image were also cited by ve respondents who mentioned positive press and useful marketing spin-offs as benets of their sustainability initiatives. Partners in sustainability efforts Many companies that have established formal sustainability programs work with other organizations to pursue common sustainability goals. This approach is widely used in the 3PL industry, and the industrys environmental partners come in many forms. By far, the most frequently mentioned sustainability partners were government agencies. About 22 CEOs reported working with government agencies on sustainability issues. This is not surprising in that environmental regulations have already been tightened in many countries, and 3PL are naturally interested in not only complying with existing regulations but also inuencing subsequent regulatory measures that might affect the industry. An illustration of the type of 3PL government sustainability alliance is the US EPAs SmartWay Program, which is a collaborative program between the EPA and the freight sector in which vehicles and carriers may become certied as SmartWay compliant. The second most frequently mentioned 3PL sustainability partner was transportation companies (cited by 15 CEOs). Many 3PL are focusing on such issues as using cleaner fuels, reducing route mileage operated, establishing better loading practices, and changing eets to better support sustainability goals. Transportation companies can provide valuable inputs into 3PL discussions of such topics and modify their operating practices in providing services to 3PL clients. Among the other types of environmental partners mentioned by at least ten CEOs were trade organizations (12), consultants (11), and non-government organizations (ten). These environmental partnerships are very important to the success of 3PL industrys sustainability efforts. Their partners provide access to data, experience, different perspectives, and larger networks to help 3PL meet sustainability goals. At the same time, the collective political power of such partnerships enhances the 3PL industrys potential to inuence future public policy in this area. Importance of sustainability issues in the sales process The 2008 survey also attempted to determine how often existing or potential customers raised sustainability issues in their contract discussions with 3PL. The CEOs responded by saying that on average 21 percent of existing customers and 20 percent of potential customers raised sustainability issues in those discussions. The CEOs were then asked what major sustainability issues were most frequently emphasized by existing or potential customers in those meetings. Their responses clustered into two areas. The rst concerned the current performance of the 3PL service provider in dealing with sustainability issues within its own organization. In this area, customers typically asked the 3PL to discuss its internal practices related to such issues as recycling, energy conservation, and reduction of its carbon footprint. The second related to the 3PLs ability to aid the customers in reaching their specic sustainability goals. More specically, 3PL customers asked about the 3PLs ability to:

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support customer efforts to reduce their carbon footprints; enhance existing return logistics programs; reduce fuel, water, and electricity consumption; help customers comply with various industry certication programs; dispose of hazardous materials; develop recycling programs; improve the performance of customer vehicle eets; and develop renewable energy sources, especially at customer facilities.

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In view of this degree of customer interest, we also wanted to know how frequently sustainability issues were a major determining factor in either extending existing contracts or securing new 3PL business. The options given the CEOs were frequently, infrequently, or very infrequently. Surprisingly, only three CEOs said these issues were frequently a major determining factor in such situations and the other 36 indicated that it happened very infrequently. In a related question, the CEOs were also asked what percentage of their companies existing contracts included sustainability performance metrics and the average response was 2.5 percent. While the 2008 survey results clearly demonstrated that there was considerable customer interest in discussing sustainability issues with major 3PL, those issues were not yet playing a major role in either the 3PL selection or the retention process and they were not being signicantly reected in 3PL contracts. Short-term sustainability challenges for 3PL For a large 3PL to pursue sustainability goals, it must deal with important corporate challenges and trade-offs. To explore those issues, the 2008 survey asked the CEOs to identify and rank-order the three most important short-term sustainability challenges faced by their companies. Again, a rst-place vote was awarded three points, a second-place vote earned two points, and a third-place vote equaled one point. The results are summarized in Table II. As shown, balancing sustainability efforts with customer expectations for low-priced 3PL services ranked rst with 55 total weighted points and ten most important votes. Finishing second was identifying appropriate environmental benchmarks/targets with 48 points and six most important votes. The third place was establishing sustainability priorities within the company with 47 points and nine most important votes. Fourth, with 22 points
Sustainability challenge Balancing sustainability efforts with customer expectations for low-priced 3PL services Identifying appropriate environmental benchmarks/targets Establishing sustainability priorities within the company Generating accurate company information related to current sustainability practices Developing an organizational sensitivity to sustainability issues Note: aNumber of most important mentions are provided in parentheses Total weighted pointsa 55 (10) 48 (6) 47 (9) 22 (4) 10 (1) Table II. Most important short-term sustainability challenges faced by 3PL

