A wave of consolidation continued to sweep over the third-party logistics (3PL) industry this past year as a number of key players either merged or entered into acquisition talks. Overseas contract distribution providers, in particular, sought to solidify their position in the U.S. market by purchasing U.S. 3PLs. "The foreign players are becoming more of a factor in the domestic market," confirms Robert C. Lieb, a professor of supply chain management at Northeastern University who conducts an annual survey of 3PL executives. "While American companies are looking overseas, foreign 3PLs are looking at the United States as an attractive marketplace."

It's no surprise that foreign companies are eyeing the domestic 3PL market with interest. Industry watcher Armstrong & Associates Inc. of Stoughton, Wis., reports that gross revenues for outsourced logistics jumped from $46 billion in 1999 to $56.4 billion in the year 2000. Interestingly, the new business has not necessarily come from new customers. "Existing customers account for most of the new revenue," says Richard D. Armstrong, president of Armstrong & Associates, which publishes a guide to third-party logistics service providers. "The third-party providers have gotten discriminating about signing new accounts. They won't do business unless they can make money off it."

Armstrong derives his industry estimate from a core group of 36 major 3PLs. He breaks the $56.4 billion market into the following segments: dedicated contract carriage providers (which reported revenues of $8.7 billion last year), companies that handle domestic transportation management ($10 billion), providers of value-added warehousing and distribution services ($20.4 billion), and U.S.-based companies with international operations ($13.8 billion). Third parties that offer information technology accounted for the remaining $3.5 billion. "3PLs have software systems and the capability of using them," notes Armstrong. "That's been one of their major attractions."

As contract distribution revenues climbed, a number of major providers made purchases to strengthen their international scope. For instance, last March, Ocean Group plc, the parent of MSAS Global Logistics, acquired NFC plc, parent of Exel, and then renamed itself Exel. The UPS Logistics Group bought Computer Logistics Solutions in Australia and Finon Sofecome in France as well as Burnham in the United States and Livingston Inc. in Canada. This past February, APL Logistics, which operates in Asia and North America, bought GATX Logistics, which focused on North and South America.

Consultant Gary Allen believes that third-party logistics companies are expanding globally in order to acquire new capabilities quickly while gaining market share. "Some of the larger companies are looking to buy their way into a market that's highly fragmented," says Allen, a senior manager at Cap Gemini Ernst & Young, a management consulting firm headquartered in Paris.

Lieb, for one, expects to see more of the top contract distribution providers forming alliances in the near future as they respond to shipper demand for one-stop shopping services. "You may have fewer major providers to choose from," explains Lieb, "but the breadth of service offerings will [expand]."

At the same time all of this consolidation is taking place, a number of new entrants have appeared on the scene. With fanfare and oftentimes enviable venture capital funding, companies entered the market to provide so-called third-party fulfillment, filling individual customer orders for online merchants. Yet by the beginning of this year, the implosion of the dot-com business appeared to be taking its toll on the third-party fulfillment providers. "A number of companies that went after [individual order] fulfillment for the dot-coms have seen that star rise and fall," reports A.T. Kearney consultant Foster Finley, who expects a shakeout this year.

While third-party fulfillment companies were struggling, the contract distribution market continued to attract newcomers. One noteworthy entrant was Vastera, a provider of software for international trade. Last year, Ford Motor Co. outsourced its customs operations to Vastera, which began offering trade management services in addition to its software solution. "Information technology is an important part of the 3PL contract," notes Lieb. "Increasingly, you may find players coming from nontraditional sources."

Despite the growing emphasis on information technology and their international expansion, contract logistics providers for the most part still cannot provide the widespread shipment visibility sought by many shippers. "3PLs are investing in technology to provide shipment visibility," notes University of Tennessee professor C. John Langley, "but shipment visibility is not a reality yet."

Some question how long the 3PLs will continue investing in that type of technology. In the months ahead, the economic slowdown could take its toll on the third-party industry. During the years of robust business expansion, third-party providers enjoyed 25-percent growth rates. But Lieb, for one, wonders how contract distribution providers will fare in a softening business climate. "This year," he notes, "will be an interesting test of the flexibility and adaptability of 3PL management."