Logistics consolidation started in 2002. It has accelerated since then. This is a history of how it happened and where it is headed. See attached for the story of how companies like CH Robinson, UTi, and others pioneered the early innings of M&A and growth in the industry.

1. 50 S U P P L Y C H A I N M A N A G E M E N T R E V I E W · M A R C H / A P R I L 2 0 0 3 www.scmr.com
The Changing Face of
By Benjamin H. Gordon
The third party logistics (3PL)
industry is undergoing a huge
transition. Currently competing
in a highly fragmented, high
growth market, 3PL providers
will soon be swept up in a mas-
sive wave of consolidations. This
trend will be driven by three fac-
tors: the increased demand for
lead logistics providers, the emer-
gence of new technology, and an
increase in cash-rich buyers seek-
ing logistics targets. Shippers
need to start scrutinizing their
3PLs and decide how well these
providers are positioned to sur-
vive in the new era.
e are living in an unprecedented time of consolida-
tion in the supply chain management industry. In the
past three years, we have witnessed such mega-merg-
ers as Deutsche Post-AEI-Danzas, UPS-Fritz, Kuehne
& Nagel-USCO, and Exel-Mark VII. The conventional
wisdom holds that these large deals, which were all com-
pleted from 1999 to 2001, are a relic of history and that
no mergers of this magnitude remain to be done.
But I will argue that the exact opposite is true. The logistics industry
is actually in the early stages of a massive wave of even greater consoli-
dation that will reward a small number of third-party logistics (3PL)
companies with tremendous value. As shippers look to simplify their
vendor base, as new technology allows large 3PLs to serve the midmar-
ket cost effectively, and as acquisitions and investment capital fuel the
growth of leading service providers, a handful of “mega-winners” will
come to dominate the 3PL marketplace.
These developments will also have a major impact on how 3PL users
select and use their service providers. Smart shippers already treat their
3PLs as true business partners. They integrate 3PLs into their business
and rely on them for critical supply chain functions. Given this depen-
dency, it’s all the more vital for shippers to understand their 3PLs’ long-
term viability amidst a rapidly changing marketplace.
As the 3PL landscape shifts, who will be the winners? How should
users of these services respond? This article provides some answers, lay-
Benjamin H. Gordon is managing director of BG Strategic Advisors, which
provides advisory services in strategy, technology, and finance to logistics
and supply chain companies.
3
rd
PARTY
LOGISTICS
W
TERRYALLEN
VALUE VISIBILITY EVOLUTION EXECUTION STRATEGY SYNERGY

2. ing out a roadmap to help both
providers and users of third-
party services navigate a dynam-
ic 3PL market.
An Industry in
Transition
Modern third-party logistics
providers have emerged recently as
a result of transportation deregula-
tion in the 1980s and the shipper
emphasis on “core competencies” in
the 1990s. As a result, outsourcing
has taken off. In the last decade,
according to research by invest-
ment banker Lazard Freres and
BG Strategic Advisors, the 3PL
category has grown at a rate
greater than 20 percent per year. It
has produced stock market darlings
like Expeditors, CH Robinson, and
Landstar. And it has spawned an
entire industry of small and midsized
logistics providers — which number
approximately 1,000 today.
Many observers have predicted that the
logistics provider industry will continue to
expand at a rate of 15-20 percent annually.
A recent Lazard Freres study shows that
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Third Party Logistics
while 37 percent of high-volume
shippers outsourced transportation
in 2000, 73 percent expected to do
so by 2005. As the outsourcing
trend continues, the 3PL industry
will benefit.
Less frequently noted is the
enormous fragmentation in the
logistics industry. Exhibit 1 shows
that all four of the core logistics sec-
tors—warehousing, transportation
management, air/ocean freight for-
warding, and dedicated contract
carriage—are growing at a rate of
15-25 percent annually. Yet the
exhibit also shows that the market
share available for small companies
(defined as all companies below the
top 50) is between 30 and 80 per-
cent. To put this in perspective, the
parcel industry is growing at 4 per-
cent, and the market share available
for small companies is zero.
