Growing pains for logistic outsourcers

Submitted by: Group 9

Third Party Logistic Providers 3 PLs

$100 billion industry Determined to save money and to focus on core business Market of 3 PLs grow at a CAGR of 10 + % 3 PLs are hard pressed due to increasing customer demands Shrinking profit margins and inadequate ROI Increasing pressure from related transport business

Current Scenario of Market

The world of 3 PLs

Help reduce Capital spending Working capital Personnel cost Offer customers 15 to 20% saving on warehousing and transportation cost Promised to reduce customer delivery cycle by 10 to 25 % Help the companies to move their inventories twice as fast as compared to in house logistics Customer demands cross border integration from 3 PLs Use IT to optimize flow of information Potential savings are frequently larger for information related logistics costs than for asset related logistics.

Tougher World for Logistic Providers

Average ROI (7-8%) is well below WACC
Reasons for low ROI are
Over payment for acquisitions Delays in capturing integration benefits Flawed contractual relationship Transparent cost structure Low renewal rates (~ 40%) Difficulty in attaining economies of scale Contract by contract approach

Approaches to Build Leading 3PL

1. Offering more value

Improve supply chain design skills focus on industries with reducible assets and information related costs Ignore companies which regard logistics as a core success factor Master the specifics of the industry supply chain match supply and demand flows with cost and performance Develop strong IT systems Expand range of services example integrated logistics and trade forwarding Enhanced regional and global scope

Approaches to Build Leading 3PL contd.

2. Structural Scale Advantages

Build scale advantages that will be harder for competitors to duplicate example UPS Use same warehouse and transportation assets to serve many customers Larger volumes enable to consolidate and renegotiate freight purchases at better rates and spread back-office and IT costs over large customer base Increased density by using shared networks
Link several participants in one network Standardizing and integrating various IT systems Setting priorities Negotiations for sharing benefits and fixed network costs

Approaches to Build Leading 3PL contd.

3. Pursuing consolidation
- 3 PL market is fragmented - M&A could help 3 PL improve their economics - M&A offered limited economies of scale in immediate term but offers integration benefits in long run - Multi client user network can be used if the merged companies had customers in the same sector - 2 groups for industrial consolidation
Group 1: developing strong regional position in number of sectors e.g., Exel, DHL Group 2: dominate one sector in single region e.g., TDG, microlog

Thank You