Executive Briefings

Mid-Market 3PLs, Offering Many Services, Are On the Rise

The mid-market third-party logistics providers are on a tear, but consolidation and competition are creating market turmoil that will not go away.

When Global 2000 supply chain executives consider third-party logistics providers, they naturally focus on the world's 25 largest 3PLs, which last year posted sales of $97bn and controlled about 30 percent of the world's logistics budget. But for the rest of the supply chain industry, the field of potential 3PLs extends to hundreds of mid-market players with annual sales between about $20m and $200m that specialize in warehousing, brokerage, transportation management and many other niche activities.

"Every segment of the mid-market is thriving nicely with double-digit growth that has not been experienced so widely for some time," says Joel Hoiland, president of the International Warehouse Logistics Association (IWLA), the oldest and perhaps the largest association representing mid-market 3PLs. IWLA membership traditionally has comprised warehousing companies, but it is growing into other outsourcing specialties.

With this newfound success, the mid-market is also finding a certain amount of uncertainty brought on by heightened customer expectations, mergers and acquisitions, consolidation pressures, demands to expand services and geographic coverage, as well as new entrants. These trends have both positive and negative connotations for the industry.

First, the Positives
On the positive side, the mid-market is finding business opportunities even with the largest customers. For example, DW Morgan is a $20m, non-asset-based 3PL based in Pleasanton, Calif., that has found a solid niche with large high-tech customers, even giant companies like Cisco. According to DW Morgan president and chief strategist Grant Opperman, these high-tech customers usually select his company because they need agility and flexible solutions that larger competitors with an established suite of set services cannot offer. Morgan provides its customers whatever they need from transportation management to service parts support to technology implementations.

"We are a pure advocate for the client," says Opperman. "We can act quickly and not be concerned about supporting a lot of assets or big-name software investments. We can hook up systems very quickly to allow all segments of a supply chain to collaborate and to accelerate change. The larger 3PLs don't usually approach their customers this way."

Brooks Bentz, an associate partner in Accenture's supply chain management practice based in Boston, agrees that many large companies have come to prefer mid-sized 3PLs, if only because they will have more leverage with the logistics provider. For example, Bentz helped a global equipment manufacturer select its 3PLs.

"They were a multibillion-dollar company, so they initially wanted to work with one of the largest 3PLs," he says. "We recommended that they look at a selection of medium and large players so they could gain different attributes with both groups. This approach allowed them to exercise much more influence with the $50m 3PL than they could with one $2bn 3PL. We got them to rethink their strategy."

For their global distribution and sourcing around the world, they needed a 3PL with global reach, says Bentz. For their specialized manufacturing in regional markets, they were better off with a local 3PL with whom they could build a custom fit.

Of course, large customers tend to use their size to leverage the lowest possible rates from their 3PLs. Even smaller customers have become accustomed to having a disproportionate amount of bargaining power with their 3PLs. No longer. According to Hoiland, the best part about this new prosperity for IWLA members is that they can now be more selective about the customers they accept.

Weber Squeezes Maximum Performance
Out of Ocean Spray's DC
Ocean Spray is a 75-year-old agricultural cooperative that generated more than $1.4bn in sales last year. Its more than 650 owners are cranberry and grapefruit growers that produce some of the world's best juices and fruit products. To meet its logistics needs, however, Ocean Spray prefers to outsource these operations to 3PLs that know their business as well as the growers know theirs.

Headquartered in Lakeville-Middleboro, Mass., Ocean Spray employs more than 2,000 people worldwide at its receiving stations and processing and bottling plants located throughout the United States and Canada. When Ocean Spray built a bottling plant in Henderson, Nev., in 1998, Kevin Groth, the company's manager of North American warehouse operations, needed to select a 3PL to operate a distribution center that would serve the plant. As part of the selection process, Groth and his team evaluated both large and regional 3PLs using an objective scorecard that considered cost, service, presence in the area, industry experience and systems capabilities. Groth selected Weber Distribution, based in Santa Fe Springs, Calif., to run the new DC that would serve the entire western U.S.

"Weber is one of the largest 3PLs in the region we are serving, but they are not so large that we would be just another customer," says Groth, "We were confident that they would have the scale to provide the complete solution we needed, not just basic storage and distribution that many smaller warehouse operators provide."

Groth says that he was especially focused on systems, best-practice processes and experience to execute all DC operations. Weber met all the requirements.

"We wanted cutting edge technology that would address everyday operations such as receiving, shipping, customer pickups and dealing with carriers," says Groth. "We needed a 3PL that has the knowledge to know what had to be done and the willingness to take full responsibility for making decisions-not wait for us to tell them what to do."

Ocean Spray built the 300,000-square-foot DC about two miles from its bottling plant, and Weber runs all operations, including receiving, put-away, picking, returns, repack, consolidation, shipping and drop-trailer management. The 50-door facility receives and ships product 24/7. Besides receiving product from the nearby bottling plant, the DC receives and ships products for other Ocean Spray plants and co-packers.

A significant amount of the outbound is customer pickups, so Weber also coordinates the shipping appointments. Ocean Spray has outsourced all the other outbound transportation management to a division of C.H. Robinson.

While some customers would call all the operations performed by Weber as value-added services, Groth calls it a total solution.

"I don't like the term value-added services, since that usually is just a term for adding additional charges and costs," says Groth. "The key value we expect from any 3PL is to understand our business and use that knowledge to solve whatever problems arise."

When Weber first started operating the Henderson DC, Groth and his group spent a lot of time measuring performance, including cost per case, fill rate, shortages at the dock, inventory accuracy, damage in the warehouse, safety, etc. Now, Groth says he does periodic performance evaluations to make sure that metrics remain at the high end of company expectations.

"The best metric has always been the noise level from the customer," says Groth, who adds that Weber must be doing right by our customers because complaints are close to zero and returns are minimal.

"We use Weber's operation of this DC as a model for its other facilities and 3PLs," says Groth. "We champion Weber's accomplishments for us, not only within our organization, but with other companies that ask us for 3PL referrals."


"If a 3PL has a problem customer or someone constantly trying to whittle down the rates, the 3PLs are in a position to say that 'maybe we are not the best fit, and you probably should find someone else,'" says Hoiland, adding that this was very different from the period between 2001 and 2003. "There was no such thing as a problem customer then."

Part of the success that mid-market 3PLs now enjoy comes from their focus on industry verticals, which gives them credibility with even the largest customers that traditionally have used the biggest 3PLs.

"It's nice to have great size and geographic reach," says Hoiland, "but big companies increasingly appreciate mid-sized 3PLs that really know the customers' business. In every vertical industry there are at least four or five mid-market players that really stand out; it's rarely one of the giant 3PLs. No logistics provider can serve many markets well, regardless of its size."

Hoiland says that most warehouse 3PLs have developed their vertical focus because of their historical customer base, whether that has been food products, chemicals, electronics or other product requiring industry knowledge. More recently, he says these niches have become even more focused to include pharmaceutical fulfillment, electrical parts assembly, and aftermarket auto parts. Final assembly of consumer electronics and other high-end items imported from Asia has become especially important for many West Coast-based 3PLs, according to Hoiland. Manufacturers will source components and parts in various offshore locations, but they don't do final assembly offshore because of piracy concerns. If the foreign supplier doesn't know the whole product, it is harder for it to make knock-offs.

"A 3PL in the U.S. will do the final assembly, so the manufacturer can protect his intellectual property," says Hoiland.

The greatest long-term driver for mid-market 3PLs' growth is the spread of the outsourcing model to manufacturers and retailers of all sizes. Throughout the 1990s, the double-digit growth of the 3PL industry was almost entirely based on the rapid adoption of outsourcing by Fortune 500 companies that as a corporate strategy chose to focus their efforts on their core businesses, not logistics.

