Posted on: May 7th, 2013
By R. Bruce Striegler
In a world awash with acronyms, 3PL is one to watch. Recently, the Journal of Commerce assembled three experts in third party logistics (3PL) to discuss this growing sector of today’s supply chain management. In lay terms, 3PL’s are businesses that provide one or more logistics-related services which can include public or contract warehousing, transportation management, distribution management and freight consolidation.
Evan P. Armstrong, President of research and consulting firm Armstrong & Associates highlighted the economic impact of 3PL’s by pointing out 2011 revenues (the latest numbers available) of the international 3PL market reached $616 billion. “Between 2006 and 2011, the North American third party logistics market grew at a rate of about four per cent, the European market by 2.2 per cent and the Asia Pacific region by 15.2 per cent.” While statistics indicate low European growth, European companies have dominated the market until 2010 when Asia Pacific companies took leading revenue positions.
Armstrong continued, “Initially there was a heavy emphasis on simply import /export. Now, there is a lot of focus on how to meet customer demand through value-added warehousing and distribution within China and other booming Southeast Asian countries.” Thailand, Indonesia and Vietnam are all experiencing double digit 3PL growth, and businesses are trying to figure out how to build out in those domestic footprints.” Mr. Armstrong expects North America will have a 3PL growth rate this year similar to last year of between five and seven per cent, Europe with its economic woes about two per cent, the Asian Pacific region around 12 to 15 per cent while South America will hit between 15 and 18.
European companies dominate top global 3PL’s
“A lot of the early competition came from European companies that built a base in North America because they had to handle cross-border traffic within Europe,” Armstrong says. He explains that in America there are no barriers from state to state in terms of transportation regulation and notes that the Europeans often had government backing or involvement to make acquisitions allowing global expansion.
“DHL Supply Chain and Global Forwarding is the largest contract 3PL, with company-wide 2011 revenues of US$32.2 billion. This German-based company is present in over 220 countries and has a workforce exceeding 280,000. When you combine warehousing and container freight stations on the forwarding side, they have over 248 million square feet of warehousing space. Then you add what they are doing on the ocean side, managing about 2.7million TEU’s (twenty foot equivalent) containers and then include the 2.4 million airfreight metric tonnes, you can see they are a large-scale operation.”
Other 3PL’s topping the list include Swiss-based Kuehne + Nagel, the largest ocean freight forwarder with 2011 revenues of US$22.2 billion, German-owned DB Schenker Logistics that has expanded significantly in Canada (overall revenues of US$20.7 billion) and at number four, Nippon Express, Japan’s DHL, according to Armstrong, with revenues of just over US$20 billion.
Armstrong commented that the largest U.S. transportation manager, CH Robinson Worldwide have been growing internationally and with this year’s acquisition of Phoenix International will provide more air freight forwarding volumes, adding, “Essentially, the acquisition doubled what they are going to do in ocean TEU’s getting up to about 500,000.”
Healthy growth projections for 2013, Southeast Asia leads
The U.S. 3PL industry has experienced a strong rebound from the economic downturn in 2009. In 2011, at 5.1 per cent, third party logistics growth was three times that of the growth rate of the U.S. gross domestic product (GDP), and is estimated to grow at 6.3 per cent for 2012, with similar projections for 2013. The US$131 billion 3PL market in the U.S. can be categorized by segment, with domestic transportation management accounting for $41.3 billion of the total, international transportation management at US$46.1 billion, dedicated contract carriage US$11.1 billion and value-added warehousing and distribution at US$34 billion.
In his projections for 3PL growth for 2013, Armstrong expects that the Asia Pacific and South American markets will continue to be the fastest growing, suggesting that Indonesia might be the ‘real deal’ with the world’s fifth largest workforce, a median age of 28.5 years and the 16th largest GDP growing at 6.5 per cent.
“International transportation management (ITM) is becoming more about the management of transportation and less about the freight. A lot of the margin in ITM is on the origin, the delivery side is pretty thin if you’re doing container yard to container yard or just managing full containers on the ocean. A lot of it is about the valued-added services, including being able to do trade and compliance, and being able to deal with all the regulatory issues around export/import.”
Armstrong observes, “A more modern-oriented Middle East should bolster growth in both air and ocean freight,” and goes on to suggest merger and acquisition activity will continue at a healthy rate, but good targets are limited. “We’re in a situation where there are still more buyers than sellers.” Mexican-American cross border traffic will likely continue its increase, although he cautions with so much of it automotive-related, growth could stall if U.S. auto sales were to slow.
“Domestically, project logistics for oil and gas will continue to be strong as production increases in North America. If you look at what BNSF Logistics and others are doing in the Bakken formation in North Dakota, there is a lot of interesting work moving drilling rigs, supplying frack sand and helping out fracking operations.” Mr. Armstrong concluded saying that he expects domestic transportation management and freight brokerage services will continue to become increasingly competitive with the greatest pressures felt by small brokers.
