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Article Excerpt
The outsourcing of business activities by large corporations has become an important element of the strategies used by these companies to compete in world markets. In response to this development, a number of industries have emerged to service the companies that are pursuing an outsourcing strategy. One of those, the third-party logistics (3PL) industry, now generates more than $225 billion in annual worldwide revenues in serving the sourcing, manufacturing, and distribution needs of clients in the global economy (Langenfeld, Halloran, and Hartford 2006, 5).
This industry continues to evolve while being driven by several dynamics, including the continued globalization of industry, major restructuring due to mergers and acquisitions, and steady growth fostered by the desire of management in many companies to concentrate on what they believe to be their companies' core competence.
Since 1994, several co-authors and I have sought to provide insights into the dynamics of the 3PL industry in North America by conducting annual surveys of the chief executive officers (CEOs) of many of the largest 3PL service providers serving that market. While the CEOs surveyed are also asked questions concerning the international operations of their companies, the primary focus of the annual surveys has been their operations in North America. This article focuses on the results of the 2006 survey.
Each year a questionnaire is developed that focuses on a number of issues related to the North American 3PL industry, including the key marketplace dynamics, the industry's service offerings, changing customer requirements, and the current status and future prospects of the industry. The CEOs are also asked to project company and industry growth rates for the next three years. These data are gathered each year to provide a longitudinal overview of the industry's development (Lieb and Randall 1996, 51-66; Lieb and Bentz 2005, 46-54). In addition, new questions are introduced each year which either examine current issues or explore aspects of the industry that have not been addressed in our previous surveys. In that respect, the 2006 survey also gave considerable attention to such issues as managing customer relationships, market differentiation strategies being used by these companies, the impact of the consolidation movement on the industry's structure, and the extent to which RFID technology has been embraced by North American 3PL service users.
The CEO of each of the companies included in the survey was contacted by telephone or e-mail and asked to participate in a Web-based survey. A target group of twenty-five companies was contacted, and the CEOs of those companies agreed to participate. Three companies were subsequently unable to complete the survey during the required time frame, and the other twenty-two questionnaires were completed online. Exhibit 1 lists the companies that participated in the 2006 North American survey.
Exhibit 1. Third-Party Logistics Companies Included in the 2006 North American 3PL Industry CEO Survey Cardinal Logistics Caterpillar Logistics Services DSC Logistics Exel Logistics Genco Kuehne & Nagel Logistics, Inc. Landstar Maersk Logistics Menlo Logistics MeridianIQ NAL NYK Logistics Panalpina Penske Logistics Pittsburgh Logistics Ryder Schenker Schneider Logistics TNT Logistics Transplace.com UPS Supply Chain Solutions UTi
RESULTS
Revenues and Profitability
The CEOs were asked several questions related to the revenues generated in North America, and the profitability of their North American operations. Their responses to these questions are discussed below.
Annual Provider Revenues. Nineteen companies reported North American revenue data. The annual revenues for 2005 reported by the respondents ranged from $290 million to $7.0 billion, with the average being $1.045 billion. Their average revenues in the two preceding years were $759.4 million in 2004 and $639.7 in 2003. Based upon those numbers, and our general knowledge of the revenue base of the three providers that did not provide financial data, we estimate that the twenty-two companies involved in this survey generated well in excess of $25 billion in North American 3PL revenues in 2005. Five of the companies included in the 2006 survey registered annual operating revenues in excess of $1 billion in 2005 in North America.
Those surveyed were also asked to indicate where their companies' revenues were generated at that time in North America (United States, Canada, and Mexico), and to project the revenue split by geography for 2008. As shown in Table 1, the averages for companies participating in this survey were 86 percent from the United States, 8 percent from Canada, and 7 percent from Mexico. Collectively, the participants projected modest shifts in that revenue split for 2008, with the averages being 81 percent from the United States, 9 percent from Canada, and 10 percent from Mexico.
Success in Meeting Growth Projections. The CEOs were also asked about the success of their companies in meeting their North American revenue growth projections during 2005. The responses showed an improvement over the results reported in the last two years. Eleven CEOs reported their companies had exceeded company revenue growth projections in 2005, seven indicated that their companies met their projections, and one indicated his company failed to meet its projections. In our 2005 survey those numbers had been six, nine, and four respectively, and they had been four, seven, and eight in our 2004 survey.
Company and Industry Profitability. The CEOs were also asked to categorize the profitability of their companies' North American business units during 2005, and for the third straight year their responses were quite positive. Two CEOs reported that their companies were very profitable during 2005, and the remaining eighteen reported their companies were moderately profitable for the year. For the third straight year, none of the participating CEOs reported that their North American business unit failed to record a profit during the year.
In our 2006 survey the CEOs were also asked to categorize their views of the profitability of the 3PL industry as a whole in North America during 2005. Fifteen CEOs (75 percent) categorized the North American 3PL industry as being moderately profitable for the year, four believed the industry broke even for the year, and one categorized the industry as moderately unprofitable the for the year. In the two previous surveys none of the participating CEOs believed the North American 3PL industry was unprofitable during the year (Lieb and Bentz 2005, 46).
Mergers and Acquisitions (M/A)
The worldwide consolidation movement in the 3PL industry continues, and it has impacted the North American 3PL marketplace. For example, within the past two years Deutsche Post acquired Exel, Deutsche Bahn acquired BAX Global, and Apollo Management L.P. purchased the contract logistics division of TNT (Kulisch 2006, 8-16). In each instance the acquired company was a major player in the North American market. Such acquisitions are affecting the structure of the industry, and as a result we included a number of questions in the 2006 survey related to that restructuring.
Percentage of Revenue Growth Expected from Acquisitions. The CEOs were asked what percentage of their companies' revenue growth over the next three years was expected to come from acquisitions. The average response was 15.4 percent with a range of to 50 percent. Surprising, four CEOs indicated they don't expect any of their companies' growth over that time period to come from acquisitions.
Effects of the Acquisitions. The respondents were asked their...
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