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  1. 2. Traditional 3PL versus e-Logistics Companies The Wall Street View November, 2002 Laurie Hahn, CFA Deutsche Bank Securities, Inc. Airfreight & Surface Transportation Team
  2. 3. E-Logistics: The Emergence of a New Threat <ul><li>During the late 1990’s, the e-logistics industry was born and roared onto the competitive landscape. </li></ul><ul><li>In little less than 12 months, over 100 e-logistics companies appeared. </li></ul>
  3. 9. E-Logistics: The Emergence of a New Threat <ul><li>New participants were well-funded: </li></ul><ul><ul><ul><li>Venture capitalists were constantly looking for new technology driven investment opportunities. </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Provided start-up/seed funding enabling first-to-market. </li></ul></ul></ul></ul></ul><ul><ul><ul><li>IPO/Investment banking provided access to capital markets and an even larger pool of funding. </li></ul></ul></ul>
  4. 10. E-Logistics: The Emergence of a New Threat <ul><li>Transportation/Logistics industry was a logical choice for investment. </li></ul><ul><ul><ul><li>Information was becoming increasingly important, necessitating the need for improved technology. </li></ul></ul></ul><ul><ul><ul><li>For many shippers, transportation function was last frontier of rationalization, technology appeared to be the answer to lower costs and improved productivity and efficiency. </li></ul></ul></ul>
  5. 11. E-Logistics: The Emergence of a New Threat <ul><li>E-logistics firms had goals: </li></ul><ul><ul><li>creation of value by eliminating the middleman (i.e. the 3PL) </li></ul></ul><ul><ul><li>creation of value by commoditizing the services of traditional transportation providers </li></ul></ul><ul><ul><ul><ul><ul><li>Truckload Carriers </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Less-than-Truckload Carriers </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Airfreight Providers </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Ocean Freight Providers </li></ul></ul></ul></ul></ul>
  6. 12. E-Logistics: The Emergence of a New Threat <ul><li>In our opinion: </li></ul><ul><li>More HYPE than Reality!!! </li></ul><ul><li>We viewed the e-Logistics participants as little more than a minor annoyance for the traditional 3PLs. </li></ul>
  7. 13. E-Logistics: The Emergence of a New Threat <ul><li>Market size was ample for new entrants without disrupting the growth prospects of the traditional 3PL. </li></ul><ul><ul><ul><li>Only 15% penetration into shipper’s transportation operations. </li></ul></ul></ul><ul><ul><ul><li>Only 7% penetration into shipper’s distribution operations. </li></ul></ul></ul><ul><ul><ul><li>Growth of transportation/logistics/SCM outsourcing fueled 20% annual industry growth for better than 10 years. </li></ul></ul></ul>
  8. 14. E-Logistics: The Emergence of a New Threat <ul><li>Shippers facing increased pressure to </li></ul><ul><li>OUTSOURCE </li></ul><ul><li>non-core corporate functions. </li></ul>
  9. 15. E-Logistics: The Emergence of a New Threat <ul><li>Increasing complexity of supply chain due to: </li></ul><ul><ul><ul><ul><li>globalization </li></ul></ul></ul></ul><ul><ul><ul><ul><li>inventory practices </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Just-In-Time </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Just-In-Case </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>search for productivity and efficiency </li></ul></ul></ul></ul><ul><ul><ul><ul><li>increasing need for continual information flow </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Glass Pipeline - the Holy Grail of SCM </li></ul></ul></ul></ul></ul>
  10. 16. E-Logistics: The Emergence of a New Threat <ul><li>More appropriate uses of managerial, intellectual and financial resources: </li></ul><ul><ul><ul><ul><li>Research & Development on core product offering </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Organic Growth </li></ul></ul></ul></ul><ul><ul><ul><ul><li>External expansion via market share gains or acquisition/merger </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Improved financial performance via earnings growth and increased returns on invested capital </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Creating additional shareholder value. </li></ul></ul></ul></ul></ul>
  11. 17. E-Logistics: The Emergence of a New Threat <ul><li>As the complexity associated with the outsourced tasks increased, the need for </li></ul><ul><li>Experience and Value-Added Ideas </li></ul><ul><li>increased in importance. </li></ul><ul><li>Created growth opportunities for the mature participants. </li></ul>
  12. 18. E-Logistics: The Emergence of a New Threat <ul><li>Funding for new entrants was at the whim of outside parties: </li></ul><ul><ul><li>so many ideas floating around, investors had options. </li></ul></ul><ul><li>Technology diminished the importance of the 3PLs transactional business: </li></ul><ul><ul><li>However, transactional business generated predictable stream of revenue/cash flow from core operations. </li></ul></ul><ul><ul><li>Cash flow was more than adequate to fund growth & expansion, as well as necessary technology investment. </li></ul></ul>
  13. 19. E-Logistics: The Emergence of a New Threat <ul><li>For the e-logistics providers, technology overwhelmed the concept. </li></ul><ul><ul><ul><ul><ul><li>Internet was the overriding driver of the business. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>First-to-market & “hits” became mantra for these businesses. </li></ul></ul></ul></ul></ul><ul><li>3PLs had substantial headstart (i.e. true first-to-market) in terms of technology. </li></ul><ul><ul><ul><ul><ul><li>Movement of freight and SCM drove the business. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Technology seen as a tool to facilitate the core operations. </li></ul></ul></ul></ul></ul>
  14. 20. The Threat is Quieted <ul><li>Two primary issues interrupted the growth potential of the e-logistics industry: </li></ul>