This combination of high growth and high fragmentation
makes the logistics industry ripe for consolidation. A growing
market supports a broad range of successful companies that
attract expansion-minded buyers. At the same time, fragmen-
tation translates into a plethora of small acquisition opportu-
nities for larger, cash-rich companies. Further, as the market
inevitably matures, businesses that were used to 20+ percent
growth will likely supplement their organic operations with
acquisitions.
Within the individual sectors of the logistics industry, no
one player dominates. For example, Exhibit 2 shows that
Danzas/AEI, holds 60 percent of the revenues generated by
the top seven companies in the sector of air and ocean freight
forwarding. However, if the chart were to be expanded to
include the U.S. revenues for all global freight forwarding
companies, Danzas/AEI’s market share would drop to less
than 25 percent. Further, when calculated as a percentage of
the overall logistics market, its true market share would drop
to just six percent. The chart also shows that only two compa-
nies have greater than 2x relative market share in their sec-
tors—Exel in warehousing and Danzas/AEI in freight for-
warding. But even those two combined enjoy less than ten
percent market share in the overall outsourced logistics mar-
ket.
Historically, winners have stayed in their corners.
Danzas/AEI enjoys strength in freight forwarding, Schneider
and Penske head up asset-based transportation, Exel stands
out in warehousing, and various players compete for leader-
ship in asset-light surface transportation and software. No
one company currently enjoys a top-two market share posi-
tion in more than one sector.
In the last three years, however, consolidation in the
industry has accelerated across both modes and geographies
(see Exhibit 2). Domestically, the UPS acquisition of Fritz
allowed the transportation and warehousing giant to add
expertise and scale in a new mode (freight forwarding).
Similarly, the Exel acquisition of Mark VII enabled a ware-
housing and freight-forwarding leader to add domestic sur-
face transportation management. By the same token, global
powerhouses have sought to acquire platforms in the United
States. Deutsche Post’s purchase of AEI/Danzas, Kuehne &
Nagel’s merger with USCO, and APL’s acquisition of GATX
all reflect this cross-geography trend.
The Consolidation Drivers
There are three main sources of this powerful consolidation:
shippers’ quest for lead logistics providers (LLPs), new game-
changing technologies, and the emergence of deep-pocketed
logistics acquirers.
TThhee SShhiippppeerr QQuueesstt ffoorr LLLLPPss
First, shippers’ need for greater accountability and control
over their outsourced activities has given rise to a new type of
logistics management company — the lead logistics provider
(LLP). These large LLPs are emerging as the “supply chain
masters” for their customers. They offer shippers a wide
range of outsourcing services through a single point of con-
tact. They also provide broad geographical coverage as well as
sophisticated technology capabilities. Typically, the LLPs rely
on a network of smaller 3PL subcontractors to deliver these
services.
Pioneers in using LLPs include giants such as General
Motors and Nortel, which both chose recently to outsource
billions of dollars in logistics spending. GM sought an LLP
EXHIBIT 1
The Logistics Market Today:
High-Growth but Extremely Fragmented
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
0% 5% 10% 15%
Annual Market Growth Rate
20% 25% 30%
AvailableMarketSharefor
CompaniesBelowTop50
Source: Armstrong & Associates, BG Strategic Advisors Analysis
Slow-Growth,
Fragmented
Slow-Growth,
Consolidated
High-Growth,
Consolidated
Parcel
High-Growth,
Fragmented
Air/Ocean
Value-Added
Warehousing
Transportation
Management
Dedicated
(DCC)

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with the technology capabilities to cut dealer order-entry
cycles from 60 days down to 15. (See the sidebar on page
56.) Nortel was looking for a logistics partner to help it free
up hundreds of millions of dollars in working capital and
inventory.
Few companies can meet the broad range of requirements
demanded by these large initiatives. Those that can possess a
broad range of capabilities, including:
Ⅲ Multimodal expertise across services including truck-
load, less than truckload, intermodal, air, ocean, and ware-
housing.
Ⅲ Global geographic scope across all locations relevant to
the client’s supply chain.
Ⅲ Complex management skills to perform “master con-
tracting” solutions, where the LLP manages other, smaller
3PLs in subcontracting relationships.
Ⅲ Analytical know-how to provide shippers with a
thoughtful, strategy-led approach that identifies opportunities
for outsourcing to add value.
Ⅲ Powerful technology systems to manage massive flows
of data, synthesize them into meaningful reports, and recom-
mend courses of action.
