Who gets what from the American 3PL pie?

Each year, supply chain market research and consulting firm Armstrong & Associates, Inc. analyses its research database of third-party logistics provider (3PL) customer relationships to gain insights into customer outsourcing trends and overall market dynamics. With Australian supply chains showing similar trends, it is interesting to review how 3PL relationships are organised ‘on the other side’.

Armstrong & Associates’ report this year is based on 3,334 3PL customer relationships, an increase of 16.4% over last year.

3PL value-added services

Value-added services differentiate 3PLs from transportation companies and basic warehousing operations. Table 1. lists primary 3PL value-added services and capabilities. The major changes since 1995 have been an increase in the degree and clustering of these services. Several of the largest 3PLs (DHL Logistics, Penske Logistics, Ryder System, and UTi Worldwide) offer all or most of these services to various customers.

The major scale differentiators between 3PLs revolve around supply chain management systems and logistics engineering expertise. Several 3PLs have implemented a fully integrated systems ‘backbone’ to support global transportation and warehouse management operations. These systems offer internet visibility and exception handling capabilities, combined with transportation management functionality allowing for the daily optimisation of thousands of shipments across large geographical areas. The same 3PLs can run valueadded warehousing operations, perform supply chain network analysis and design, and manage call centre and fulfilment operations. Several 3PLs have expanded their global scope to provide significant coverage in those countries which make up the majority of the world’s gross domestic product (GDP). Over the next few years, major 3PLs will continue to integrate the pieces they now have. Ten to twelve will offer single-source global solutions with the scale to handle the supply chain needs of large multinational companies.

The size of 3PL accounts varies in net revenue from a few hundred thousand dollars to over $100 million. Most major 3PLs steer away from accounts of less than $10 million in purchased transportation or distribution management. Smaller accounts with transportation management needs often turn to Landstar Logistics, C.H. Robinson or smaller brokerage- based 3PLs such as BNSF Logistics or Allen Lund. Smaller accounts tend to offer marginally better profitability and change their 3PLs less often.

While the database does not include every 3PL customer relationship, it is large enough to identify how and to what extent customers are using 3PL services. Table 2. lists the top Global Fortune 500 3PL customers utilising ten or more 3PLs within their supply chain operations.

Two primary sales strategies have emerged amongst 3PL providers: DHL Logistics, Menlo Worldwide, Penske Logistics and other well-known major 3PLs emphasise selling to the top 200-250 Fortune companies. Other companies like C.H. Robinson and Landstar Logistics are more inclined to pursue smaller accounts offering the potential for longer relationships with better profit margins.

The awareness among Fortune 101-1000 companies to the benefits of using 3PLs is continuing to grow and this growth should hold over the next five or more years. For their part, 3PLs continue to develop business opportunities at three to four times the rate of growth in the U.S. GDP. We estimate that the overall U.S. 3PL market will expand 7.5% (+/- 1.5%) in 2008.

The increased 3PL usage described above is consistent with information from other ongoing 3PL market research. Armstrong & Associates estimates 3PL penetration of the total potential US 3PL market is 16%, up from 10% in 2002. Consistent with this figure is the estimate of total U.S. 3PL revenues increasing from $65.3 billion in 2001 to $122 billion in 2007.

This year the researchers have included different sub-segment analyses for the top industry segments by 3PL spend for the Fortune 500 Global and utilise the Fortune company categories to develop the sub-segments. This information is detailed below. Also, additional analyses and segmentations are available on request from the authors.

For the domestic Fortune 500 companies, the total 3PL revenue is $82.1 billion or 72.3% of the total U.S. 3PL market for 2006.

The report’s estimate of the 2006 3PL revenues from the Global Fortune 500 is $162.4 billion. These companies account for 38.9% of the $417.1 billion global 3PL market. This estimate is subject to North American definitions and orientation to third-party logistics. That is, segments are defined as domestic transportation management, international transportation management, dedicated contract carriage (DCC), and value-added warehousing/distribution (VAWD). The first two categories are non-asset based; the latter two are traditionally asset based. These definitions grew out of the regulatory framework for transportation and warehousing in the U.S.

The Asian picture

FY2006 3PL revenue by industry ($ billions)

Figure 2. FY 2006 3PL revenue by industry

from the Fortune 500 – global ($ billions).

To the degree that third-party logistics is developing in Asia, the separate segments are more likely to be lumped under the term supply chain management and tend to be international transportation management (freight forwarding and NVOCC) focused.

