3PL Hybrids: Becoming a 3PL for Fun and Profit
While the third-party logistics market has grown at a compound annual rate of 14.2 percent since 1996, 3PLs have only penetrated 12 percent of the market potential in the United States. The market is still fragmented, with plenty of room for growth.
Such attributes make the sector attractive to companies looking for business opportunities. If you are already in the transportation business, one way to ride the growth curve is to expand by offering value-added logistics services. That's what some carriers and forwarders have already done.
For shippers with solid logistics staff and expertise who want to get into a fast-growth industry, becoming a 3PL may make sense. And that is precisely what a small cadre of companies has done in the U.S. market.
While examples of retailers migrating into the logistics solutions provider business are few, manufacturers and distributors are making the move in small numbers. The motivation for extending an internal logistics department into the 3PL business can be slim margins or tough competition in the parent company's market segment.
Becoming an effective and profitable 3PL is no easy task for a manufacturer or distributor. In order to succeed as a 3PL, the new logistics division or subsidiary needs relative autonomy and a direct pipeline to corporate management. It needs its own P&L, the freedom to solicit business, sufficient IT and financial resources, and most importantly, time. Investing the time needed to build a successful business is often the greatest challenge for nouveau 3PLs.
"Most 3PL spinoffs or outgrowths initially tend to stay within the parent company's own industry, so they are niche players," says Gene Tyndall, president, Supply Chain Executive Advisors, Miami, Fla.
"This creates a challenge because it's almost impossible to sell outside your industry, and staying inside it means you could be selling to competitors. As long as there's some connection with the parent company, in most cases the 3PL's number-one client is its boss."
But where there is challenge, there is also opportunity as niche players often are very familiar with vendors and customers. Those relationships provide good opportunities to sell logistics solutions and projects.
One 3PL spinoff that has expanded well beyond that initial niche stage is Caterpillar Logistics Inc., Morton, Ill., which generates slightly more than 50 percent of its revenue from contracts with internal Caterpillar clients. The Cat Logistics division provides demand planning work for other large manufacturers, and has developed a strong supply chain practice with a strategic perspective.
Cat Logistics is able to provide these higher-level services because of its systems strength. To help maintain its edge, Cat Logistics worked with Ford Motor Company and software developer SAP to create a state-of-the-art service parts logistics execution software package, which was unveiled in January.
The most logical candidates for 3PL spinoffs are companies where distribution is already a core competency. Many distributors have previously invested in multiple warehouses and warehouse management and transportation management systems, and have developed strong carrier relationships.
While the ranks of hybrid 3PLs are small, a handful—including the following four firms—have a handle on what it takes to succeed.
Building a 3PL: Cat Logistics Services
"We know firsthand that logistics can either make or break a company," says Mary Bell, chairman and president, Caterpillar Logistics Services.
It can also create a company. For more than 80 years, Caterpillar products have been building the world's infrastructure. And for as many years, Cat has provided the logistics support to ensure that those products—operating in demanding applications globally—perform at the highest levels to meet customer demands.
In 1987, sports vehicle manufacturer Land Rover wanted to improve its after-sales service and was looking for a company to benchmark. It chose Caterpillar.
"After studying Caterpillar's after-sales support operations, Land Rover asked, 'Why don't you do this for us?' We thought that idea made sense. There are opportunities for scale, there are synergies," Bell recalls. "Service and support are core competencies for us. It was a good business decision to leverage our expertise and provide these services to Land Rover."
Land Rover became Caterpillar's first external customer, and Caterpillar Logistics Services Inc. was formed as a wholly owned subsidiary of Caterpillar Inc.
Today, Cat Logistics serves more than 65 client companies globally in different market sectors. The 3PL subsidiary, with some 10,500 employees, has more than 100 facilities and operations in 25 countries on six continents. It ships more than 16 billion pounds of freight annually.
Initially, Bell says, the subsidiary focused on providing solutions to automotive and industrial clients that were similar to its internal Caterpillar client. Today, the 3PL serves clients in more than one dozen distinct industries from automotive, aerospace, and manufacturing to technology, industrial products, and consumer durables.
"We help companies solve their logistics challenges, whether they be inbound service parts or finished goods," Bell says. Caterpillar Logistics' client roster includes Ford Motor Co., DaimlerChrysler, Toshiba, Bombardier Aerospace, Eaton, Harley-Davidson, Irwin Tool, and, of course, Caterpillar.
"The biggest challenge in externalizing the logistics business was making the transition to a B2B environment," Bell says. "Our traditional world—providing services to internal clients and dealers—was different than B2B. Prospective external clients don't necessarily know you, and unlike our internal clients, they have no reason to prefer you. So you have to be able to define and sell a credible value proposition, then deliver it. That is a huge challenge.