"The Fortune 100 and even the Fortune 500 are pretty well saturated in terms of shifting to more logistics outsourcing," says Hoiland. "There is only a four or five percent growth potential there. But beyond the Fortune 500, only about 20 percent of companies have embraced outsourcing, so we see a huge potential among mid-market customers for many years to come."

Mid-market 3PLs are also seeing the disappearance of one of the major barriers to more large-customer business. The cost and complexity of logistics technology used to be a major barrier for mid-market 3PLs trying to serve customers that demanded IT capabilities, but that is no longer the case according to Accenture's Bentz.

"Today, there are excellent web-based, pay-as-you-go solutions that are affordable and easy to integrate into large company systems," says Bentz. "Any mid-sized 3PL can afford to satisfy a client's IT needs. Technology is no longer a cost barrier; it is now a knowledge barrier. Mid-market 3PLs just have to understand their customer's need and then recruit the right people to provide the solution."

And the Negatives
The negative side of the success that mid-market 3PLs are finding includes two market-driven factors: consolidation pressure and more aggressive competition from larger 3PLs.

Ben Gordon, principal in BG Strategic Advisors that provides financial consulting to CEOs in the logistics industry, sees a trend he calls the collapse of the middle.

"Five years ago, there used to be lots of high-quality 3PLs in the $20m to $200m range that controlled about 80 percent of the U.S. logistics market," says Gordon. "Many have been acquired by the global multibillion-dollar giants, and this trend will continue. In the next five years, the global 3PLs will control at least 50 percent of the U.S. market, mainly because of acquisitions."

The IWLA's Joel Hoiland agrees that consolidation has become a powerful trend in the industry, but he believes that it will be tempered by the verticalization that most mid-market 3PLs have adopted. He says that customers are so oriented around vertical needs that broad-based consolidation is just not going to happen.

"If success in warehouse logistics were only a matter of owning the most facilities in the most markets, a giant like UPS with $3bn in available cash could just buy up the whole industry," he says. "There is going to be consolidation, but it will be vertical by vertical with three to five major players remaining in each space."

 

DSi Has the Right Prescription for Sanofi-Aventis
For pharmaceutical companies, one of their most powerful marketing promotion tools is providing samples of new products to thousands of physicians around the U.S. through their field sales forces. Managing the logistics of these drug rollouts, however, can be expensive and risky if not handled with flawless precision. The drug company must deliver the pharmaceutical samples and literature to sales representatives at residential addresses throughout the United States while complying with the Prescription Drug Marketing Act (PDMA), which requires a documented chain of custody at every stage of the process. Deliveries must be made by appointment to residential addresses in order to keep the representatives in the field as much as possible.

For Michael DeMartin, manager of samples and promotional material fulfillment for Sanofi-Aventis, in Bridgewater, N.J., these promotions entail about 40,000 shipments a year, and each one has to be closely monitored to meet regulatory guidelines.

"Our company is legally responsible for controlling each delivery even if we have a third-party logistics provider actually handling the process," says DeMartin.

After trying various service vendors that did not meet his service requirements, DeMartin started looking for a 3PL almost two years ago. He says that he learned about Traverse city, Mich.-based Distribution Solutions International (DSi) at a pharmaceutical industry convention and was impressed with its professionalism.

"DSi's specialists were enthusiastically participating in the workshops to understand the issues pharma companies are facing," says DeMartin. "I could see that they clearly understood the regulations and would have the customer service orientation that I was looking for."

Ultimately, DeMartin says that he selected DSi because of its 99-percent-plus on-time delivery record, and its reputation as the leader in pharmaceutical sample distribution management. DSi manages over 24,000 pharmaceutical sample deliveries each month for five of the top 10 pharma companies in the U.S., which have over 50,000 sales representatives requiring residential delivery.

In January 2004, DSi started to provide sample shipment preparation, linehaul and appointment deliveries for Sanofi-Aventis's entire sales force.

"DSi provides a complete solution," says DeMartin. "I call up DSi about two weeks before I have a promotional campaign, and they take it from there."

Delivery orders to field sales reps are entered electronically through DSi's proprietary technology. DSi analyzes the order, creates the optimum linehaul plan, transmits a picking order to the two Aventis distribution centers handling sample fulfillment and then arranges the packaging and transportation to local markets. Local delivery vendors are notified of incoming freight and set up delivery appointments with sales representatives. When the delivery is made, the delivery vendor receives a signed proof of delivery document that fulfills the chain of custody requirements of the PDMA. A unique feature of DSi's process is that deliveries can be recalled or redirected at any point in the distribution process, saving time and money when a sales representative transfers, leaves the company or changes an order.

DSi selects its local delivery vendors according to strict criteria. Standard operating procedures are in place for each client nationwide to insure that all requirements are understood and satisfied.

Sanofi-Aventis has an especially demanding two-hour window for each delivery, but over 75 percent of these deliveries occur in the first hour.

DeMartin lists three attributes that make DSi stand out:

Technology: "DSi has a technology in place that is built specifically for sample distribution," says DeMartin. "We have order status visibility continuously throughout the entire distribution process, and so do our sales reps. Our reps have more time doing sales work, not waiting at home for deliveries."

Order visibility is provided 24/7/365 through DSi's secure web-based Client Central application. Drill-down reporting capabilities allow clients to access information in any format required.

"These reports have helped us fine-tune our delivery scheduled for each sales rep resulting in savings of thousands of dollars," according to DeMartin. He says it costs about the same to send one box as it does multiple boxes. "We consolidate sample shipments for reps that don't distribute high volumes."

Compliance: "DSi works with most of the major pharma companies, which all have the same regulatory requirements," says DeMartin. "DSi has the process down pat." DSi provides complete and documented chain of custody throughout the distribution process to meet all PDMA regulations. DSi maintains a rate of over 99.5 percent proof of delivery on-hand within 48 hours and less than 0.5 percent over, short and damaged for all pharmaceutical deliveries.

"DSi tracks every single box from the time it leaves our DC to the time the sales rep signs for it," says DeMartin. "They are good at tracking down any in-transit losses."

Customer service: "DSi has the right people in place, and they keep them trained," says DeMartin. "They train their customer service reps, their account managers and their project managers. No matter who I am dealing with, they know my needs and I get the same level of customer service, which is outstanding."


Nevertheless, Gordon sees the major 3PLs become much more aggressive in going after the mid-market customers who have become more interested in outsourcing.

"The primary reason that the whole 3PL industry is seeing about 15 percent annual growth is that outsourcing is growing at least 12 percent annually," says Gordon, adding that this growth is mainly from mid-market customers. "The large 3PLs have developed strategies to capture a large part of this new business."

In the past, large 3PLs did not find small and mid-sized customers profitable enough to bother with, but according to Gordon, the large 3PLs are using technology to cut internal operating costs so they can target smaller customers. For example, Gordon says that Schneider Logistics used to limit its customer base to those with more than $50m in annual transportation spend because of the cost of integrating the technology to support a new customer. Now Schneider has a web-based system called MySummit that is easy to implement, even for relatively smaller customers with as little as $5m in transportation spend.

"New technology makes for a lower breakeven point for large 3PLs," says Gordon. "They are competing in the marketplace that small competitors previously dominated, and the large players are taking this market share."

Dynamics for 3PL Segments
Besides the generalized positives and negatives impacting mid-market 3PLs, each segment of the industry has its own dynamics. For example, Accenture's Brooks Bentz says that mid-market warehousing 3PLs have competed effectively with the large players because there is little economy of scale in contract warehousing. Each customer has its own operating practices, hiring needs, technology and training, so the 3PL has to customize for each customer.

"The big players may be large in scope and scale, but they still have to create one-off solutions for each customer, and their size gives them no competitive advantage. It can actually be a hindrance."