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and four most important votes, was generating accurate company information related to current environmental practices. Finishing a distant fth with ten points and one most important vote was developing an organizational sensitivity to sustainability issues. Importance of sustainability issues three years from now The CEOs were also asked how important they believed that 3PL provider greenness would be three years from now, and they were clearly divided in their opinions. While 16 respondents said they believed that it would be substantially more important, 17 indicated that they thought it would be marginally more important, three suggested it would be about at the same level of importance, and two believed it would be marginally less important. The 2009 survey The 2009 survey also included sustainability questions designed to test the impact of the global recession on the commitment of the 3PL to their sustainability goals and to determine how the 3PL customer base viewed sustainability goals in a challenging economic climate. Continued 3PL commitment to sustainability The CEOs involved in the 2009 survey were asked if their companies had scaled back their commitment to sustainability goals as a result of the recession, and surprisingly all 35 indicated that they had not. In fact, 22 of the 35 (63 percent) reported expanding the existing sustainability programs during the previous year and 25 of the 35 (71 percent) indicated that they had launched completely new sustainability initiatives during the same time frame. Furthermore, as discussed below, the CEOs reported that despite the economic downturn, their customers continued to express interest in sustainability issues. Expansion of existing sustainability programs The 22 CEOs who reported that their companies had expanded existing sustainability programs in the past year identied a wide range of expansion efforts in the administrative, analytical, transportation-related, and other categories introduced earlier in this paper. Typically, these expansion efforts involved extending small-scale or pilot programs to other organizational units or geographies. The most notable of the expansion efforts were in the analytical category. These efforts included: development of more robust analytical capabilities to quantify a companys carbon footprint with respect to its freight optimization efforts, establishment of a review process for new technologies and their potential impact on the carbon footprint of the company, and development of diagnostic technologies that give customers real-time visibility into a companys eet performance with the goal being to monitor and improve vehicle routing, fuel usage, speed, idle time, and driver-shifting patterns. New initiatives Among the new administrative initiatives reported in 2009 were: development of a web site to update customers on the companys sustainability initiatives and how they impact customer needs and the community; establishment of a formal company

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procedure to anticipate and understand future government sustainability actions and develop appropriate company responses; expansion of collaborative partnerships with other 3PL and customers to include sustainability; institution of a work-from-home program for some employees; introduction of a Green Training Program which involves telecom/webinar training sessions about climate change regulations; experimentation with a paperless ofce concept; establishment of a dedicated team to review procedures for energy savings and fuel use in facilities and equipment; integration of sustainability issues into a companys broader business agenda and objectives; and development of methods and tools to encourage employees to focus on sustainability agenda both at work and at home. Among the new transportation-related initiatives reported were: participating in the EPAs SmartWay Program; establishing an Eco-Transport Program to not only use more ecologically friendly modes but also promote cargo consolidation; mandating reduced vehicle speed on the companys eet to save fuel and reduce emissions; releasing a prototype for an eco-friendly containership; installation of solar panels on roll-on-roll-off vessels to power ancillary services; investment in a line of tractors and trailers engineered to reduce fuel consumption and greenhouse gas (GHG) emissions; making ultra low-sulfur diesel available at all company refueling stations, and bio-diesel available at some locations. Among the new analytical initiatives reported by respondents were: calculation of a companys carbon footprint so that it can be prepared for carbon pricing; development of a carbon footprint calculator for logistics solutions so that customers can consider and weigh the environmental costs and benets of a particular solution as well as the traditional cost and service benets; incorporation of sustainability cost/benet in customer solutions and proposals; development of a carbon footprint metrics tool to measure and report GHG emissions based on ton-mile, average weight per load, average miles per load, and average number of loads related to customer operations; measurement of carbon footprints for customer supply chains operated by a company; establishment of a company target to reduce its carbon footprint by 5 percent annually against existing guidelines; and development of Think Green services through a companys consulting division to help clients to reduce their carbon footprints. Among the other new initiatives reported were: use of third parties to identify potential lighting upgrades to reduce kilowatt hour consumption, utility costs, and GHG emissions within all company facilities; development of an eco-consumption program focusing on management of the purchase, consumption, reuse, and recycling of ofce supplies and packaging materials; implementation of high-efciency lighting projects at DCs; tracking of gas and electricity use at company-operated warehouses and DCs; establishment of pilot programs to substantially reduce energy consumption in company warehouses; consolidating a companys warehousing network; raising sustainability awareness within a company and extending it to vendors and customers; promoting a paperless environment within a company; and incorporation of sustainability guidelines into all new building designs and materials. Customer interest in sustainability issues We also wanted to know how much attention was being given to sustainability issues by the existing customer base of the 3PL involved in the 2009 survey. On average, the CEOs reported that 13 percent of their customers were giving substantial attention to such

