No end to the good news
The 3PL industry continues to grow at a double-digit rate as it finds new sources of customers and revenue.
By Staff -- Logistics Management, 7/1/1999
In 1998, U.S. companies increased their expenditures on third-party logistics services by 15 percent, or $5 billion, according to Armstrong & Associates, a Stoughton, Wis., consulting firm that tracks the logistics outsourcing industry. In 1997, shippers' total outlay for such services was $34.2 billion. In 1998, that figure rose to $39.6 billion.The domestic transportation-management sector of the 3PL industry experienced the fastest growth in 1998, with a 21-percent increase in revenues, according to Armstrong & Associates President Richard Armstrong. This $5.8 billion industry segment includes a wide range of service offerings, ranging from optimization of a shipper's distribution network down to the very basics of rate negotiation and contracting.
Armstrong divides that sector into three tiers. At the top level, companies like Ryder, C.H. Robinson, and Menlo Logistics report revenues of several hundred million dollars. "These 3PLs handle large volumes of freight and have enough leverage with the carriers to negotiate the best rates and service," he says. "They also have the technology and the management to make the deals with the large carriers and manage the largest shippers' networks."
3PLs in the second tier have revenues of less than $100 million but are large enough to afford the best software, which allows them to offer the same technology and network management as the very largest players. The third tier includes hundreds of brokers and small management companies with gross revenues in the range of $10 million to $20 million.
"This group is going to have a harder and harder time competing," says Armstrong. "They just can't leverage the carriers the same way the larger 3PLs can. I see a lot of consolidation coming in the ranks of the [smaller] third parties."
The $6.2 billion dedicated contract carriage business grew at 20 percent in 1998. According to Armstrong, profits in this sector are high, especially among truckload carriers. Companies such as Swift, Werner, and M.S. Carriers are growing rapidly, primarily by drawing new business from companies that have decided to outsource their private-fleet operations. These carriers have large customer bases they can serve with the same vehicles, and they have the technology to manage freight flows optimally.
The dedicated sector also includes many truck-leasing companies, which are most prevalent in the shorthaul delivery sector. The leasing companies have a different business model than do the contract carriers. According to Armstrong, the leasing sector is not as profitable as the truckload sector because the leasing companies' customers generally contract for very few trucks. "It is difficult to find much leverage with fleets of this small size," he notes, "but they still are more efficient than most private fleets and they are making money."
Contract Warehousing on the Rise
The largest 3PL sector is the value-added warehousing and distribution industry, which reported 1998 revenues of $14.4 billion. Many of the companies in this sector belong to the International Warehouse Logistics Association (IWLA), which represents public and contract warehouse companies throughout North America.
IWLA President Michael Jenkins says that his members' warehouse space is growing at about 15 to 20 percent per year. But that's not the whole story. "Revenue is growing faster--at about 20 to 25 percent per year--because more revenue is coming in from value-added services rather than just storage charges," Jenkins adds. He notes that 90 percent of IWLA's members offer some form of value-added service, such as freight consolidation, inventory management, bar coding, private labeling, pick and pack, or order fulfillment. Jenkins says members have been expanding into other value-added services, including management of product returns under warranty, repair and replacement, destruction of returned goods, Internet order fulfillment, and computer assembly.
Fueling the third-party warehousing industry's growth is the decision by many companies to outsource their private warehousing operations. In the mid-1990s, about 11 percent of warehouses in the United States were third-party operations. Jenkins reports that 18 percent of warehouses now are public or contract operations.
The business is attracting new entrants. According to Jenkins, 30 percent of his group's new members are trucking companies that have added warehousing to their service offerings. "We also are seeing railroads and freight forwarders adding warehouse capabilities. They are looking at the amount of money spent on logistics, especially the warehousing and value-added aspects, and they want to participate," he says.
According to Richard Armstrong, it is precisely this broadening base of companies entering the value-added warehousing business that is hurting its profitability. "Too many 3PLs in this sector lack experience in all aspects of warehousing and value-added service operations," he says. "Too many of these service providers do not have a good fix on their costs and the cost of serving customers. They are underpricing their services. As their contracts expire, pricing will go up in this sector, but it is probably not going to catch up with the profitability of other sectors."
Jenkins insists that his members are doing just fine and that their growth rate of more than 20 percent exceeds that of most other sectors of the 3PL industry. "CEOs, CFOs, and other senior executives are seeking our members out because they know that they need to outsource such manpower-intensive functions as warehousing and distribution," he says.
Armstrong agrees that companies are increasing their use of all types of logistics outsourcing. The trend is especially strong among the mid-sized companies that are proving to be the 3PLs' main customer base. According to a recent survey of 1,000 3PL customers conducted by Armstrong & Associates, 83 percent of the respondents were mid-sized companies. Only about half of the Fortune 500 companies were users of 3PL services. The survey also showed that overseas operations by third-party providers accounted for a quarter of the industry's gross revenue.
The survey statistics show two important trends, Armstrong notes. First, the 3PL industry has a tremendous untapped opportunity for growth with the Fortune 500 companies. At the same time, the mid-sized companies are making the best use of savings and service advantages that outsourcing can offer.
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