In Europe, 3PLs Rule

Europe still has its share of kings and queens, but the new rulers of the European Union's burgeoning transportation and distribution business are its third-party logistics providers.

By Thomas A. Foster -- Logistics Management, 10/1/1999

Third-party logistics services may have been gaining momentum in the United States for the past decade, but the concept is nothing new in Europe, where outsourcing has been a way of business for centuries. Many of Europe's best-known names in the logistics field, in fact, have their roots in the Middle Ages, when their ancestor organizations provided a combination of warehousing, transportation, and customs brokerage services between the hundreds of dukedoms and baronies that made up the Europe of that day. These ancient service providers have grown to become such sizable companies as Schenker, Kuehne & Nagle, and Danzas that still handle logistics tasks for most of Europe's major manufacturers, retailers, and wholesalers.

Today, these old-line European 3PLs have been joined by a new wave of European third-party logistics companies as well as by such major U.S.-based providers as Ryder Integrated Logistics, BAX Global, Penske Logistics, Schneider Logistics, and UPS Worldwide Logistics. These late arrivals are finding that there still is plenty of room in this long-established market for newcomers, especially if they can offer something different.

Outsourcing Dominates in Europe

Outsourcing is a much bigger part of the logistics scene in Europe than it is in the United States, according to figures supplied by UPS Worldwide Logistics. Just under one-quarter of the $129 billion European logistics-services market--or $31 billion--is contracted out to third parties. (See Figure 1.) In the United States, that percentage is well below 10 percent. UPS Worldwide Logistics forecasts that average market penetration by 3PLs in Europe will reach 28 percent by 2002.

The outsourcing trend really began to take off in the late 1980s and early 1990s, just before the economic unification of Europe in 1993, says Rene Boerema of the Holland International Distribution Council, a marketing and business-development organization representing transportation and logistics companies in the Netherlands. He explains that until the end of the 1980s, most newly established European distribution centers (EDCs) for U.S. companies were self-operated. But as these companies realized they would need to be more flexible and offer different types of services to meet the new European Union's demands, they began to shift toward logistics outsourcing. The number of third-party-operated EDCs, therefore, exploded in the 1990s. Today, he says, for every company that operates its own EDC in Europe, there are 10 to 12 that outsource those operations to a 3PL.

The same forces that have propelled the growth of outsourcing in the United States are driving outsourcing in Europe. Companies want to focus on their core competencies. They want to conserve capital. And they want to take advantage of the 3PLs' leverage and use of best practices to reduce total distribution costs and improve service.

Another major reason behind the growth of 3PLs is the very high cost and administrative effort needed to run a distribution facility in Europe. Although owning and operating a distribution center is no easy matter in the United States, that task is made more difficult in Europe by higher labor costs and unionization rates, more taxes, more regulations, and more operating restrictions. European costs can often be twice what they are in the United States. It is not surprising, then, that so many companies have opted to outsource facility management and operations when setting up shop in Europe.

3PL Players Expand

In Europe, there's greater variety among third-party companies and the services they offer than there is in the United States. Doug Harrison, managing director of Ryder Integrated Logistics-Europe in The Hague, reports that there are several tiers of 3PLs in Europe today.

At the top of the ladder are the largest 3PLs, which provide a wide range of value-added services that manufacturers need to customize their goods for sale in the many different markets within Europe. These services range from labeling and packaging in various languages to product assembly.

In this top-level tier, the U.S.-based players include Ryder Integrated Logistics, UPS Worldwide Logistics, Schneider Logistics, and several others that are competing head on with the better-established European 3PLs. In Harrison's opinion, there are no dominant players in this top tier right now.

Even though no 3PL operating in Europe has a dominant share of market, the European-owned 3PLs have a commanding presence. One example is Schenker International Integrated Logistics Services, a division of Germany's Schenker International. Schenker has a presence in every significant market in Europe to handle forwarding, warehousing, and transportation, says U.S. Vice President Robert Laird in Freeport, N.Y. Next April, Schenker will be opening a new integrated logistics center in Rotterdam. The 322,000-square-foot facility will serve as a basic European distribution center that will handle container receiving and reconsolidation for ocean and air freight, consolidation of outgoing shipments to customers in Europe, and inventory management. It also will be a center for performing value-added activities such as assembly, packaging, and product customization.

U.S.-based Ryder Integrated Logistics offers another example of the large, multi-faceted 3PLs that have been so successful in Europe. Ryder operates primarily as a non-asset-owning 3PL in Europe, performing transportation, logistics management, packaging, light assembly, order fulfillment, merchandising, store-display setup, and many other customized services. Ryder is active in 12 European countries, has 2,000 employees, and earned $140 million in revenues in 1998. It recently has expanded into Eastern Europe.

As big as it is, however, Ryder and other similar 3PLs still have challenges to meet. "We see all of Europe as a major opportunity," says Harrison. "The challenge is coming in matching the extent of services to the many different market needs that exist throughout the continent." Those differences vary widely: In France, Holland, and Germany, for example, 3PLs must provide sophisticated outsourcing services with an emphasis on technology and supply chain integration. In the Mediterranean countries, where infrastructure is not as well developed, the focus is on transportation and warehousing. And in Eastern Europe, where the transportation and telecommunications infrastructures are underdeveloped, companies turn to third parties for basic transportation and logistics services. "These differences pose a unique challenge," says Harrison. "For a U.S.-based 3PL to be successful, there is a big need for local expertise."

