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The Top 30 3PLs 2006

This preface to LQ's Top 30 North American 3PLs ranking provides an insightful perspective on trends in this cross-border segment of the industry, and identifies potential advantages and pitfalls logisticians should be mindful of.

by Richard Armstrong

Are customers better off with very large acquisitive global 3PLs? Does customer service suffer when a very large acquisition like DHL's purchase of Exel has to be split into over 900 separate projects? The two stand alone companies were so large that it will take years before they are really one company.

Similarly, Deutsche Bahn, the German railroad, not only has the challenge of integrating BAX and Schenker but has some political problems in Germany. Some German legislators are questioning why German taxpayers who own a big piece of Deutsche Bahn need to support Deutsche Bahn's global expansion.

In other cases, customers have been treated to less than satisfactory acquisition results. UPS Supply Chain solutions has had major problems integrating Menlo Forwarding. Then there is TNT Logistics' lukewarm offering to the 3PL market.

It seems that every big deal has generated a host of problems, disrupting some customer relationships and lowering profits for the new companies. Turnover of key personnel and procedures because of purchases are a regular complaint. Our analysis indicates that the net income margin* is only 4.1% for 3PLs with net revenues greater than one billion dollars. If we take expeditors and Caterpillar Logistics out of the group, the margin drops to 2.5%. Expeditors and Caterpillar have primarily grown organically rather than through purchases.

The strongest group financially among 3PLs includes those with net revenues between $500-1000 million. The net income margin for this group is 8.2%. C.H. Robinson, Kuehne + Nagel, J.B. Hunt Dedicated and Werner are in this group. In general, companies in this group have size of scale and advantages over many smaller competitors while not being so large that they are unwieldy, procedurally rigid or in danger of losing touch with customers.

The feedback we get from customers indicates more "A" performances from these midsized 3PLs.

Aside from the disruptions caused by major acquisitions, the North american 3PL market continues to grow. Transportation capacity shortages have been a diminishing problem as 3PL gross revenues grew to $104 billion for 2005. They are expected to expand by 9-10% for 2006.

There are positive signs for each segment. Transportation management continued to be more profitable than the asset-based segments. At the same time, dedicated contract carriage has expanded the last three years in response to market demands for assured capacity. For value-added warehousing/distribution (VAWD), the net income margin has increased to 4%.

Much of VAWD in North America has moved to a new level. We are regularly visiting large, radio frequency monitored and WMS labor assisted operations. Inventory controls are good - shrinkages are minimal, labor productivity is high. In our study of U.S./Canadian warehousing, we found that the average contract warehouse is 250,000 square feet. Contracts average $4.4 million per year - operating margins run 13.5%. Pricing is consistently divided into fixed cost components for building and related non-variable items. Labor and other variable items are priced on a unit basis. For example, per-carton prices have become fairly common.

This pricing change is occurring at the expense of open-book cost-plus agreements. An advantage for the 3PL is that closed-book arrangements tend to be more profitable. These arrangements, by their nature, provide greater incentive to 3PLs. This incentive often translates into better quality operations. Menlo, UTi and Kuehne & Nagel are examples of VAWD who continue to improve processes across their operations. Menlo now has over one half of its customers in multi-client warehouses. It shifts personnel to new tasks every two hours as demands change. Much more efficient utilization of personnel and systems are standards of modern warehousing.

The same applies for automotive 3PLs like Ryder, Penske, TNT and Linc. Sequencing centers run in support of operations are tightly controlled in cooperation with inbound transportation management. Exact JIT delivery of the right product to the right place at the right time is now routine in this VAWD business.

An important change is also taking place in dedicated contract carriage (DCC). Greatwide's emergence from the shadows shows a DCC with 3,300 tractors provided by owner-operators. J.B. Hunt also has several hundred owner-operators in DCC. Cardinal Logistics has extensive owner-operator operations for Home Depot stores. Most potential customers are not concerned whether DCC drivers are employees or owner-operators as long as they perform. A list of the Top 20 DCCs is provided.

In this article, we tend to emphasize cross-border 3PLs with significant Canadian operations and we limit ourselves to 30 companies. We do not want to overlook a couple of important items that were outside our top 30. Those items were two important acquisitions involving companies that are likely to have significant future impact:

Firstly, PWC Logistics, based in Kuwait, bought GeoLogistics. PWC has grown rapidly during the Iraq war. It continues to do well with the U.S. Defense Department. GeoLogistics is a well known freight forwarder, which has needed a financial savior for over a decade. The integration has gone well and PWC/GeoLogistics has the momentum and financial resources to become a major player.

Similarly, Ozburn-Hessey Logistics, a regional warehousing company three years ago, has acquired Barthco, a medium-sized Philadelphia based freight forwarder, and Turbo Logistics, a Georgia based freight broker. In addition, it picked up Freightek, a brokerage-forwarder software company. These purchases will put Ozburn-Hessey above $450 million in net revenues for 2006. Scott McWilliams, Chief Executive Officer of Ozburn-Hessey, and his team will now have all of the pieces for global SCM. So far they have been able to integrate and move quickly. Let's see how they handle this new challenge.

Top DCCs

1J.B. Hunt Dedicated Contract Services5051
2Ryder System3851
3Werner Enterprises3500
5Penske Logistics097
6Ruan Transportation Management Systems2764
7Schneider National*2500
8DHL Exel Contract Logistics2021
9Cardinal Logistics1811
10Meridian IQ1606
11U.S. Xpress1600
12Logistics Insight Corp.1100
13UPS Supply Chain Solutions940
14TNT Logistics North America864
15NFI Industries850
16Crete Carrier781
17Averitt Express734
18England Logistics625
19Scully NationaLease600
20Salem NationaLease550
*Schneider has 5000 additional tractors which supply dedicated capacity.