Ⅲ The financial resources to provide solutions such as the
upfront purchase of a shipper’s logistics division, combined with
a willingness to enter into risk and reward-sharing contracts.
The few companies that can meet these requirements are
part of an elite group—less than a dozen worldwide. As large
shippers continue to seek providers who possess LLP-level
capabilities, third-party providers will feel the pressure to
expand the scale of their operations.
EXHIBIT 2
3PL Industry: Consolidation Across Modes and Geographies
U.S. Logistics Market Map:Top 50 Companies
Total = $27 Billion for the Top 50
100%
80%
60%
40%
20%
0%
2001eRevenues($M)
Air/Ocean Asset-Based
Trasportation
Value-Added
Warehouse
Non-Asset-Based
Surface
Transportation
Software
$7.2B $6.7B
International Acquirors
$6.7B $4.5 $2.3B
0% 20% 40% 60% 80% 100%
Danzas AEI
EGL
Fritz
Expeditors
UTi
BAX
Airborne Logistics
Penske
Logistics
Schneider
Dedicated
Ryder
Dedicated
USF
Logistics
JB Hunt
Dedicated
Deutsche Post
US&T
Swift
Werner Dedicated
Other
north
American
Exel
Americas
TNT Logistics/
CTI
Tibbett &
Britten
APL (GATX)
CAT Logistics
USCO
Genco
DSC
Kenco
Standard
Other
NFI
UPS
Logistics
Ryder
Logistics
Menlo
CH
Robinson
FedEx
Logistics
Schneider Logistics
Exel (Mark VII)
Hub Group
Transplace
NFI
Other
i2
Manu-
gistics
Descartes
Manhattan
Associates
EXE
Kuehne & Nagel APL Uti/Standard
Merger
Exel/Mark VII
Merger
Fritz/UPS
Merger

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Third Party Logistics
The Vector and Nortel LLP contracts are particularly
important because they may be early adopter models for the
rest of the industry. As Exhibit 3 shows, what the largest
companies of the Fortune 100 do, the rest of the market
tends to follow over time. Just as automotive giants like GM
and Ford led the way toward outsourcing in the early 1990s,
so too may the adoption of LLPs provide a model for mid-
sized companies in the coming decade.
The lead logistics provider movement will create two key
consequences for 3PLs. First, it will increasingly reward
those large companies that can meet the stringent require-
ments demanded by shippers. Second, it will have a ripple
effect on the 3PLs that are forced to serve as subcontractors to
the LLPs. These smaller providers face a distinct risk of margin
compression, technology compliance, reduction in growth
opportunities, and outright termination at the hands of LLPs.
NNeeww GGaammee--CChhaannggiinngg TTeecchhnnoollooggiieess
The second major factor driving consolidation is technology.
A growing number of shippers are coming to rely on their
3PLs for sophisticated and costly technology solutions. Many
leading-edge 3PLs specialize in understanding new technolo-
gies and use them to bring substantial value to shippers.
Users increasingly rely on their logistics providers for exper-
tise in complex technologies such as transportation manage-
ment systems (TMS), warehousing management systems
(WMS), supply chain event management (SCEM), and inter-
national trade logistics systems (ITLS).
Shippers can benefit from tapping the knowledge that 3PLs
gain from working with multiple customers. A logistics
provider may purchase a TMS and implement it for 20 differ-
ent accounts. Through this experience, it can gain valuable
expertise on how to get the most productivity out of the tech-
nology. In addition, tech-savvy 3PLs can provide their shippers
with a better understanding of the latest technologies.
Shippers, for their part, can gain powerful cost advantages by
leveraging a service provider’s purchasing power to gain volume
discounts and by paying only for those modules they need. Not
surprisingly, technology has become a key component in many
Fortune 1000 companies’ decision to outsource logistics.
As Exhibit 4 shows, companies that can afford the upfront
investments in technology systems can achieve powerful savings
in the form of operational efficiencies. For a 3PL generating more
than $10 million in revenues, for example, a Web-based, fully-
automated system can cut the cost of a transportation transaction
by over 80 percent. Those 3PLs that cannot afford such technol-
ogy investments will suffer a crippling competitive disadvantage.