Thinking Outside the Box

U.S.-based 3PLs must offer something a little out of the ordinary if they are to compete with their powerful and well-established European competitors. One example is the arrangement between UPS Worldwide Logistics (WWL) and Fender International, the global arm of the U.S.-based guitar manufacturer. Fender has charged UPS, based in St. Albans, the United Kingdom, with the task of helping it streamline and centralize its distribution process as part of its plan to double its European sales over the next few years.

WWL manages Fender International's inbound ocean- and land-based shipments from manufacturers around the world. The third party holds that inventory in its European distribution center in Roermond, the Netherlands. Employees at the EDC inspect the products for quality, oversee inventory, fulfill distributors' and retailers' orders, and manage multi-carrier deliveries. By using WWL's centralized DC, Fender now is able to cut delivery times, monitor quality control better, and deliver orders of any size, says William L. Mendello, Fender's vice president-international.

What's unusual about the way UPS Worldwide Logistics adds value to Fender's supply chain is that the logistics provider tunes and sets up all guitars before shipping them to retailers, a service Fender provides in the United States. "When a retailer takes a guitar out of the box, it must be playable," says Mendello. "We are committed to that in the United States and now have the capability of delivering that level of service in Europe."

At the lower end of the 3PL scale, there is a uniquely European entity called the international freight forwarder. This is an asset-based operator that performs trucking, warehousing, customs brokerage, and packing services, usually with a specific geographic or commodity focus.

Although many of Europe's largest 3PLs started out years ago providing these types of services, most of the hundreds of international freight forwarders in existence today have not evolved beyond offering very basic logistics services. "They are not high on technology and have very limited resources," says Ryder's Harrison. Much of their business had been derived from the complexity of intra-Europe customs handling, which has essentially disappeared. As a result, he observes, they are consolidating or going out of business.

In addition to the large multinational and smaller regional third parties, a whole new generation of European 3PLs is developing out of other types of freight-service providers. For example, the Eurokai Group, the main container-terminal operator in the Port of Hamburg, Germany, and a major terminal operator in Italy, France, the Czech Republic, Austria, and Portugal, has formed a 3PL subsidiary called Oceangate Distribution. Oceangate provides contract logistics services for companies doing business in Central, Southern, and Eastern Europe, primarily for electronics companies and retailers of food, clothing, and shoes. From its primary base in its container terminal at the Port of Hamburg, Oceangate operates racked warehousing covering nearly 365,000 square feet. Oceangate also has warehousing and distribution capabilities in 42 cities in Europe. In addition, Oceangate provides complex logistics services for the retail and manufacturing industries.

One of the most popular value-added services Oceangate provides for its retail customers, who import heavily from Asia, is expediting portions of inbound shipments to increase inventory cycle times. Containerships traveling from Asia to Europe via the Suez Canal stop in Southern Italy where containers, or even portions of containerloads, are taken off the ship and trucked immediately to locations specified by the customers. The rest of the inbound goods continue by ocean to Northern European ports, where Oceangate moves them through conventional routing to customers. The expedited goods fulfill urgent orders, while the lower-cost, all-water shipments arrive just as the expedited goods sell out. "We are able to boost the customer's return on inventory investment by about 10 percent," says Michael Sroka, Oceangate's managing director.

Yet another quickly expanding class of European 3PLs has grown out of large, state-owned institutions such as the national railroads and postal authorities. For much of the last year, Germany's post office, Deutsche Post, for example, has been on a buying spree that included the purchase of the giant Swiss 3PL Danzas.

Competition on the Rise

The advent of numerous new players into the European third-party logistics game indicates a high level of confidence in that market's growth potential. As the globalization of trade breaks down Europe's traditional inward focus, sales of non-European goods are soaring--and with them demand for logistics services by multinational companies that are rapidly expanding their presence on the Continent. At the same time, the advent of the European Union and its effect on trade patterns within Europe has forced even local and regional manufacturers to get involved in multiple markets; they, too, need the help of experienced 3PLs to manage their changing distribution networks. Finally, general business trends that are becoming as entrenched in Europe as they are elsewhere, such as the renewed emphasis on core competencies, are driving growth in what many had thought was a stagnant market.

For shippers, these developments have led to an explosion of logistics service providers in Europe. With so many choices--from old-line freight forwarders that have refocused on logistics, to U.S.-based third parties, to 3PLs developing out of state-owned monopolies and private freight businesses--shippers know there will be a wide range of innovative services available in Europe for years to come.

Penetration of European Logistics Markets by 3PLs

(U.S. $Million)

In-House 3PLs' Logistics Total 3PLs' Market

Logistics Costs Revenue Logistics Costs Penetration

Germany $26,528 $8,074 $34,602 23.33%

France $18,784 $6,911 $25,695 26.90%

United Kingdom $15,485 $8,150 $23,635 34.48%

Italy $12,102 $1,771 $13,873 12.77%

Spain $5,655 $1,241 $6,896 18.00%

Netherlands $4,848 $1,620 $6,468 25.05%

Belgium $2,914 $971 $3,885 24.99%

Austria $2,746 $637 $3,383 18.83%

Sweden $2,610 $737 $3,347 22.02%

Denmark $2,175 $543 $2,718 19.98%

Finland $1,662 $415 $2,077 19.98%

Ireland $734 $238 $972 24.49%

Portugal $674 $137 $811 16.89%

Greece $690 $85 $775 10.97%

Luxembourg $119 $40 $159 25.16%

Total $97,726 $31,570 $129,296 24.42%

Source: UPS Worldwide Logistics, Marketline

Figure 1. Third-party logistics companies handle nearly one-fourth of all logistics transactions in Europe, according to a study by UPS Worldwide Logistics. The heaviest use of logistics outsourcing is in the United Kingdom, at nearly 35 percent.