For example, Ray Pickering, president of the warehouse 3PL Commodity Logistics with facilities in Ohio and California, says that being a niche player in the mid-market is an excellent position for his company.

"As a niche market player, we can differentiate ourselves from the large 3PLs with our premium, hands-on service capabilities," he says. "We show customers that we can do value-added logistics that the large guys usually can't do with the flexibility that a fast-changing marketplace requires."

Among the specialized services that Commodity provides is adding value to Asian imports for manufacturers coming through the ports of Los Angeles/Long Beach at its four-million-square foot DC in Ontario, Calif. After de-vanning containers, Commodity processes orders bound for all the major retailers such as Wal-Mart, Kmart and Target. Each of these retailers has unique requirements, so Commodity will provide the customized labeling, packaging, consolidation and delivery compliance that each demands.

"The requirement may be as simple as labeling or shrink-wrapping each package, or we may have to do complete customized packaging of each product, label the inner case and consolidate full truckloads for a specific DC," he says. "We are also applying RFID tags under a pilot program for some of the big retailers. We do whatever the customer requires, and change those requirements as quickly as necessary."

Growth Without Risk?
Thus, the dilemma for the most successful mid-market warehouse 3PLs is how to grow the business without taking on additional risk. Although warehouse 3PLs are having the best year in recent history and are optimistic about the near future, Hoiland says that the companies in this space have learned to be cautious about growing too quickly.

"Most mid-market players prefer to grow organically," says Hoiland. "They are pretty comfortable with the economy, despite concerns about inflation, interest rates and fuel costs, but they are not building a lot of new capacity. The largest players in this group that are funded by private equity firms are the ones most likely to grow by acquisition."

Indeed, in the last year or two, private equity firms have been extremely active in acquiring mid-market 3PLs, including both warehouse and transportation providers. As examples, Ben Gordon points to Reliant Equity buying Air-Road, Welsh Carson buying OH Logistics, Warburg Pincus buying New Breed and Fenway Partners acquiring Panther II Transportation.

"Private equity firms love consolidation of niche businesses, and they clearly like what they see in the 3PL sector," says Gordon, who has taken part in a number of such deals himself. "Expect to see many more of these in the near future."

Richard Armstrong, president of Armstrong & Associates, the leading researcher following the 3PL industry, agrees that the mid-market warehouse 3PLs are in a tricky position. They are doing quite well right now, but in the long run, they are likely to be at a disadvantage to their larger competitors. He says that the strongest players in the warehouse mid-market, such as Kenco, Genco, Weber Distribution, Saddlecreek, Jacobson, and other privately owned 3PLs, are so successful that they are not seriously entertaining the constant buyout overtures.

"They compete very well with the larger players on contract distribution operations," says Armstrong. "Where they begin to have problems is when a customer's request for proposal (RFP) includes a global element to it."

Armstrong says that any large customer that has significant global business is likely to single-source his warehouse logistics to a larger 3PL that can operate globally as well as domestically. He adds that mid-market 3PLs also have a brand recognition problem. Large customers increasingly will limit their RFPs to those 3PLs they know the best.

"Mid-market players do not have the customer awareness to get on these lists," says Armstrong. "At some point, even the most successful mid-market warehouse 3PLs will hit a ceiling, and they will have to make some tough decisions."

Bentz agrees that largest of the mid-market players are going to have the most difficulty because they are competing head-on with the billion-dollar 3PLs. Customers are pressuring them to broaden service offerings and their global footprint, but few have the ability to makes these expansions.

 

Invacare Finds Healthy Gains with Unyson TMS Services
With $1.4bn in sales, Invacare is the leader in the $6bn market for home medical products, including wheel chairs, respirators, ostomy products, and many more.

Both inbound and outbound freight have become a growing expense category for Invacare because some of its freight has traditionally moved as less than truckload (LTL) or package express. Invacare has always prepaid its outbound freight to customers, while the inbound was viewed as just part of the invoice price of purchased materials and products.

"With LTL rates constantly rising, freight costs were cutting into our margins," says Carrie Messer, director of logistics for Elyria, Ohio-based Invacare. "Something had to change,"

To route and rate its outbound shipments to over 15,000 independent, home medical equipment providers, Invacare had relied primarily on an in-house "rate-shopping" system that essentially compared small package rates against various LTL carriers.

"We became so comfortable with current carrier relationships that we were not optimizing our freight opportunities," says Messer. "We needed an approach that took us outside our comfort zone, so we could see what is really available to us."

Messer looked for a mid-sized 3PL to help with these issues, and found it within a large 3PL she had been using for years primarily for its intermodal services. The Hub Group, known mainly as an intermodal marketing company, has long offered transportation management and other logistics services, but these were a small part of the company's overall business. This summer, the Hub Group spun-off its 3PL services as a separate provider called Unyson.

The relaunched 3PL offered Invacare separate solutions for its inbound and outbound freight. For the outbound freight, Unyson conducted a reverse auction on all of its routes among Invacare's best carriers and some that Unyson suggested. The freight auction allowed Invacare to present its freight volumes to carriers in an organized fashion that would allow the carriers to provide the most competitive volume rates.

"We were looking for some cooperation from our carriers, and it looks like we are getting it," says Messer, adding that she expects to realize about 10 percent savings from the bid process. "Our primary focus remains on providing the best service we can offer our customers, but have to deal with the ever-rising cost of freight."

For its supplier freight, Unyson has enabled Invacare to embark on a full-fledged inbound routing program for every shipment from its suppliers.

"We never had a formal inbound program before," says Messer.

Like many manufacturers, Invacare provided its suppliers with a routing guide listing carriers with which it had good rates and service, but the guide was rarely used. When vendors received a purchase order from Invacare, they shipped each order separately with the carriers they chose. Invacare did not select the carriers, nor was it able to find consolidation opportunities.

According to Messer, carriers were picking up LTL twice a day from the same supplier and then separately delivering both shipments to Invacare the next day. Carriers would pass each other in the Invacare parking lot coming from the same supplier.

"It was very inefficient, but we did not have a system for dealing with our supplier freight," says Messer.

Unyson is now using its hosted, web-based inbound freight transportation system to manage inbound shipments per month from some suppliers.

When a supplier is ready to fulfill a purchase order from Invacare, it goes to the Unyson web site and posts the shipment. The system selects the optimal carrier for each shipment based on rates and service and then sends an electronic notice to the supplier specifying the carrier and mode. The order is tendered electronically to that carrier.

Already, Invacare is seeing a large shift from individual small package express shipments to consolidated LTL shipments and to truckload consolidations, which is the most economical mode.

In the past, a supplier could have sent an 11,000-pound shipment by LTL when it could have been a truckload (TL) shipment by itself. Now, each shipment is optimized and wherever possible, shipments are consolidated into the most economical quantities.

"We expect to save the most money from using more TL stop-off services," says Messer, who adds that as much as 20 percent of the inbound could be converted to TL service. "We are expecting to save between 15 and 18 percent with the inbound program, which will be a big win for us."

Besides saving a substantial amount on its freight costs, Invacare gains total supply chain visibility of its purchase orders and shipments with Unyson's inbound program. The same system that optimizes the rating and routing tracks the freight.

"From the time the purchase order is made, we have visibility into the order until the shipment is delivered to us," says Messer. "This visibility will greatly enhance our internal supply chain efficiency."


"The smaller niche players are in a better position because they compete with a limited number of similar companies," he says. "Of course, that niche can't be too crowded and they must have specialized knowledge. If they also have low-fixed costs and overhead, no debt and steady growth, they are well positioned."

Profitable mid-market 3PLs should be very cautious about trying to grow through acquisition, according to Bentz, who says that companies invariably underestimate the pain, cost and disruption of integrating acquisitions.