Sophisticated systems are becoming a powerful lever for
separating the strong from the weak. I know of one situation
where CH Robinson displaced a mid-sized freight broker by
providing the Fortune 500 customer with a sophisticated
order management system (OMS). The OMS integrated
directly into the customer’s ERP system. Once CH Robinson
had control of the customers’ orders, it was able to route
them wherever it deemed appropriate. Not surprisingly, they
were channeled, more often than not, to CH Robinson inter-
nally for brokerage execution. By the same token, a major fac-
tor in GM’s outsourcing decision was Vector’s ability to pro-
vide global supply chain visibility.
The technology bar will only continue to rise. UPS Logistics,
for example, has made aggressive investments in building out a
logistics and technology-consulting group with a mix of third-
party and proprietary solutions. It helps that UPS has invested
more than $11 billion in technology over the past 10 years. Very
few companies will have the resources and wherewithal to keep
up with these giants and their investments.
The next battleground for technology adoption in logistics
will be the midmarket. Web-based transportation and ware-
housing management systems now enable large 3PL compa-
nies to reach smaller customers. Schneider Logistics provides
a good example of this capability. Historically, this large ser-
vice provider would not do business with midsized companies.
As Schneider’s former Senior Vice President of Business
Development Bob DeVos recounted, “If you were under $50
million in freight spend, I didn’t even take your call.” But now,
with its Web-based SUMIT system in place, Schneider
expects to serve a much broader range of customers more cost
effectively. As the Schneider example shows, technology low-
ers the threshold size of customers that big 3PLs can reach.
This only intensifies the pressures on midsized logistics com-
panies to keep pace with new technology offerings.
DDeeeepp--PPoocckkeetteedd LLooggiissttiiccss AAccqquuiirreerrss
The third driver of consolidation is the emergence of cash-
rich buyers seeking logistics targets. In the last three years
alone, we have seen such major acquisitions as:
Ⅲ Kuehne & Nagel buying USCO Logistics for $400 million.
Ⅲ UPS buying Fritz for $500 million.
Less-Penetrated
Higher-Growth
Fully-Penetrated
Slower-Growth
EXHIBIT 3
What GM and Nortel Do Today,
The Midmarket May Do Tomorrow
20%
15%
10%
5%
0
Fortune 401-500
301-400
201-300
101-200
1-100
Five-YearForecastGrowthRate
0% 10% 20% 30% 40% 50% 60% 70% 80%
Source: Armstrong & Associates, BG Strategic Advisors
Percentage of Fortune 500 Companies
Using Outsourcing
As midmarket outsourcing grows, large
logistics companies will pursue aggressively.

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Ⅲ Deutsche Post buying AEI for $1.2 billion.
Ⅲ Deutsche Post buying Danzas for $1.2 billion.
Ⅲ TPG buying CTI for $650 million.
Ⅲ APL buying GATX for $210 million.
In many cases, large European players have pursued U.S.
platforms in order to expand their geographic coverage and
tap into the high-growth U.S. market, which at 20 percent is
expanding at more than double the rates of Europe. For
instance, Kuehne & Nagel (K&N) was seeking a leader in
U.S. value-added warehousing with a focus on the high tech-
nology and telecommunications industries. With USCO,
K&N gained instant scale and credibility in North America.
Similarly, the Dutch post office, TPG, wanted a top position
in automotive logistics and found what they were looking for
in CTI. Global buyers have paid premiums as high as 19
times cash flow in a bid to establish beachheads in the $1
trillion U.S. supply chain market.
North American buyers have tended to pay lower prices
than their European counterparts but still find substantial
value in acquisitions that can provide leadership in comple-
mentary services. For instance, UPS acquired Fritz in order to
bolster its global freight-forwarding network. Conversely, UTi
acquired Standard Logistics in October 2002 to add value-
added warehousing capabilities to its forwarding expertise.
These major acquisitions will only continue. In a rapidly
evolving marketplace, time can be more important than
money. Buyers will continue to be attracted by the ability to
gain new customers, geographies, services, technologies, and
talented managers, which they can realize more quickly
through an acquisition than by organic growth. Further,
wealthy buyers—UPS alone generates $2 billion in annual
cash flow—possess ample resources to fund major invest-
ments in the market.