The largest industry segment is ‘Automotive’ of which $38.9 billion of the 3PL spend is from motor vehicles and parts companies. General Motors, Ford Motor, DaimlerChrysler, Volkswagen, BMW, and Toyota Motor have 43, 36, 31, 30, 21, and 19 reported 3PL relationships respectively.

Accounting for $37.6 billion of the estimated 3PL spend is the more varied ‘Technological’ industry segment. It encompasses companies in eight different sub segments. The largest sub segment of ‘Electronics, Electrical Equipment’ companies accounts for 44.7% of total ‘Technological’ segment revenues with an estimated 3PL spend of $16.8 billion. Companies in this segment include Siemens, Royal Philips Electronics, Sony, Samsung Electronics, and LG with 18, 15, 14, 11, and 10 respective 3PL relationships. The next largest sub-segment is ‘Computers, Office Equipment’ with $8.1 billion of 3PL spend. It includes Hewlett-Packard, IBM, and Dell.

‘Retailing’ is the third largest 3PL revenue segment for the Fortune 500 Global. It has total 3PL revenues of $25.5 billion.

‘Elements’ with $24.4 billion is dominated by companies with core businesses in petroleum refining and account for an estimated $14.5 billion of the total 3PL spend and 59.4% of total segment revenues. Much of the total spend from these companies is transportation-related. There are twelve 3PL relationships and two lead logistics provider (LLP) relationships tallied for Exxon Mobil, the second-ranked Fortune 500 Global company. Third-ranked Royal Dutch Shell is using ten 3PLs. ‘Elements’ also includes chemical manufacturers with $3.8 billion of 3PL spend. Notables include DuPont with 12 identified 3PL relationships and BASF with 11.

What is “lumped” into the “Other” industry segment? Many of these are engaged in transportation services. ‘Mail, Package, Freight Delivery’ companies such as FedEx, the U.S. Postal Service, Deutsche Post, and United Parcel Service use 3PLs and account for $2.5 billion or 27.8% of the segment revenues. Also, airlines, railroads, and shipping lines have relationships with 3PLs to often facilitate non-core transportation activities. ‘Entertainment’ companies Time Warner and Walt Disney are both shown with five 3PL relationships and significant spends.

The combination of integrated, supply chain management, and lead logistics accounts for 21% of the responses. This 21% of services has more strategic properties. Or, stated the other way, about 79% of the services offered by 3PLs are tactical.

Of the 3,334 3PL customer relationships identified, there are 10,094 individual types of services being provided by 3PLs. The primary 3PL services provided were led by transportation management (21.4%), warehousing (19.2%), and value-added services (18.7%). These are shown in Figure 3.

On average, 3.0 services are provided by 3PLs for each customer relationship. This has grown from 2.9 services in 2004. These increases reflect how 3PL relationships with existing customers are expanding each year.

The number of services provided per contract is highest in Technology and Automotive indicating the higher degree of differentiated, mature supply chains in these verticals.

The types of 3PL services utilised vary by industry segment. Table 5 details the ranking and percentage for each service. The results in Table 5 indicate that warehousing services are most important in consumer products, healthcare, and high-tech industries.

Transportation management is the most important 3PL service in the other industry segments.

Armstrong & Associates has watched supply chain manager (SCM) and lead logistics provider (LLP) relationships closely since 2000. The total number of SCM and LLP relationships has increased each year. The relative percentage of SCM and LLP relationships for total services has increased to 8.2%. As shown above, these are included in the 21% of services of a strategic basis. 79% of 3PL services are still contracted on a tactical basis. While there is some slow change, most customers are still reluctant to turn over inventory control and extended supply chain management to their logistics providers.

To the extent that SCM and LLP relationships have been formed, they are most likely to occur in high-tech, automotive, and retail areas, where relationships are partnership- based and involve larger 3PL accounts.

Armstrong & Associates, Inc. is a supply chain market research and consulting firm specializing in 3PL market research, provider benchmarking, strategic planning, mergers and acquisitions, logistics outsourcing, centralised transportation management programs, and supply chain systems evaluation and selection. Armstrong & Associates publishes Who’s Who in North American Logistics and Supply Chain Management and Who’s Who in International Logistics and Supply Chain Management. Recent research papers include "Warehousing in North America – 2007 Market Size, Major 3PLs, Benchmarking Prices and Practices" and "U.S. and Global – 3PL Financial and Acquisition Results.” The full report and other research papers are available from the company at www.3plogistics.com.

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