"Steady organic growth allows companies to maintain margins and service stability," he says. "Rapid growth through acquisition always excites a CEO, but it can create serious overhead problems when the economy sours."

Big Times for Brokers
While warehouse 3PLs are doing well, Armstrong says that the mid-market, non-asset 3PLs, including brokerage and transportation management providers, are having the strongest performance right now.

Given customers' need for finding capacity and small carriers' need to be under load at all times, these 3PLs that match the two are thriving. Armstrong says that well-established brokers, which earn a portion of the total freight bill as commissions, are earning gross margins of at least 15 percent and often double that figure in certain markets.

"Not only are they making good money, but all of them are receiving frequent phone calls from larger competitors or investors about being bought," says Armstrong. "The transportation management 3PLs that just earn fees from their customers are doing okay, but the brokers are making the best returns right now. On a regional basis, they can go head-to-head with the very big players such as C.H. Robinson. They just don't have the coverage or depth that the big ones do."

One mid-market broker that is thriving right now is Total Quality Logistics. Based in Milford, Ohio, TQL is a truck broker that has its roots in the produce and refrigerated business, but is moving more and more into dry freight. According to its executive vice president, Kerry Byrne, TQL moves 90,000 truckloads a year. The company doubled its revenue last year and will double it again this year.

"What sets us apart is accountability at the account executive level," says Byrne, adding that TQL is one of the few brokers where one account rep is totally responsible for the entire shipment. "They work with customers to find the freight, find the truck and every step in between. Customers appreciate the personal accountability we provide."

To be successful today as a truck broker, a web-based, fully functional accessibility to customers is a necessity. TQL has an online system that helps match loads for its 1,100 customers with equipment from more than 16,500 carriers. Customers can tender loads and track shipments online, or they can use the phone.

"To satisfy large customers like Tropicana and Chiquita Brands, we have to have this type of technology. We built the technology ourselves."

Transportation Management Prospers
While profit margins for transportation management 3PLs are not generally as high as the commissions that brokers receive, the business is more stable and revenues can grow rapidly as more and more customers' freight is under contract.

"For transportation management economies of scope and scale are important because the more volume that moves through the system, the more leverage the 3PL has with carriers," says Accenture's Bentz.

But even for mid-sized transportation management 3PLs, Bentz still sees great regional opportunities.

"We are working with a retailer that just sold off about 40 stores to another company," he says. "That company has no logistics organization in place, so this is a perfect opportunity to outsource the whole transportation requirement to a mid-market 3PL. There is only a moderate amount of volume and it's all regional."

One of the newest names in this sector of the mid-market is Unyson, which was recently spun off from the $1.4bn intermodal provider, Hub Group. According to Unyson executive vice president, Don Maltby, Unyson handles non-intermodal logistics, primarily truck transportation management.

"Potential customers see what they spend on transportation and they ask us if we can help them reduce that amount by 5 percent or more," says Maltby. "We leverage the volume of that customer with the volume of our other customers with carriers we have under contract. We have our own collaborative network."

Maltby believes that this model is more attractive to customers than brokerage because a company like Unyson is essentially working as the customer's transportation department. Its web-based systems are integrated into the customer's system as if they were part of the company. Charges are predictable and are either a set management fee or a per-shipment transaction fee.

"From the customer's standpoint, brokerage is transactional," says Maltby. "They are handling a movement from A to B. As a transportation management 3PL, we are handling load consolidation, mode conversion, negotiating LTL prices, shipping airfreight and providing full supply chain visibility and metrics to corporate management. Ours is a much more complex business that not many mid-market or larger 3PLs can handle well. We have a solid niche."

 

Redback Networks Finds Savings and Reliability with DW Morgan
After the tech bubble burst in 2001, cost pressures forced changes on how suppliers of internet and telecom hardware managed their supply chains. Redback Networks, the San Jose, Calif.-based global supplier of equipment for broadband networks, brought in Ebrahim Abassi as its senior vice president of operations, information technology and customer service to transform supply chain operations to meet these new challenges.

Abassi's plan centered on creating a more leveraged operation, so as many activities as possible were outsourced to the least number of suppliers.

"Our philosophy is to keep in-house only those activities that change customer buying behavior such as design, quality control and testing," says Abassi. "Everything else is outsourced, including manufacturing and logistics."

According to Abassi, the company held an enormous amount of inventory at nearly 50 depots around the world, and it employed dozens of people to manage the inventory and fulfill orders. At the same time, Redback has service level agreements (SLAs) with customers that guarantee new parts delivery in as little as four hours. Redback's widely dispersed distribution network was actually limiting its ability to meet SLA requirements. Abassi's first action to reign in the high supply chain costs and improve service response was to reduce the number of logistics providers.

"We had to devote a great deal of staff and time just to manage the dozens of providers we used," says Abassi. "I wanted to have just one that would reliably handle every aspect of our logistics."

To make the right third-party logistics selection, Abassi considered three factors:

1. Capabilities: The 3PL must have the technology and full-service capabilities, so Redback did not have to buy software, employ people and manage processes. "I wanted a logistics vendor that would do the complete job and just send me the bill," says Abassi.

2. Agility: The network equipment market changes rapidly, so Abassi needed a 3PL that was responsive and flexible enough to deal with the maverick nature of the business.

3. Mindshare: "I want to be able to pick up the phone and talk to the 3PL owner if for some reason my requirements are not met," says Abassi. "Few 3PLs provide this close assurance, but for me it is important."

Redback Networks selected DW Morgan, a $20mn 3PL based in Pleasanton, Calif., to take over the networking company's entire service parts logistics operation to include planning and systems, inventory management, warehousing, distribution operations, order fulfillment and transportation management. When a customer such as Verizon or Bell South has a failed switch or card in a piece of Redback networking equipment, it is totally up to DW Morgan to meet the SLA.

"We no longer have any logistics staff of our own anywhere in the world," says Abassi. "Morgan hired the people it needed from our staff. Even the person who does shipping and receiving in our headquarters now works for Morgan."

As soon as customers report a system failure to Redback's technical assistance desk, they are issued a return material authorization (RMA) that initiates the part replacement process. The RMA is simultaneously sent to Morgan's web-based system that provides inventory visibility across every location. The system determines the optimal location for fulfilling the order, pulls the item and dispatches it with a carrier selected to meet the SLA delivery deadline. When the part is delivered, the failed part is picked up and forwarded to the designated contract manufacturer or repair vendor. In rare cases, the part is sent to Redback for analysis. Morgan's system determines what parts to replenish and when, as well as where they should be stocked.

DW Morgan's web-based system supports a tracking function within Redback's portal, so a customer will know exactly where the part is and when it will arrive, as well as such details as the serial number, whether it's new or rebuilt, its revision number and so on.

"The only direct involvement we have is to issue the RMA to the customer," says Abassi.

Some Redback customers insist on managing the inbound parts delivery themselves using their designated logistics provider, but Abassi is transitioning these customers to the Redback system using DW Morgan.

"When we show them how well it works and how happy our other customers are, they tend to switch," he says.

Since outsourcing its logistics to DW Morgan, Redback has gained the following benefits:

• The total number of depots needed to serve Redback's customers has been cut from 50 to 21, resulting in lower overhead costs. In North America alone, the number of inventory locations has been cut from 28 to 13, which includes two large hubs that service depots around the world.

• Worldwide inventory is visible through a web-based system that allows real-time information to be shared between depots. Overstocking has been eliminated and the total cost of goods in the field has dramatically dropped.

• Fulfillment time is significantly cut, because Redback staff can order immediate replacements online.

• Eligibility of parts under SLA contracts is easily determined, eliminating warranty replacements for non-covered customers and creating new sales opportunities.