Changing attitudes to 3PL’s in industrial real estate
David E. Knee, Managing Director of real estate company Jones Lang LaSalle’s 3PL practice group, illustrated U.S. 3PL penetration by big box transactions, “We looked at deals that were reported mid-year 2012, and we highlighted those where 3PL’s were directly on the lease. We found that there was a tremendous penetration nationally, with 3PL representing almost 40 per cent.”
Traditional real estate views of 3PL’s have changed dramatically in recent years. “The old conventional view was that they took the inexpensive, lower ceiling, older buildings. The reality today is that 3PL’s are taking very modern high-bay buildings with a focus on cross-dock facilities. Also, looking back, most 3PL’s were seen as very low-tech, with no IT or material handling facilities infrastructure, they were just providing labour. But today they are running highly mechanized facilities and leveraging their IT acumen.”
He adds another outdated perception was that 3PL’s were not creditworthy, commenting that presently most 3PL’s are exceedingly stable financially. “It’s changed the dynamic of how developers look at 3PL and also how the customer base looks at 3PL.” He notes that third party logistics match the overall distribution of tenants in the market due to the wide variety of industries they serve.
“In Europe, 3PL’s are responsible for the largest share of logistics take-up and the demand is driven by contracts from their customers that are mainly major retailers and manufacturers.” The third party logistics sector is responsible for about 41 per cent of total European space in 2012, up from 39 per cent the year before. There are wide differences by country, with 3PL accounting for only 23 per cent in the United Kingdom, but 59 per cent in Spain. He says that 3PL’s are the fastest growing occupiers of industrial real estate both in the U.S. and Europe, but they account for a higher percentage of space utilization in Europe.
In terms of real estate trends and requirements, Mr. Knee says there are a number of things to think about as 3PL’s enter the marketplace. “The length of the building lease 3PL businesses require is often tied to the length of their customer contract. Some may have contracts of three years. However, in real estate contracts, the standard is more like ten years.” Third party logistics also must react quickly to request for proposals and that impacts the quantity or availability of buildings they are able to consider, and that impacts their pricing.
Other considerations include functionality. “Typically, 3PL’s look for loading docks, usually one door per 3,500 to 5,000 square feet. They look for one to two trailer positions per door, optimized truck court design, secured perimeters and easy access to highways, since often “final mile” logistics are outsourced to 3PL’s.”
Mr. Knee says that ironically, 3PL’s are benefitting from the uncertain economy. “The more uncertain the economic environment, the greater proportion of industrial leases will be signed by 3PLs because they offer critical flexibility and scalability giving shippers options in an economic situation that defies forecasting.”
How 3PL’s fit with U.S. compliance and regulatory bodies
Daniel L. Gardner, President and co-founder of Los Angeles-based Trade Facilitators Inc., provided an overview of general U.S. import and export requirements that all importers and exporters must navigate, as well as the myriad government departments that govern U.S. trade. Included were the U.S. Department of Commerce, Bureau of Industry and Security; the U.S. Department of State; Directorate of Defense Trade Controls and the U.S. Department of Homeland Security, as well as Customs and Border Protection.
“There are no revolutionary activities coming into effect that will impact trade and export procedures in 2013, but there are evolutionary items that continue to grow with the compliance requirements of the United States.” Mr. Gardner says the biggest story is around Automated Commercial Environment (ACE). This is a multi-year project intended to modernize business processes supporting the securing of U.S. borders, speeding the flow of legitimate shipments, and targeting illicit goods.
ACE is intended to replace the Automated Commercial System (ACS). Underway for almost ten years, ACE will ultimately serve as the backbone of an integrated import/export trade portal which will become a single window for all trade and government agencies involved in the import/export business. Partially implemented ACE provides traders and freight forwarders periodic monthly statements, electronic manifest and summary processing.
Gardner says that a successful pilot program has seen the implementation of Simplified Entry capabilities and there is now an operational first phase of cargo release for air-only at 16 U.S. ports. “In November 2012, work began on re-engineering the legacy Automated Export System which will move from a mainframe to a single automated export processing platform for all export manifest, commodity, export control/licensing and export targeting transactions.”
Gardner concluded saying, “Some 3PL’s consider compliance a hassle. I think the more enlightened 3PL’s not only consider it the law but also an opportunity to set them apart from the competition. From a business perspective, there is competitive advantage to be found in helping to facilitate compliance.” He notes that operationally, forwarders and brokers already play a vital role in supporting compliance classification and valuation. “Forwarders and brokers should use compliance expertise to facilitate trade on behalf of clients, and to create competitive advantage.”