One particularly interesting trend is the recent emergence of
the private equity firm in this space. These firms tend to invest
in private companies where they see unique opportunities for
growth and profitability. Many private equity firms today are
excited about the logistics services market because they see an
opportunity to (1) consolidate markets that exhibit economies
of scale in marketing, purchasing, and technology; and (2)
accelerate the growth of leading companies in niche markets.
In the last four years, top-tier investment firms have
stepped into the logistics sector. Recent examples include:
Ⅲ Eos Partners’ investment in NewBreed, a warehousing-
based company that has evolved into sophisticated supply
chain network design and implementation for customers like
the U.S. Postal Service, Verizon Wireless, and Siemens
Medical Solutions.
Ⅲ GTCR’s investment in Cardinal, a leading transporta-
tion management company focused on dedicated delivery and
logistics consulting for companies like 7-Eleven and Home
Depot.
Ⅲ Code Hennessy and Simmons’ multiple investments in
May Logistics, a top regional warehousing and logistics com-
pany, and Mail Contractors of America, the largest private
transporter of bulk mail for the U.S. Post Office.
Ⅲ Heritage Partners’ investment in APX, which provides
package delivery, package sortation, and direct delivery solu-
tions at a postage discount of approximately 40-45 percent of
typical post office rates.
Many of these private-equity-backed logistics companies
are growing revenues and profits at greater than 30 percent
through organic expansion and acquisitions.
We can expect to see more of these investments. With
$120 billion in private equity capital sitting on the sidelines, a
record level of funding exists. My discussions with more than
20 investment firms in the past year suggest that a substantial
amount of that capital will be deployed in the supply chain
marketplace.
This infusion of smart capital from private equity investors
will accelerate the acquisition and consolidation trend. If pri-
vate equity investors commit 5 percent of their total capital to
the sector and continue to grow their portfolio companies at
30 percent annually, within 10 years their companies could
control $64 billion in logistics services. This would amount to
more than 20 percent of the expected market for 2012.
Where will it end? Again, a comparative industry analysis
may help to frame this question. In 10 years, the logistics sec-
tor may end up looking like other, more mature transportation
markets. In 1971, when Fred Smith launched Federal Express,
the parcel industry was extremely fragmented. The top two
players back then represented less than 20 percent of the total
market. Today, FedEx and UPS have successfully consolidated
the parcel market, and combined they own a commanding
80+–percent market share. A similar pattern is likely to emerge
in the 3PL industry.
Implications for 3PLs: The Winners?
Logistics companies that can successfully position their busi-
nesses to benefit from these trends will enjoy an exciting
future. These will be the companies with broad multimodal
capabilities, geographic scope, and technological leadership.
For the majority of companies in this industry, however,
EXHIBIT 4
The Power of Technology to Cut Costs
and Improve Efficiencies
$50
$40
$30
$20
$10
0
Phone/Fax
$42
Source: BGSA analysis. Assumptions: $100,000 fully loaded cost per rep, 240 working
days/year, 10 loads/day phone/fax, 20 loads/day dispatch, 30 loads/day TMS (trad.),
50 loads/day TMS (Web)
Dispatch
System
Cost of a Transportation Transaction, Fully-Loaded
$21
TMS:
Traditional
$14
TMS:
Web-Based
$8

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Third Party Logistics
one overriding question emerges: What can you do if you are
not FedEx, UPS, or Deutsche Post? If you’re not a multibil-
lion dollar company, but you do have the size, capabilities,
and ambition to continue profitable growth in midst of this
marketplace, how should you evolve to maximize your oppor-
tunity?
Smart, midsized companies have two main options. First,
they can invest aggressively in niche strategies and technolo-
gies that create differentiation and drive growth. Second, they
can find a “big brother” with deep pockets and position the
business for a merger or sale. Successful models exist for
both options.
NewBreed, Cardinal, May Logistics, MCA, and APX are all
examples of private equity-backed companies that pursued a
differentiated, technology-led strategy and raised capital to
build out their model. All five companies have deployed large
amounts of funding to build sophisticated technology systems
and national networks. Today, each is a formidable competitor
in its target market.