In all, DW Morgan's 3PL service to Redback has created cost of goods sold savings of at least 30 percent since it was implemented in 2002.

 

 

When Global 2000 supply chain executives consider third-party logistics providers, they naturally focus on the world's 25 largest 3PLs, which last year posted sales of $97bn and controlled about 30 percent of the world's logistics budget. But for the rest of the supply chain industry, the field of potential 3PLs extends to hundreds of mid-market players with annual sales between about $20m and $200m that specialize in warehousing, brokerage, transportation management and many other niche activities.

"Every segment of the mid-market is thriving nicely with double-digit growth that has not been experienced so widely for some time," says Joel Hoiland, president of the International Warehouse Logistics Association (IWLA), the oldest and perhaps the largest association representing mid-market 3PLs. IWLA membership traditionally has comprised warehousing companies, but it is growing into other outsourcing specialties.

With this newfound success, the mid-market is also finding a certain amount of uncertainty brought on by heightened customer expectations, mergers and acquisitions, consolidation pressures, demands to expand services and geographic coverage, as well as new entrants. These trends have both positive and negative connotations for the industry.

First, the Positives
On the positive side, the mid-market is finding business opportunities even with the largest customers. For example, DW Morgan is a $20m, non-asset-based 3PL based in Pleasanton, Calif., that has found a solid niche with large high-tech customers, even giant companies like Cisco. According to DW Morgan president and chief strategist Grant Opperman, these high-tech customers usually select his company because they need agility and flexible solutions that larger competitors with an established suite of set services cannot offer. Morgan provides its customers whatever they need from transportation management to service parts support to technology implementations.

"We are a pure advocate for the client," says Opperman. "We can act quickly and not be concerned about supporting a lot of assets or big-name software investments. We can hook up systems very quickly to allow all segments of a supply chain to collaborate and to accelerate change. The larger 3PLs don't usually approach their customers this way."

Brooks Bentz, an associate partner in Accenture's supply chain management practice based in Boston, agrees that many large companies have come to prefer mid-sized 3PLs, if only because they will have more leverage with the logistics provider. For example, Bentz helped a global equipment manufacturer select its 3PLs.

"They were a multibillion-dollar company, so they initially wanted to work with one of the largest 3PLs," he says. "We recommended that they look at a selection of medium and large players so they could gain different attributes with both groups. This approach allowed them to exercise much more influence with the $50m 3PL than they could with one $2bn 3PL. We got them to rethink their strategy."

For their global distribution and sourcing around the world, they needed a 3PL with global reach, says Bentz. For their specialized manufacturing in regional markets, they were better off with a local 3PL with whom they could build a custom fit.

Of course, large customers tend to use their size to leverage the lowest possible rates from their 3PLs. Even smaller customers have become accustomed to having a disproportionate amount of bargaining power with their 3PLs. No longer. According to Hoiland, the best part about this new prosperity for IWLA members is that they can now be more selective about the customers they accept.

Weber Squeezes Maximum Performance
Out of Ocean Spray's DC
Ocean Spray is a 75-year-old agricultural cooperative that generated more than $1.4bn in sales last year. Its more than 650 owners are cranberry and grapefruit growers that produce some of the world's best juices and fruit products. To meet its logistics needs, however, Ocean Spray prefers to outsource these operations to 3PLs that know their business as well as the growers know theirs.

Headquartered in Lakeville-Middleboro, Mass., Ocean Spray employs more than 2,000 people worldwide at its receiving stations and processing and bottling plants located throughout the United States and Canada. When Ocean Spray built a bottling plant in Henderson, Nev., in 1998, Kevin Groth, the company's manager of North American warehouse operations, needed to select a 3PL to operate a distribution center that would serve the plant. As part of the selection process, Groth and his team evaluated both large and regional 3PLs using an objective scorecard that considered cost, service, presence in the area, industry experience and systems capabilities. Groth selected Weber Distribution, based in Santa Fe Springs, Calif., to run the new DC that would serve the entire western U.S.

"Weber is one of the largest 3PLs in the region we are serving, but they are not so large that we would be just another customer," says Groth, "We were confident that they would have the scale to provide the complete solution we needed, not just basic storage and distribution that many smaller warehouse operators provide."

Groth says that he was especially focused on systems, best-practice processes and experience to execute all DC operations. Weber met all the requirements.

"We wanted cutting edge technology that would address everyday operations such as receiving, shipping, customer pickups and dealing with carriers," says Groth. "We needed a 3PL that has the knowledge to know what had to be done and the willingness to take full responsibility for making decisions-not wait for us to tell them what to do."

Ocean Spray built the 300,000-square-foot DC about two miles from its bottling plant, and Weber runs all operations, including receiving, put-away, picking, returns, repack, consolidation, shipping and drop-trailer management. The 50-door facility receives and ships product 24/7. Besides receiving product from the nearby bottling plant, the DC receives and ships products for other Ocean Spray plants and co-packers.

A significant amount of the outbound is customer pickups, so Weber also coordinates the shipping appointments. Ocean Spray has outsourced all the other outbound transportation management to a division of C.H. Robinson.

While some customers would call all the operations performed by Weber as value-added services, Groth calls it a total solution.

"I don't like the term value-added services, since that usually is just a term for adding additional charges and costs," says Groth. "The key value we expect from any 3PL is to understand our business and use that knowledge to solve whatever problems arise."

When Weber first started operating the Henderson DC, Groth and his group spent a lot of time measuring performance, including cost per case, fill rate, shortages at the dock, inventory accuracy, damage in the warehouse, safety, etc. Now, Groth says he does periodic performance evaluations to make sure that metrics remain at the high end of company expectations.

"The best metric has always been the noise level from the customer," says Groth, who adds that Weber must be doing right by our customers because complaints are close to zero and returns are minimal.

"We use Weber's operation of this DC as a model for its other facilities and 3PLs," says Groth. "We champion Weber's accomplishments for us, not only within our organization, but with other companies that ask us for 3PL referrals."


"If a 3PL has a problem customer or someone constantly trying to whittle down the rates, the 3PLs are in a position to say that 'maybe we are not the best fit, and you probably should find someone else,'" says Hoiland, adding that this was very different from the period between 2001 and 2003. "There was no such thing as a problem customer then."

Part of the success that mid-market 3PLs now enjoy comes from their focus on industry verticals, which gives them credibility with even the largest customers that traditionally have used the biggest 3PLs.

"It's nice to have great size and geographic reach," says Hoiland, "but big companies increasingly appreciate mid-sized 3PLs that really know the customers' business. In every vertical industry there are at least four or five mid-market players that really stand out; it's rarely one of the giant 3PLs. No logistics provider can serve many markets well, regardless of its size."

Hoiland says that most warehouse 3PLs have developed their vertical focus because of their historical customer base, whether that has been food products, chemicals, electronics or other product requiring industry knowledge. More recently, he says these niches have become even more focused to include pharmaceutical fulfillment, electrical parts assembly, and aftermarket auto parts. Final assembly of consumer electronics and other high-end items imported from Asia has become especially important for many West Coast-based 3PLs, according to Hoiland. Manufacturers will source components and parts in various offshore locations, but they don't do final assembly offshore because of piracy concerns. If the foreign supplier doesn't know the whole product, it is harder for it to make knock-offs.

"A 3PL in the U.S. will do the final assembly, so the manufacturer can protect his intellectual property," says Hoiland.

The greatest long-term driver for mid-market 3PLs' growth is the spread of the outsourcing model to manufacturers and retailers of all sizes. Throughout the 1990s, the double-digit growth of the 3PL industry was almost entirely based on the rapid adoption of outsourcing by Fortune 500 companies that as a corporate strategy chose to focus their efforts on their core businesses, not logistics.

