Third Parties: Full speed ahead
The contract logistics industry will likely continue its record growth ... if it can overcome some short-term hurdles.
By James A Cooke -- Logistics Management, 7/1/1998
Third-party logistics providers (3PLs) will continue to grow next year despite messy divorces, a shortage of qualified personnel, and hostility from distribution departments. That's the view shared by a number of industry experts, all of whom believe that logistics outsourcing companies will sustain and expand their business as manufacturers and retailers turn over more supply-chain functions to outsiders.Today, 3PLs provide an array of services, including warehousing, carrier selection, dedicated fleet operation, transportation, and inventory management. Many of the leading contract logistics providers have their roots in either transportation or warehousing, and they often are allied with a parent that operates a motor carrier or public warehouse.
How big is the third-party industry today? Most estimates of its size stretch into the billions of dollars. Armstrong & Associates, which publishes the guide Who's Who In Logistics?, pegged the 1997 total market for contract logistics services at $34.2 billion. Armstrong identified Ryder as the leader among U.S.-based third-party logistics service providers, with some $1.8 billion in gross revenue alone. (See the accompanying table.)
Booming Market
Indeed, many analysts contend that third-party distribution is the hottest segment of the logistics market. The Wall Street analyst Gerard Klauer Mattison & Co. Inc. in New York City, for instance, projects that 3PLs will achieve a 19.0-percent growth rate over the next five years. "If you look at the revenues, the only conclusion is that Corporate America's supply chains are in such a mess that 3PLs are needed," says Gregory E. Burns, an analyst at the company who follows the logistics industry.
Research done by Hugh Randall, a group vice president with Mercer Management Consulting Inc. in Washington, D.C., and Northeastern University Professor Robert Lieb supports the notion that big corporations, at least, are turning to outsiders for help managing their supply chains. Randall and Lieb's 1997 survey of logistics directors at Fortune 500 manufacturing companies found that 3PL usage had reached an all-time high in the United States, with some 69 percent of survey respondents hiring contract logistics providers. Their 1996 survey had found that only 58 percent of those manufacturers had outsourced some type of logistics activity.
Randall and Lieb's research further indicates that a corporation's decision to use a third party often is triggered by a particular event. Nearly three-quarters of the survey respondents said they had decided to outsource as a result of corporate restructuring, a change in top management, or a companywide benchmarking effort.
In the coming year, third-party logistics providers will grow as existing corporations turn over more distribution activities to an outside provider. "They [3PLs] will spend more energy on selling to existing clients than on getting new clients," says Lieb. "The growth will come from existing customers."
In addition, Lieb and Randall's study found that almost half of their user respondents had engaged 3PLs for both domestic and international operations. No wonder, then, that many analysts believe that overseas trade will prove an especially fruitful area for contract logistics companies. "Companies that are focused on international trade and operations will see the fastest growth," Burns predicts.
Obstacles to Growth
Despite rosy projections for increased earnings, the third-party providers face a number of hurdles. For starters, although their gross revenues are high, profit margins for most providers are thin. Lieb, for one, foresees 3PLs becoming more selective about their clients and even going so far as to charge shippers for the time spent developing a bid proposal. "The [3PL] CEOs now are saying the challenge is to come up with a price structure that allows for a reasonable rate of return," Lieb says.
In addition, the industry has received a few black eyes from messy divorces this past year when shippers publicly broke their service agreements with third parties. In fact, Randall and Lieb's research found that 37 percent of their shipper respondents had canceled a 3PL contract. "There will be more breakups, but not as many," Randall predicts. "As providers and users become more comfortable with the way to do business, there will be [fewer] of them."
On top of that, contract logistics firms still face resistance from corporate distribution departments, which fear the loss of jobs due to outsourcing. In fact, nearly two-thirds of the 3PL users that participated in Randall and Lieb's study reported that outsourcing had enabled their companies to cut their workforce. "We still have a high number of managers who believe that if they outsource, it will threaten their positions," says Michael Jenkins, president of the International Warehouse Logistics Association. "Because of that, they avoid the recommendation for outsourcing."
To win converts, Burns believes, third parties will have to aim their marketing efforts above distribution managers to the very top of the corporation. "The biggest obstacle remains getting to the CFO," he says, "and getting away from the people you're putting out of business. You've got to sell at the higher level."
Finally, the booming economy has strained the 3PLs' ability to find and retain knowledgeable personnel to meet burgeoning requests for services. "Human resources is still a big obstacle for this industry," opines Randall. "There are never enough people in general and never enough IT [information-technology] people in particular."
Consolidation Ahead
As 3PLs cope with those challenges, many believe that industry consolidation will become inevitable. "The big will get bigger and the lesser lights will cease to be active," Randall predicts. "In the end, most users will want to do business with someone with a proven track record.
"The Top Logistics Providers"
Provider Gross Revenue
($Millions)
Ryder 1,800
C.H. Robinson 1,790
Schneider Logistics 800
Penske Logistics 730
Mark VII 690
Schneider Dedicated 620
Menlo Logistics 520
Americold 500
Caliber 500
Exel 423
UPS Worldwide 400
Werner 400
CTI 389
USF Logistics 300
GATX 272
Axis 258
Hunt Logistics 235
Caterpillar Logistics 220
Landstar 209
DSC 208
Burnham 200
Hunt Dedicated 185
Arnold 180
Ruan 170
Skyway 160
Pittsburgh 145
Rollins 130
Builders 121
Associated 110
Airborne 107
Kenco 105
MS Logistics 104
USCO 100
FedEx 100
Source: Who's Who In Logistics? Armstrong's Guide to Third Party Logistics Services Providers, 5th Edition.
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