  15. 21. The Threat is Quieted <ul><li>NASDAQ/Internet Bubble Burst </li></ul><ul><ul><ul><ul><ul><li>Profitability once again became important </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Viability of technology driven business models questioned </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Valuations became increasingly inflated scaring off would be investors </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>VC funding dried up </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Equity markets currently unavailable to many of these businesses, further limiting availability of much needed funding </li></ul></ul></ul></ul></ul>
  16. 22. The Threat is Quieted <ul><li>Traditional 3PLs responded to the threat </li></ul><ul><ul><ul><ul><ul><li>Saw the Internet as a tool to create efficiencies, lower costs, and provide better information (real-time) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Utilized sizable presence in the logistics arena to fund technology enhancements </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Took best practices and technologies from the e-logistics companies and applied them to their own business models. </li></ul></ul></ul></ul></ul>
  17. 23. The Threat is Quieted <ul><li>Quickly became apparent that services offered by e-logistics companies were rudimentary, comprised of procedures that could be easily automated: </li></ul><ul><li>Load-matching </li></ul><ul><li>Rating Systems for shippers & carriers </li></ul><ul><li>Tools for Selection Criteria (ex. Price) </li></ul><ul><li>Online Freight Bidding </li></ul><ul><li>Online connection between shippers and carriers </li></ul><ul><li>Online routing and mapping </li></ul><ul><li>Online tracking and tracing </li></ul><ul><li>Data warehousing </li></ul><ul><li>Fleet utilization software </li></ul><ul><li>Purchasing Co-Ops </li></ul>
  18. 24. The Threat is Quieted <ul><li>However, logistics and SCM is more than a sequence of automated processes. </li></ul><ul><li>Traditional 3PLs created additional VALUE-ADDED services: </li></ul><ul><li>Carrier selection </li></ul><ul><li>Rate negotiation </li></ul><ul><li>Transportation </li></ul><ul><li>Warehouse management </li></ul><ul><li>Shipment consolidation </li></ul><ul><li>Freight forwarding </li></ul><ul><li>Inventory management </li></ul><ul><li>Product assembly </li></ul><ul><li>Product returns </li></ul><ul><li>Order processing </li></ul><ul><li>Order fulfillment </li></ul><ul><li>Information services </li></ul>
  19. 25. The Threat is Quieted <ul><li>Companies emerged offering software & technologies performing same functions as the e-logistics companies; allowed traditional 3PLs to automate certain functions and services as a complement to their traditional and value-added services. </li></ul><ul><ul><ul><ul><ul><li>i2 Technologies </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Descartes </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Manhattan Associates </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>EXE </li></ul></ul></ul></ul></ul>
  20. 26. The Battle Goes On <ul><li>While failure and consolidation has eaten into the e-logistics ranks, the stronger players remain. </li></ul><ul><ul><ul><li>Examples: </li></ul></ul></ul><ul><ul><ul><ul><ul><li> </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li> </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>DAT Services </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li> </li></ul></ul></ul></ul></ul><ul><ul><li>Viable Business Model </li></ul></ul><ul><ul><ul><ul><ul><li>View technology as a tool and not the end all solution </li></ul></ul></ul></ul></ul><ul><ul><li>Many supported by stronger parent company </li></ul></ul>
  21. 27. The Threat is Quieted <ul><li>However, we believe the 3PLs now have the upper hand: </li></ul><ul><ul><ul><ul><li>used sizable industry presence to capture additional market share as outsourcing trend continues </li></ul></ul></ul></ul><ul><ul><ul><ul><li>no funding issues, core operations provide necessary cash flow </li></ul></ul></ul></ul><ul><ul><ul><ul><li>recent events increase complexity of logistics tasks, further necessitating need for experience and value creation </li></ul></ul></ul></ul>
  22. 28. Impact of Recent Events <ul><li>Attacks of September 11th resulted in substantial supply chain disruptions globally and across nearly all industries. </li></ul><ul><ul><ul><li>Examples: </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Automotive </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>High Tech </li></ul></ul></ul></ul></ul><ul><li>In our opinion, given these disruptions, supply chain management is likely to be elevated to a new level of importance within all shippers’ organizations. </li></ul>
  23. 29. Impact of Recent Events <ul><li>Complexity of supply chain management increases: </li></ul><ul><ul><ul><li>Firms will be forced to examine inventory management techniques </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Balance minimizing inventory carrying costs versus cost of production disruptions </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Adjust inventory management to Just-in-Case in order to smooth any disruption </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Examine need for global sourcing of raw materials </li></ul></ul></ul></ul></ul>
  24. 30. Impact of Recent Events <ul><li>Complexity of supply chain management increases: </li></ul><ul><ul><ul><li>Firms will be forced to ensure access to all modes of transportation and reduce reliance on any one mode </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Domestic </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>International </li></ul></ul></ul></ul></ul>
  25. 31. Impact of Recent Events <ul><li>Weak U.S. and Global Economies </li></ul><ul><ul><ul><li>Increases the need for shippers to focus on operational and financial improvements </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Rationalize all non-core operations as a means of improving financial performance and increasing shareholder value </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Will likely drive further growth in the outsourcing of transportation and supply chain management functions </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Provides further growth opportunities for the traditional 3PLs </li></ul></ul></ul></ul></ul>
  26. 32. <ul><li>Q & A </li></ul>