"The Fortune 100 and even the Fortune 500 are pretty well saturated in terms of shifting to more logistics outsourcing," says Hoiland. "There is only a four or five percent growth potential there. But beyond the Fortune 500, only about 20 percent of companies have embraced outsourcing, so we see a huge potential among mid-market customers for many years to come."

Mid-market 3PLs are also seeing the disappearance of one of the major barriers to more large-customer business. The cost and complexity of logistics technology used to be a major barrier for mid-market 3PLs trying to serve customers that demanded IT capabilities, but that is no longer the case according to Accenture's Bentz.

"Today, there are excellent web-based, pay-as-you-go solutions that are affordable and easy to integrate into large company systems," says Bentz. "Any mid-sized 3PL can afford to satisfy a client's IT needs. Technology is no longer a cost barrier; it is now a knowledge barrier. Mid-market 3PLs just have to understand their customer's need and then recruit the right people to provide the solution."

And the Negatives
The negative side of the success that mid-market 3PLs are finding includes two market-driven factors: consolidation pressure and more aggressive competition from larger 3PLs.

Ben Gordon, principal in BG Strategic Advisors that provides financial consulting to CEOs in the logistics industry, sees a trend he calls the collapse of the middle.

"Five years ago, there used to be lots of high-quality 3PLs in the $20m to $200m range that controlled about 80 percent of the U.S. logistics market," says Gordon. "Many have been acquired by the global multibillion-dollar giants, and this trend will continue. In the next five years, the global 3PLs will control at least 50 percent of the U.S. market, mainly because of acquisitions."

The IWLA's Joel Hoiland agrees that consolidation has become a powerful trend in the industry, but he believes that it will be tempered by the verticalization that most mid-market 3PLs have adopted. He says that customers are so oriented around vertical needs that broad-based consolidation is just not going to happen.

"If success in warehouse logistics were only a matter of owning the most facilities in the most markets, a giant like UPS with $3bn in available cash could just buy up the whole industry," he says. "There is going to be consolidation, but it will be vertical by vertical with three to five major players remaining in each space."

 

DSi Has the Right Prescription for Sanofi-Aventis
For pharmaceutical companies, one of their most powerful marketing promotion tools is providing samples of new products to thousands of physicians around the U.S. through their field sales forces. Managing the logistics of these drug rollouts, however, can be expensive and risky if not handled with flawless precision. The drug company must deliver the pharmaceutical samples and literature to sales representatives at residential addresses throughout the United States while complying with the Prescription Drug Marketing Act (PDMA), which requires a documented chain of custody at every stage of the process. Deliveries must be made by appointment to residential addresses in order to keep the representatives in the field as much as possible.

For Michael DeMartin, manager of samples and promotional material fulfillment for Sanofi-Aventis, in Bridgewater, N.J., these promotions entail about 40,000 shipments a year, and each one has to be closely monitored to meet regulatory guidelines.

"Our company is legally responsible for controlling each delivery even if we have a third-party logistics provider actually handling the process," says DeMartin.

After trying various service vendors that did not meet his service requirements, DeMartin started looking for a 3PL almost two years ago. He says that he learned about Traverse city, Mich.-based Distribution Solutions International (DSi) at a pharmaceutical industry convention and was impressed with its professionalism.

"DSi's specialists were enthusiastically participating in the workshops to understand the issues pharma companies are facing," says DeMartin. "I could see that they clearly understood the regulations and would have the customer service orientation that I was looking for."

Ultimately, DeMartin says that he selected DSi because of its 99-percent-plus on-time delivery record, and its reputation as the leader in pharmaceutical sample distribution management. DSi manages over 24,000 pharmaceutical sample deliveries each month for five of the top 10 pharma companies in the U.S., which have over 50,000 sales representatives requiring residential delivery.

In January 2004, DSi started to provide sample shipment preparation, linehaul and appointment deliveries for Sanofi-Aventis's entire sales force.

"DSi provides a complete solution," says DeMartin. "I call up DSi about two weeks before I have a promotional campaign, and they take it from there."

Delivery orders to field sales reps are entered electronically through DSi's proprietary technology. DSi analyzes the order, creates the optimum linehaul plan, transmits a picking order to the two Aventis distribution centers handling sample fulfillment and then arranges the packaging and transportation to local markets. Local delivery vendors are notified of incoming freight and set up delivery appointments with sales representatives. When the delivery is made, the delivery vendor receives a signed proof of delivery document that fulfills the chain of custody requirements of the PDMA. A unique feature of DSi's process is that deliveries can be recalled or redirected at any point in the distribution process, saving time and money when a sales representative transfers, leaves the company or changes an order.

DSi selects its local delivery vendors according to strict criteria. Standard operating procedures are in place for each client nationwide to insure that all requirements are understood and satisfied.

Sanofi-Aventis has an especially demanding two-hour window for each delivery, but over 75 percent of these deliveries occur in the first hour.

DeMartin lists three attributes that make DSi stand out:

Technology: "DSi has a technology in place that is built specifically for sample distribution," says DeMartin. "We have order status visibility continuously throughout the entire distribution process, and so do our sales reps. Our reps have more time doing sales work, not waiting at home for deliveries."

Order visibility is provided 24/7/365 through DSi's secure web-based Client Central application. Drill-down reporting capabilities allow clients to access information in any format required.

"These reports have helped us fine-tune our delivery scheduled for each sales rep resulting in savings of thousands of dollars," according to DeMartin. He says it costs about the same to send one box as it does multiple boxes. "We consolidate sample shipments for reps that don't distribute high volumes."

Compliance: "DSi works with most of the major pharma companies, which all have the same regulatory requirements," says DeMartin. "DSi has the process down pat." DSi provides complete and documented chain of custody throughout the distribution process to meet all PDMA regulations. DSi maintains a rate of over 99.5 percent proof of delivery on-hand within 48 hours and less than 0.5 percent over, short and damaged for all pharmaceutical deliveries.

"DSi tracks every single box from the time it leaves our DC to the time the sales rep signs for it," says DeMartin. "They are good at tracking down any in-transit losses."

Customer service: "DSi has the right people in place, and they keep them trained," says DeMartin. "They train their customer service reps, their account managers and their project managers. No matter who I am dealing with, they know my needs and I get the same level of customer service, which is outstanding."


Nevertheless, Gordon sees the major 3PLs become much more aggressive in going after the mid-market customers who have become more interested in outsourcing.

"The primary reason that the whole 3PL industry is seeing about 15 percent annual growth is that outsourcing is growing at least 12 percent annually," says Gordon, adding that this growth is mainly from mid-market customers. "The large 3PLs have developed strategies to capture a large part of this new business."

In the past, large 3PLs did not find small and mid-sized customers profitable enough to bother with, but according to Gordon, the large 3PLs are using technology to cut internal operating costs so they can target smaller customers. For example, Gordon says that Schneider Logistics used to limit its customer base to those with more than $50m in annual transportation spend because of the cost of integrating the technology to support a new customer. Now Schneider has a web-based system called MySummit that is easy to implement, even for relatively smaller customers with as little as $5m in transportation spend.

"New technology makes for a lower breakeven point for large 3PLs," says Gordon. "They are competing in the marketplace that small competitors previously dominated, and the large players are taking this market share."

Dynamics for 3PL Segments
Besides the generalized positives and negatives impacting mid-market 3PLs, each segment of the industry has its own dynamics. For example, Accenture's Brooks Bentz says that mid-market warehousing 3PLs have competed effectively with the large players because there is little economy of scale in contract warehousing. Each customer has its own operating practices, hiring needs, technology and training, so the 3PL has to customize for each customer.

"The big players may be large in scope and scale, but they still have to create one-off solutions for each customer, and their size gives them no competitive advantage. It can actually be a hindrance."

