Top 50 3PLs: Getting the balance right

Establishing close relationships with “key logistics service providers” has long been a precedent with shippers the world over; however, this top priority may have faced its sternest test during the last recession. By most accounts, however, the worst is behind us, and those who are left standing—on both the shipper and service provider side—are gathered in a tight circle.

In fact, that circle could indeed become even tighter. The Institute for Supply Management’s (ISM) Semiannual Economic Forecast points to continued growth throughout the rest of the year. Researchers also suggest now that a global recovery is moving along, shippers are looking to profit from the economic rebound by engaging the most reliable third party logistics providers (3PLs) to help them stretch their supply chains into existing and emerging markets.

ISM’s forecast coincides with the release of Armstrong & Associates’ market analysis showing that the international transportation management 3PL segment led with a 30.1 percent gross revenue (turnover) increase over the course of 2010. According to the consultancy’s chairman Richard Armstrong, third-party logistics providers are growing at multiples of Gross Domestic Product, and should be able to sustain this pace through 2011.

“The main takeaway here is that 3PLs are taking advantage of ongoing economic globalization,” says Armstrong.

Revenues and profitability increased in all four 3PL segments in 2010, according to Armstrong’s findings. Gross revenue increases ranged from 12.9 percent to 30.1 percent and were up 19.4 percent overall. Net revenues (gross revenue minus purchased transportation) were up 13.2 percent. According to Armstrong, net revenues are a better indicator of true business improvement because fuel related costs have minimal impact. Overall, net income increased 23.4 percent in 2010 over 2009 levels.

Armstrong’s report notes that the international transportation management segment of the 3PL market led with a 30.1 percent gross revenue (turnover) and net revenue (gross margin) increases. Dedicated contract carriage followed at 13.1 percent.  Overall, 3PL U.S. gross revenues jumped 18.9 percent in 2010 to $127.3 billion slightly exceeding the 2008 result. The compound annual growth rate (CAGR) for third-party logistics net revenue from 1995 through 2010 was 12.7 percent. 

“When we look back, 2009 was the only negative year since we began tracking results in 1995,” says Armstrong. “From 2009 to 2010, the increase in 3PL net revenue was 4.7 times the rate of U.S. GDP growth.”

One driving factor of 3PL growth was world trade volumes, which increased 12.4 percent in 2010. Armstrong cites a recent report from the International Monetary Fund suggesting that freight integrators are mirroring the success of major multinationals. “Shippers are continuing to go global,” says Armstrong, “and the larger 3PLs are expanding at a rate to meet this demand.”

Encouraging reflections
“Mirror as metaphor” is more than poetic license for Adrian Gonzalez, president of Adelante SCM Corp. He is another prominent logistics and supply chain analyst who sees encouraging reflections that the 3PL market is on the rebound.

“The numbers are very encouraging,” says Gonzalez, “but we must remember just how bad a year it was for everyone in 2009. Nor do I feel that globalization is the only reason for this improvement. A lot of domestic and cross-border activity is also driving this growth.”

Gonzalez says that when a shipper decides to penetrate a new market, it’s not always best to go with the same 3PL one might use for North America, however. “The best provider in one country could very well be the worst in another,” he says. “And you will find that most major companies would rather not put all of their eggs in one basket anyway. Risk mitigation is a major concern now, and having more than one or two 3PLs working for you can be a real hedge.”

Gonzalez adds that outsourcing overseas does not necessarily mean a diminution of domestic targets. He says that manufacturers can have it both ways without “cannibalizing” their operations and those of their 3PLs. “U.S. companies are going to want 3PLs in places where they have assets and domain expertise,” he says. “They’ll be looking to stay close to points of consumption and production, working with logistics partners for regional advantages.”

Like Armstrong, Gonzalez says this does not mean smaller “niche” players will be out of the game, however. He says that there is room for a few specialists to compete in the global marketplace—especially 3PLs focused on auto parts, pharmaceuticals, and anything related to the cold chain. At the same time, though, both men say the barriers to entry are getting higher all the time.

“This is a capital intensive business,” says Armstrong, “with requirements for sophisticated supply chain visibility. That means IT at the front end and back end of every enterprise. A new company would have real trouble competing in this marketplace.”