USCO and RoadLink USA represent variations on the sec-
ond option. In USCO’s case, the warehousing company saw an
opportunity to meet its customers’ needs for worldwide solu-
tions and found a global merger partner in Kuehne & Nagel. In
RoadLink USA’s case, several intermodal drayage companies
joined forces to compete more effectively. They are now able
to provide their customers with a single point of contact; supe-
rior tracking, routing, billing, and management systems
through pooled resources; and higher overall service levels.
There is a third option: do nothing. However, while mid-
sized logistics companies may continue to enjoy growth and
profitability for the next two to four years, the longer-term
market dynamics will require continual evolution and re-
investment to ensure differentiation and growth. The status
quo is not a winning choice in the long run.
Implications for 3PL Users: What to Do?
For users, the increasing consolidation of the 3PL industry
has profound implications on choosing and using service
providers. Smart shippers already monitor their logistics part-
ners on the basis of daily operational metrics, such as on-time
delivery rates and costs per ton-mile. But with the landmark
changes in the marketplace, they will need to do even more.
Specifically, they will need to analyze their 3PLs’ strategic
positioning, ability to invest in the future, and viability.
Some new key questions 3PL users should be asking cen-
ter on the following:
Ⅲ Business needs: How are your company’s needs chang-
ing, and what impact does that have on how you select a
3PL? For example, a company pursuing low-cost manufactur-
ing may choose to source raw materials from Asia, in which
I
n December of 2000, General Motors announced that it was
forming a joint venture with Menlo Logistics called Vector SCM
(supply chain management). This $6 billion startup would han-
dle all of GM’s outsourced logistics, serving as the primary point of
contact for dozens of 3PLs that once worked with GM directly.
Vector was a massive deal—costing more than 600 times the
average logistics-outsourcing contract of $10,000 and represent-
ing nearly 10 percent of the entire $65 billion outsourced logistics
industry to date. GM performed exhaustive analyses of several
major logistics companies before selecting Menlo, a division of
CNF. The two companies now share board seats and equity stakes.
GM’s motivation included the desire to slash dealer car-pur-
chase and ordering cycles from 60 days down to 15. (These effi-
ciencies are highlighted in the accompanying graphic.) The effi-
ciencies are driven by a logistics technology platform known as
“Vector Vision.” With this integrated system, GM is seeking to
create a clearer view of its global logistics operations and a truly
electronic supply chain. The system allows them to perform real-
time modifications at all steps in the car delivery process.
“This will enable us to know exactly what is in transit, identify
a vehicle that matches a customer’s order, and redirect it from its
original destination of a dealer’s inventory to a customer instead,”
explains Harold Kutner, Group Vice President of GM’s Worldwide
Purchasing and Production Control & Logistics.
Vector, and initiatives like it, will continue to push the industry
toward consolidation for several reasons. The Vector mandate is
driven by specialized, sophisticated technological systems that few
companies can afford. In addition, those midsized logistics com-
panies that used to work directly with GM will now be forced into
subcontracting relationships with Vector. Over time, these 3PLs
may see narrower margins, reduced growth opportunities, and the
risk of being switched out of large accounts. As a result, outsourc-
ing arrangements like Vector may have a major ripple effect on
the 3PL industry.
GM’s Big Outsourcing Push
GM's Vector Vision
Source: Line 56, Manufacturing.net
Order Cycle
60 Days
Fragmented
view of their
global logistics
operations
Untimely
inventory
information
Long
delivery
times to
dealers
Order Cycle
Before Vector Vision
With Vector Vision
15 Days
• Accuracte and reliable delivery
• Single system to capture
all EDI (electronic data interchange) links
• Better management of all material and finished
vehicles in the GM pipeline

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case the choice of a freight forwarding partner
specializing in Asian-U.S. trade lanes will be a
critical strategic decision. A shipper focused
on economic value-added (EVA) may seek to
maximize high returns off of low capital
invested, which could lead it to select a 3PL
willing and able to purchase its logistics assets
in exchange for a long-term contract.
Ⅲ Lead logistics provider: Will your busi-
ness be better served by a lead logistics
provider, a series of best-of-breed providers by
geography or service offering, or the status
quo? GM and Nortel concluded that a LLP
would provide accountability, technology-
based visibility solutions to reduce inventory,
and aggressive reductions in the working cap-
ital that would free up hundreds of millions
of dollars in cash. In contrast, others have
found that a strategy of several regional best-
of-breed players provides many of the bene-
fits of an LLP without the risks of complete
dependency on one party.