For example, Ray Pickering, president of the warehouse 3PL Commodity Logistics with facilities in Ohio and California, says that being a niche player in the mid-market is an excellent position for his company.

"As a niche market player, we can differentiate ourselves from the large 3PLs with our premium, hands-on service capabilities," he says. "We show customers that we can do value-added logistics that the large guys usually can't do with the flexibility that a fast-changing marketplace requires."

Among the specialized services that Commodity provides is adding value to Asian imports for manufacturers coming through the ports of Los Angeles/Long Beach at its four-million-square foot DC in Ontario, Calif. After de-vanning containers, Commodity processes orders bound for all the major retailers such as Wal-Mart, Kmart and Target. Each of these retailers has unique requirements, so Commodity will provide the customized labeling, packaging, consolidation and delivery compliance that each demands.

"The requirement may be as simple as labeling or shrink-wrapping each package, or we may have to do complete customized packaging of each product, label the inner case and consolidate full truckloads for a specific DC," he says. "We are also applying RFID tags under a pilot program for some of the big retailers. We do whatever the customer requires, and change those requirements as quickly as necessary."

Growth Without Risk?
Thus, the dilemma for the most successful mid-market warehouse 3PLs is how to grow the business without taking on additional risk. Although warehouse 3PLs are having the best year in recent history and are optimistic about the near future, Hoiland says that the companies in this space have learned to be cautious about growing too quickly.

"Most mid-market players prefer to grow organically," says Hoiland. "They are pretty comfortable with the economy, despite concerns about inflation, interest rates and fuel costs, but they are not building a lot of new capacity. The largest players in this group that are funded by private equity firms are the ones most likely to grow by acquisition."

Indeed, in the last year or two, private equity firms have been extremely active in acquiring mid-market 3PLs, including both warehouse and transportation providers. As examples, Ben Gordon points to Reliant Equity buying Air-Road, Welsh Carson buying OH Logistics, Warburg Pincus buying New Breed and Fenway Partners acquiring Panther II Transportation.

"Private equity firms love consolidation of niche businesses, and they clearly like what they see in the 3PL sector," says Gordon, who has taken part in a number of such deals himself. "Expect to see many more of these in the near future."

Richard Armstrong, president of Armstrong & Associates, the leading researcher following the 3PL industry, agrees that the mid-market warehouse 3PLs are in a tricky position. They are doing quite well right now, but in the long run, they are likely to be at a disadvantage to their larger competitors. He says that the strongest players in the warehouse mid-market, such as Kenco, Genco, Weber Distribution, Saddlecreek, Jacobson, and other privately owned 3PLs, are so successful that they are not seriously entertaining the constant buyout overtures.

"They compete very well with the larger players on contract distribution operations," says Armstrong. "Where they begin to have problems is when a customer's request for proposal (RFP) includes a global element to it."

Armstrong says that any large customer that has significant global business is likely to single-source his warehouse logistics to a larger 3PL that can operate globally as well as domestically. He adds that mid-market 3PLs also have a brand recognition problem. Large customers increasingly will limit their RFPs to those 3PLs they know the best.

"Mid-market players do not have the customer awareness to get on these lists," says Armstrong. "At some point, even the most successful mid-market warehouse 3PLs will hit a ceiling, and they will have to make some tough decisions."

Bentz agrees that largest of the mid-market players are going to have the most difficulty because they are competing head-on with the billion-dollar 3PLs. Customers are pressuring them to broaden service offerings and their global footprint, but few have the ability to makes these expansions.

 

Invacare Finds Healthy Gains with Unyson TMS Services
With $1.4bn in sales, Invacare is the leader in the $6bn market for home medical products, including wheel chairs, respirators, ostomy products, and many more.

Both inbound and outbound freight have become a growing expense category for Invacare because some of its freight has traditionally moved as less than truckload (LTL) or package express. Invacare has always prepaid its outbound freight to customers, while the inbound was viewed as just part of the invoice price of purchased materials and products.

"With LTL rates constantly rising, freight costs were cutting into our margins," says Carrie Messer, director of logistics for Elyria, Ohio-based Invacare. "Something had to change,"

To route and rate its outbound shipments to over 15,000 independent, home medical equipment providers, Invacare had relied primarily on an in-house "rate-shopping" system that essentially compared small package rates against various LTL carriers.

"We became so comfortable with current carrier relationships that we were not optimizing our freight opportunities," says Messer. "We needed an approach that took us outside our comfort zone, so we could see what is really available to us."

Messer looked for a mid-sized 3PL to help with these issues, and found it within a large 3PL she had been using for years primarily for its intermodal services. The Hub Group, known mainly as an intermodal marketing company, has long offered transportation management and other logistics services, but these were a small part of the company's overall business. This summer, the Hub Group spun-off its 3PL services as a separate provider called Unyson.

The relaunched 3PL offered Invacare separate solutions for its inbound and outbound freight. For the outbound freight, Unyson conducted a reverse auction on all of its routes among Invacare's best carriers and some that Unyson suggested. The freight auction allowed Invacare to present its freight volumes to carriers in an organized fashion that would allow the carriers to provide the most competitive volume rates.

"We were looking for some cooperation from our carriers, and it looks like we are getting it," says Messer, adding that she expects to realize about 10 percent savings from the bid process. "Our primary focus remains on providing the best service we can offer our customers, but have to deal with the ever-rising cost of freight."

For its supplier freight, Unyson has enabled Invacare to embark on a full-fledged inbound routing program for every shipment from its suppliers.

"We never had a formal inbound program before," says Messer.

Like many manufacturers, Invacare provided its suppliers with a routing guide listing carriers with which it had good rates and service, but the guide was rarely used. When vendors received a purchase order from Invacare, they shipped each order separately with the carriers they chose. Invacare did not select the carriers, nor was it able to find consolidation opportunities.

According to Messer, carriers were picking up LTL twice a day from the same supplier and then separately delivering both shipments to Invacare the next day. Carriers would pass each other in the Invacare parking lot coming from the same supplier.

"It was very inefficient, but we did not have a system for dealing with our supplier freight," says Messer.

Unyson is now using its hosted, web-based inbound freight transportation system to manage inbound shipments per month from some suppliers.

When a supplier is ready to fulfill a purchase order from Invacare, it goes to the Unyson web site and posts the shipment. The system selects the optimal carrier for each shipment based on rates and service and then sends an electronic notice to the supplier specifying the carrier and mode. The order is tendered electronically to that carrier.

Already, Invacare is seeing a large shift from individual small package express shipments to consolidated LTL shipments and to truckload consolidations, which is the most economical mode.

In the past, a supplier could have sent an 11,000-pound shipment by LTL when it could have been a truckload (TL) shipment by itself. Now, each shipment is optimized and wherever possible, shipments are consolidated into the most economical quantities.

"We expect to save the most money from using more TL stop-off services," says Messer, who adds that as much as 20 percent of the inbound could be converted to TL service. "We are expecting to save between 15 and 18 percent with the inbound program, which will be a big win for us."

Besides saving a substantial amount on its freight costs, Invacare gains total supply chain visibility of its purchase orders and shipments with Unyson's inbound program. The same system that optimizes the rating and routing tracks the freight.

"From the time the purchase order is made, we have visibility into the order until the shipment is delivered to us," says Messer. "This visibility will greatly enhance our internal supply chain efficiency."


"The smaller niche players are in a better position because they compete with a limited number of similar companies," he says. "Of course, that niche can't be too crowded and they must have specialized knowledge. If they also have low-fixed costs and overhead, no debt and steady growth, they are well positioned."

Profitable mid-market 3PLs should be very cautious about trying to grow through acquisition, according to Bentz, who says that companies invariably underestimate the pain, cost and disruption of integrating acquisitions.