Yet even at the current pace of maturation, Armstrong maintains that 3PLs have room to expand beyond current penetration levels: “Right now, it’s at 20 percent of all shippers,” he says. “We see it moving to 40 or 45 percent before leveling off.”
Transitional phase

A recent paper called Global 3PL & Logistics Outsourcing Strategy, produced by researchers for London-based Eyefortransport (EFT), comes to many of the same positive conclusions. Katherine O’Reilly, EFT’s executive director, says the industry “is much changed” and still in transition.

“Looking at the impact of the worldwide economic situation, a notable number of total respondents (43 percent) expected their company’s growth in 2010-2011 to be as strong as previously predicted, though 50 percent anticipate a slower rate of growth than predicted,” she says. “These results again show great contrast when compared to those from last year, where a much lower number anticipated strong growth and a higher number expected revenues to decline.”

When survey respondents were asked to predict a timescale for the global economy to return to pre-crisis levels, results were more negative than last year, says O’Reilly. The majority of respondents this year (58 percent) do not anticipate this scenario until 2012 or later, while only 16 percent of respondents last year anticipated recovery taking this long.

“Expectations for the shape of the economic rebound were only marginally more positive than last year, with a larger number of respondents expecting a V-shaped recovery as opposed to a W-shaped or L-shaped recovery,” she says.

The EFT survey also looked at the measures being taken by 3PLs to combat the continually challenging global economic conditions. The most popular responses were reducing costs through internal efficiencies (81 percent), concentrating on core markets (51 percent), diversifying product offering (49 percent), being very selective with new customer accounts (46 percent), ceasing to work on existing unprofitable accounts (44 percent), asking contractors for lower prices (41 percent), and looking for strategic mergers and acquisitions (38 percent).

“The results were broadly similar to those seen last year, although this year saw notably fewer respondents cutting jobs or asking contractors for lower prices, and slightly fewer reducing expansion plans,” O’Reilly says.

Respondents representing 3PLs were also asked to identify the geographical regions that provide them with the greatest opportunities, with China (59 percent) and India (43 percent) being the most common responses. The most notable change here was the large reduction in 3PLs seeing opportunities in Eastern Europe, and the notable increase in opportunities seen in North America.

“Our survey asked 3PLs what they think shippers are looking for when choosing a new 3PL,” O’Reilly adds.  “The majority of 3PLs thought lowest price and best quality service were the factors of most importance to their customers, with slightly more importance being placed on lowest price than best quality service.”

Shippers were then asked to identify what they are looking for when choosing a new 3PL, with results showing a marked difference. While 3PLs thought most importance would be placed on lowest price, shippers actually placed most importance on best quality service. In fact, 58 percent of responding shippers said they consider service most important, as opposed to 18 percent for lowest price.

EFT also examined whether shippers have recently switched 3PLs or are currently planning to switch to a different 3PL. Results, says O’Reilly, “proved interesting,” with 47 percent of shippers having changed or planning to change 3PLs over the past 12 months. Of these, 31 percent were changing as a result of service while 16 percent were changing due to cost; however, of those not changing 3PL, a greater number (34 percent) reported not doing so because of cost as compared to those not doing so because of service (19 percent).

Wild ride for lead logistics providers
Transport Intelligence, another London-based think tank, has come up with similar findings in its recent Contract Logistics report. But it says that the U.S. market is more difficult to assess.

The U.S. debt and budget problems are depressing demand and undermining confidence, yet there are clear signs that 3PLs are continuing to grow both in the domestic sector and for international traffic. Canada and Mexico are strong economic performers and are likely to expand across all logistics sectors in 2011.

“Therefore global trends suggest demand is capable of supporting the sort of growth seen in the global logistics market over the past six months,” says Cathy Roberson, Ti’s senior North American analyst in Atlanta. “As ever, the joker in the pack is oil prices. These are presently high despite moderate demand in western markets.”

Roberson says that even if a restrained recovery in consumer spending takes place in U.S., the oil price might increase to levels capable of suppressing demand for transport.

Yet Roberson says that there are a surprising number of good opportunities available for acquisitive companies, not only in emerging markets such as the Middle East, but also in the developed world. Like other analysts we spoke with for this report, she agrees that there are still large targets that may come on to the market.

“Take a look at private equity owned CEVA, and a number of aggressive Asia Pacific businesses with the cash and the will to buy them, such as Toll,” says Roberson. “This industry is clearly on the move, and it’s going to be a wild ride.”