3PLs: Riding the wave

Buffeted by market changes, third-party logistics service providers are branching out from their traditional transportation and warehousing offerings and launching more services for the digital age.

By -- Logistics Management, 7/1/2000

For the third-party logistics (3PL) industry, 1999 was a year of mixed signals. During this period, a number of traditional logistics outsourcing providers merged, signaling a possible trend toward global consolidation. At the same time, a whole new category of providers cropped up in the United States to handle fulfillment for the upstart dot-coms seeking to peddle merchandise online. "A flurry of purchase and merger activity plus migration to e-systems is changing the face of the growing third-party logistics industry," says Richard D. Armstrong, president of Stoughton, Wis.-based Armstrong & Associates Inc., which publishes a guide to third-party logistics service providers.

Despite all the turmoil, the field of contract distribution continues to post impressive numbers. Armstrong & Associates Inc. reports that outsourced logistics jumped from $39.6 billion in gross revenues in 1998 to nearly $46.0 billion last year. "About 60 percent of that growth is from existing business," says Richard Armstrong. "There's geographic expansion [overseas], and there's a broadening of the services performed."

As the basis for his study, Armstrong tracked 38 leading 3PLs, which by themselves earned about $26.1 billion in gross revenues in 1999. That number represents a 17.8-percent hike over the previous year's total of $22.1 billion.

Although he finds gross revenues useful in year-to-year comparisons like the preceding one, Armstrong bases most of his analysis on adjusted numbers for providers' net logistics revenue, which he believes provide a more accurate assessment of the 3PLs' financial strength than gross revenues do. "The difference between gross and net is that we take out the cost of transportation purchased for clients to calculate net revenue," Armstrong explains. "We treat purchased transportation as a pass-through [expense]." Based on net logistics revenue for 1999, Ryder topped the chart of U.S. providers with an impressive $1.3 billion (see the accompanying chart).

More Mergers Ahead?

In the 3PL industry, acquisitions and mergers involving established contract distribution companies captured the headlines last year. Deutsche Post, the German postal service, bought third-party provider and global freight forwarder Air Express International (AEI) for $1.14 billion. Deutsche Post eventually combined AEI with its Danzas subsidiary, which also offered forwarding and logistics services worldwide. The combination of Danzas and AEI created a major global 3PL, now known as Danzas-AEI.

In the wake of Deutsche Post's purchase of AEI, two British logistics providers joined forces. Ocean Group plc, parent of international forwarder and logistics provider MSAS Global Logistics, bought NFC plc, parent of Exel, which specializes in asset-based logistics management. The merged 3PL was retitled Exel plc.

The emergence of two European logistics giants has sparked speculation that other mergers lie ahead. "The movement toward acquisition is picking up speed in Europe," says Robert Lieb, a professor of supply chain management at Northeastern University who conducts an annual survey of 3PL executives. "You might see something happening like that domestically in the next six months."

Armstrong, for his part, predicts that other European third-party distribution providers will come hunting for acquisitions in North America. "The major international freight forwarders are going to be interested in following the paradigm set by Exel and MSAS," he observes. "Companies like Schenker and Kuehne and Nagel have to get serious trying to find 3PLs in North America. [They also have to start] broadening their capabilities to deal with the deregulation occurring globally where international barriers are coming down. They have to have the IT capabilities that are provided by 3PLs in North America, which are ahead of the market."

Here Come the 3FLs

At the same time that the traditional contract distribution companies are starting to consolidate, the industry is also expanding with a host of new entrants. Many of these companies, called third-party fulfillment providers (3FLs), are targeting dot-com retailers and offering warehousing, shipping, and order-management services to the online merchants. Some of these 3FLs are even handling nonlogistics tasks like credit-card clearance as a value-added service. "In some cases, they are even doing Web site development as well as fulfillment," observes Lieb.

Although 3FLs were created to handle distribution for Web stores, A.T. Kearney consultant Foster Finley believes that they'll actually find more work in the quick fulfillment of small orders for the suppliers themselves. "The business-to-business component will overshadow the business-to-consumer component at the end of the day," says Finley. "The Internet has created this cycle of customer expectations beyond the pale of most pick, pack, and ship operations."

Armstrong notes that many of the 3FLs in the business-to-consumer arena have their roots as catalog companies or customer-service call centers. Those in the business-to-business marketplace, on the other hand, are actually niche specialists trying to connect big corporations with small businesses. "Few of the traditional 3PLs are going into this," he says.

The traditional contract distribution companies are probably wise to act with caution. Although dot-com retailers make attractive candidates for outsourced logistics, Lieb notes, many of the online stores may not survive.

More Change Ahead

As logistics becomes more dependent on software tools to optimize the storage and movement of inventory, third-party logistics companies are also branching out from their traditional offerings into providing information technology. Lieb notes that many 3PLs have struck up partnerships with software vendors. "All of these companies are partnering with IT companies to provide IT support," he says. "They are all trying to offer a solution [that includes both IT and logistics]."

At the same time, the advent of the Internet and the creation of online transportation exchanges are further transforming the third-party industry. Armstrong believes that 3PLs may find themselves either forced to join an exchange or else create their own. He notes that J.B. Hunt Logistics and five other motor carrier logistics divisions set an industry precedent recently when they created the exchange Transplace.com. "Transplace has turned up the heat," says Armstrong. "3PLs have to use somebody's infrastructure [for an exchange] or else build their own."