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issues at this time, 50 percent were giving moderate attention to them, 30 percent were giving little attention to sustainability issues, and only 7 percent were giving no attention to them. The fact that nearly two-thirds of the customers of these large 3PL were giving at least moderate attention to sustainability issues during the economic downturn indicates a growing sensitivity to sustainability issues in the 3PL customer community. These issues will become more important in the marketplace, and the commitment to sustainability issues of individual 3PL is likely to become a signicant differentiation factor. Summary and implications Our research indicates that many of the major global 3PL service providers have made important commitments to environmental sustainability improvements during the past several years. Those companies have made capital expenditures, implemented organizational changes, and modied operating practices to address such issues. While the reasons for making these commitments vary from company to company, the most commonly cited reasons have been an organizational desire to do the right thing with respect to environmental concerns and pressure from customers. In pursuing sustainability goals, many of the 3PL have closely worked with customers, transportation companies, trade associations, non-governmental organizations, and government agencies. Interestingly, in many instances, their efforts have resulted in signicant cost savings for the companies. What do we expect? In the short-term, while the companies involved in these surveys will remain committed to sustainability issues, the lingering effects of the recession will likely limit some of their initiatives in the coming months. While low-cost operational changes that can yield sustainability gains will continue, nancial pressures and board concerns will likely lead to the postponement of more capital-intensive initiatives. However, many of the companies involved in the surveys indicated that some of their sustainability initiatives generated substantial cost savings. That development should make it easier for 3PL managers to convince board members and investors to support further action in this area. In the longer term, we expect sustainability issues to attract even more managerial attention in the 3PL industry. The benets already generated within the 3PL companies through their sustainability initiatives have been signicant. At the same time, both the 3PL and their customers will undoubtedly face more stringent environmental regulations such as the cap and trade legislation being considered in the USA. Such regulatory changes will put considerable pressure on companies to operate greener supply chains. This should provide real market opportunities for the 3PL that have focused on sustainability issues as existing and potential customers turn to them for assistance in complying with the new regulations. While this will be an important issue in all geographies, it will likely be most signicant in the Asia-Pacic region where governments have often been slow to respond to environmental concerns and are now feeling international pressures to catch up. These opportunities, coupled with a continuing desire to do the right thing on the part of the large 3PL, and possible use of sustainability programs as a market differentiation factor would all seem to point to a growing commitment to sustainability issues in the global 3PL industry.

References Burnson, P. (2009), The top 50 3PLS: treading water, Logistics Management, Vol. 49 No. 6, pp. 48s, 50s, 52s (3PL special supplement). Cooke, J.A. (2008), The greening of Whirlpools supply chain, CSCMPs Supply Chain Quarterly, Quarter 2, pp. 46-9. Lieb, K.J. and Lieb, R.C. (2008a), The North American, European, and Asia-Pacic markets for 3PL services: the 2008 3PL Provider CEO Survey, paper presented at the CSCMP Annual Conference, Denver, CO, Sponsored by Penske. Lieb, K.J. and Lieb, R.C. (2008b), Why 3PLs need to build their brand, Supply Chain Management Review, Vol. 12 No. 8, pp. 46-52. Lieb, K.J. and Lieb, R.C. (2009), The North American, European, and Asia-Pacic Markets for 3PL Services: the 2009 3PL Provider CEO Survey, paper presented at the CSCMP Annual Conference, Chicago, IL, Sponsored by Penske. Murphy, J.V. (2008), Supply chains reduce carbon footprints and save you money, Global Logistics and Supply Chain Strategies, Vol. 12 No. 3, pp. 30, 32, 34-36, 38, 40-42. Further reading Quelch, J.A. and Jocz, K.E. (2009), How to market in a downturn, Harvard Business Review, April, pp. 1-12. Corresponding author Kristin J. Lieb can be contacted at: kristin_lieb@emerson.edu

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