"Steady organic growth allows companies to maintain margins and service stability," he says. "Rapid growth through acquisition always excites a CEO, but it can create serious overhead problems when the economy sours."

Big Times for Brokers
While warehouse 3PLs are doing well, Armstrong says that the mid-market, non-asset 3PLs, including brokerage and transportation management providers, are having the strongest performance right now.

Given customers' need for finding capacity and small carriers' need to be under load at all times, these 3PLs that match the two are thriving. Armstrong says that well-established brokers, which earn a portion of the total freight bill as commissions, are earning gross margins of at least 15 percent and often double that figure in certain markets.

"Not only are they making good money, but all of them are receiving frequent phone calls from larger competitors or investors about being bought," says Armstrong. "The transportation management 3PLs that just earn fees from their customers are doing okay, but the brokers are making the best returns right now. On a regional basis, they can go head-to-head with the very big players such as C.H. Robinson. They just don't have the coverage or depth that the big ones do."

One mid-market broker that is thriving right now is Total Quality Logistics. Based in Milford, Ohio, TQL is a truck broker that has its roots in the produce and refrigerated business, but is moving more and more into dry freight. According to its executive vice president, Kerry Byrne, TQL moves 90,000 truckloads a year. The company doubled its revenue last year and will double it again this year.

"What sets us apart is accountability at the account executive level," says Byrne, adding that TQL is one of the few brokers where one account rep is totally responsible for the entire shipment. "They work with customers to find the freight, find the truck and every step in between. Customers appreciate the personal accountability we provide."

To be successful today as a truck broker, a web-based, fully functional accessibility to customers is a necessity. TQL has an online system that helps match loads for its 1,100 customers with equipment from more than 16,500 carriers. Customers can tender loads and track shipments online, or they can use the phone.

"To satisfy large customers like Tropicana and Chiquita Brands, we have to have this type of technology. We built the technology ourselves."

Transportation Management Prospers
While profit margins for transportation management 3PLs are not generally as high as the commissions that brokers receive, the business is more stable and revenues can grow rapidly as more and more customers' freight is under contract.

"For transportation management economies of scope and scale are important because the more volume that moves through the system, the more leverage the 3PL has with carriers," says Accenture's Bentz.

But even for mid-sized transportation management 3PLs, Bentz still sees great regional opportunities.

"We are working with a retailer that just sold off about 40 stores to another company," he says. "That company has no logistics organization in place, so this is a perfect opportunity to outsource the whole transportation requirement to a mid-market 3PL. There is only a moderate amount of volume and it's all regional."

One of the newest names in this sector of the mid-market is Unyson, which was recently spun off from the $1.4bn intermodal provider, Hub Group. According to Unyson executive vice president, Don Maltby, Unyson handles non-intermodal logistics, primarily truck transportation management.

"Potential customers see what they spend on transportation and they ask us if we can help them reduce that amount by 5 percent or more," says Maltby. "We leverage the volume of that customer with the volume of our other customers with carriers we have under contract. We have our own collaborative network."

Maltby believes that this model is more attractive to customers than brokerage because a company like Unyson is essentially working as the customer's transportation department. Its web-based systems are integrated into the customer's system as if they were part of the company. Charges are predictable and are either a set management fee or a per-shipment transaction fee.

"From the customer's standpoint, brokerage is transactional," says Maltby. "They are handling a movement from A to B. As a transportation management 3PL, we are handling load consolidation, mode conversion, negotiating LTL prices, shipping airfreight and providing full supply chain visibility and metrics to corporate management. Ours is a much more complex business that not many mid-market or larger 3PLs can handle well. We have a solid niche."

 

Redback Networks Finds Savings and Reliability with DW Morgan
After the tech bubble burst in 2001, cost pressures forced changes on how suppliers of internet and telecom hardware managed their supply chains. Redback Networks, the San Jose, Calif.-based global supplier of equipment for broadband networks, brought in Ebrahim Abassi as its senior vice president of operations, information technology and customer service to transform supply chain operations to meet these new challenges.

Abassi's plan centered on creating a more leveraged operation, so as many activities as possible were outsourced to the least number of suppliers.

"Our philosophy is to keep in-house only those activities that change customer buying behavior such as design, quality control and testing," says Abassi. "Everything else is outsourced, including manufacturing and logistics."

According to Abassi, the company held an enormous amount of inventory at nearly 50 depots around the world, and it employed dozens of people to manage the inventory and fulfill orders. At the same time, Redback has service level agreements (SLAs) with customers that guarantee new parts delivery in as little as four hours. Redback's widely dispersed distribution network was actually limiting its ability to meet SLA requirements. Abassi's first action to reign in the high supply chain costs and improve service response was to reduce the number of logistics providers.

"We had to devote a great deal of staff and time just to manage the dozens of providers we used," says Abassi. "I wanted to have just one that would reliably handle every aspect of our logistics."

To make the right third-party logistics selection, Abassi considered three factors:

1. Capabilities: The 3PL must have the technology and full-service capabilities, so Redback did not have to buy software, employ people and manage processes. "I wanted a logistics vendor that would do the complete job and just send me the bill," says Abassi.

2. Agility: The network equipment market changes rapidly, so Abassi needed a 3PL that was responsive and flexible enough to deal with the maverick nature of the business.

3. Mindshare: "I want to be able to pick up the phone and talk to the 3PL owner if for some reason my requirements are not met," says Abassi. "Few 3PLs provide this close assurance, but for me it is important."

Redback Networks selected DW Morgan, a $20mn 3PL based in Pleasanton, Calif., to take over the networking company's entire service parts logistics operation to include planning and systems, inventory management, warehousing, distribution operations, order fulfillment and transportation management. When a customer such as Verizon or Bell South has a failed switch or card in a piece of Redback networking equipment, it is totally up to DW Morgan to meet the SLA.

"We no longer have any logistics staff of our own anywhere in the world," says Abassi. "Morgan hired the people it needed from our staff. Even the person who does shipping and receiving in our headquarters now works for Morgan."

As soon as customers report a system failure to Redback's technical assistance desk, they are issued a return material authorization (RMA) that initiates the part replacement process. The RMA is simultaneously sent to Morgan's web-based system that provides inventory visibility across every location. The system determines the optimal location for fulfilling the order, pulls the item and dispatches it with a carrier selected to meet the SLA delivery deadline. When the part is delivered, the failed part is picked up and forwarded to the designated contract manufacturer or repair vendor. In rare cases, the part is sent to Redback for analysis. Morgan's system determines what parts to replenish and when, as well as where they should be stocked.

DW Morgan's web-based system supports a tracking function within Redback's portal, so a customer will know exactly where the part is and when it will arrive, as well as such details as the serial number, whether it's new or rebuilt, its revision number and so on.

"The only direct involvement we have is to issue the RMA to the customer," says Abassi.

Some Redback customers insist on managing the inbound parts delivery themselves using their designated logistics provider, but Abassi is transitioning these customers to the Redback system using DW Morgan.

"When we show them how well it works and how happy our other customers are, they tend to switch," he says.

Since outsourcing its logistics to DW Morgan, Redback has gained the following benefits:

• The total number of depots needed to serve Redback's customers has been cut from 50 to 21, resulting in lower overhead costs. In North America alone, the number of inventory locations has been cut from 28 to 13, which includes two large hubs that service depots around the world.

• Worldwide inventory is visible through a web-based system that allows real-time information to be shared between depots. Overstocking has been eliminated and the total cost of goods in the field has dramatically dropped.

• Fulfillment time is significantly cut, because Redback staff can order immediate replacements online.

• Eligibility of parts under SLA contracts is easily determined, eliminating warranty replacements for non-covered customers and creating new sales opportunities.

In all, DW Morgan's 3PL service to Redback has created cost of goods sold savings of at least 30 percent since it was implemented in 2002.