Ⅲ Technology: Can your current 3PL(s) keep up with the fast
pace of technology innovation that your business will require
over the next two to four years? Logistics companies are already
expected to provide expertise in such technologies as TMS,
WMS, SCEM, and ITLS systems. As supply chain technology
continues to develop further, shippers will turn to 3PLs for
advice on new categories such as radio-frequency identification
(RFID) tags, which can provide continuous tracking of inventory
at the SKU level. Finally, post-Sept. 11 security requirements,
such as the ocean carrier 24-hour rule, are fueling demand for
new tracking and monitoring systems. Top 3PLs will be expect-
ed to provide clients with expertise on all of these fronts. In
effect, these logistics providers will need to evolve into supply
chain consulting firms that can also provide execution capabili-
ties.
Ⅲ Scope: Does your 3PL have the scope of services and
locations that you will need in the future? As shippers look
for integrated supply chain solutions, 3PLs are developing
sophisticated service combinations. For example, NFI
Industries is adding contract-manufacturing capabilities to
augment its warehousing and transportation operations.
Jacobson Companies has added not just co-packing but also
temporary staffing services. These value-added services
enable a 3PL to solve larger problems for their clients.
Ⅲ Capital: Will your 3PL have the resources to reinvest in
continued growth? Standard Logistics, a highly-regarded
regional warehousing company, evaluated its Fortune 500
customer needs and assessed the likely capital requirements
for continued success. Standard concluded that it should
merge with a larger company that could provide the resources
to fund expansion. As shippers demand expanded geographi-
cal coverage and services, 3PLs will be pressed to make the
necessary investments, or alternatively select the right merger
partner, in order to develop these capabili-
ties.
Ⅲ Viability: Ultimately, does your 3PL have
what it takes to survive and succeed in the
coming era of consolidation? Amidst the
changing customer priorities, increasing com-
petitive intensity, and marketplace volatility,
many companies will be unable to move for-
ward. Will your 3PL be one of them?
For a frightening example of the risks
involved in avoiding these questions, just
look at the recent failures of freight bill
audit and payment companies like STI,
United Traffic Management Systems, and
Computrex. Large companies like Formica,
ATOFINA, Bridgestone/Firestone, Pella,
QVC, and dozens of other Fortune 500 cus-
tomers chose these companies partly on the
basis of low prices. They lost millions of dol-
lars in the ensuing bankruptcies.
The more likely risk is that a shipper will
pick a 3PL that lacks the resources and vision
to evolve in an increasingly dynamic industry. For instance, a
provider that does not make the necessary investments in a
productivity-enhancing TMS, WMS, or SCEM system may
place its customers at a competitive disadvantage. Similarly, a
shipper may choose a 3PL that is unwilling or unable to
expand into new geographies and needed service offerings. In
the long run, these strategic factors can dwarf operational met-
rics in terms of their impact on a shipper’s business.
Asking the Hard Questions
The 3PL market today stands at a crossroads. As shippers
demand broader solutions, technology companies bring inno-
vations to market, and a flood of capital chases differentiated
companies, the pace of change promises only to accelerate.
These dynamics will pose major challenges and opportunities
to both users and service providers, demanding the attention
of all supply chain professionals.
To emerge as winners, 3PLs will need to carve out a dif-
ferentiated square on the chessboard. Consolidation is an
unmistakable reality. The choice—raise capital to pursue a
niche strategy, sell to a larger player, or harvest the busi-
ness—is not easy. However, just as UPS and FedEx achieved
domination in the once-fragmented parcel industry, today’s
logistics providers who pick a unique strategy and make the
necessary investments can be big winners going forward.
Shippers also face important decisions. Should you pick a
global logistics partner, a series of regional 3PLs, or a matrix of
best-of-breed providers by service offering? Does your 3PL
understand what drives value in your business? Is your partner
well positioned to succeed amidst the changing marketplace?
Shippers who understand changing market requirements and
pick winning 3PLs can develop superior supply chain strate-
gies that deliver a powerful competitive edge.
Those 3PLs
that cannot
afford
investments in
sophisticated
technology will
suffer a crippling
competitive
disadvantage.