"We also had to overcome the fact that although our core competencies could transcend to other markets, we had to demonstrate that we understood the unique needs of companies outside of industrial and automotive," she adds.
Cat Logistics has another hurdle to overcome: making sure customers believe the 3PL understands their business and can deliver.
"Any consultant can say, 'I have a formula. If you do x, your supply chain will improve by y percent,'" Bell says. "But the 3PL that demonstrates the ability to understand the customer's business and value drivers, and that has proved its ability to implement the solution, is the one companies should pay attention to and ultimately partner with."
Looking to the future, Bell says the real opportunity for competitive advantage lies in improving the supply chain as a whole. "To date," she says, "companies have gained value by 'leaning' each link in the supply chain. Like anything else, you mine the gold in those areas, then look around for additional opportunities.
"Going forward, though, determining and extracting value from the supply chain as a whole will produce the biggest impact," Bell says.
Three's Company: ATCLE
Aftermarket Technology Corp. (ATC) was formed in 1994 by Aurora Capital Group, a venture capital firm seeking business opportunities in the automotive drivetrain remanufacturing business. Aurora purchased 15 companies in this space, recognizing that there was no single major player commanding a large market share.
Next, Aurora consolidated its activities and formed ATC, which today counts Ford, Honda, and Chrysler among its customers and claims a 33-percent share of the $800-million transmission-repair market, specifically serving the original equipment service segment. In the course of buying the original 15 companies, ATC executives realized that three specific business units didn't fit into drivetrain remanufacturing activities.
One unit was a small warehouse that performed handset programming and repair for a large wireless telephone service provider; the second was a small company that primarily repaired speedometers; and the third managed dealer excess parts returns for the major automakers.
The three units were bundled together under the name ATC Logistics and Electronics (ACTLE). Although the three entities were not actively soliciting business, they kept growing.
When ATCLE President Bill Conley came onboard in 2002, the company was in the process of installing Oracle enterprise resource planning (ERP) systems across its operating units. It also had RedPrairie's WMS running the wireless handset warehouse.
"The chairman of ATC asked me, 'When you look at these three businesses, what do you see?'" recalls Conley. "I answered, 'I see the perfect solution to do everything—from post manufacturing to end-of-life supply chain management.
"We already provide forward and reverse logistics, as well as electronics repair, all under one umbrella. But because these activities are spread across three small, separate companies, no one knows it.'
"When we brought the three smaller companies together and suggested that they work together as one—bingo, the light went on," Conley says.
The Oracle ERP system and the integration of the RedPrairie WMS at all three units allowed ATCLE to start marketing itself as a single company to provide supply chain services.
"We had to build the business to serve outside customers, while at the same time keep our existing customers happy and continue to grow with them," Conley explains.
ATCLE identified its core strengths—providing logistics, returns management, testing, and repair for wireless devices, cellular telephones, broadband cable, and high-end electronics. It figured out the logical markets to target, formed a business development team, and began selling its services in the open market.
"We went from a private-label logistics firm serving a large national wireless company to a full-service public 3PL," Conley says. "Our wireless customers didn't mind because they realized that if we added more customers, their costs would go down."
Today, ATCLE has centralized all common activities across the former three business units and created a single corporate staff to provide better focus on its customers—including a team that pursues business in its target markets.
"Our formula seems to be working," Conley says. "We went from having zero accounts two and a half years ago to a 45-percent annual growth rate last year. Initially, we were just a hobby to our parent company. But once ATC recognized the business opportunity, it gave us the resources we needed to grow."
A Sea of Profit: Mitsui USA
Headquartered in Tokyo, Mitsui & Co. Ltd. is one of the world's most diversified and comprehensive trading, investment, and service enterprises. It maintains a global network of 175 offices in 75 countries, and has 723 subsidiaries and associated companies worldwide.
Both the company and its subsidiary, Mitsui USA, are involved in importing/exporting, manufacturing, and trading commodities such as iron and steel, energy, transportation, food, electronics and telecommunications, plastics, organic chemicals, retail, consumer goods, and others.
With such a diverse lineup, it is only natural that the company developed sound logistics expertise over the years. Its Transportation Logistics Division, one of 11 commercial divisions of Mitsui USA, was originally established as Mitsui's in-house logistics service provider.
"When I joined Mitsui, transportation was a corporate department within Mitsui rather than a profit center," says Satoshi Katsumata, director, traffic business department, Transportation Logistics Division.
"In the early 1990s, however, we realized the possibility of future growth not only as a provider for logistics services inside the company, but also as a profit-making service provider to outside customers."
As the transportation and logistics arm of a big trading firm, Katsumata's division routinely manages a large number of different commodities and products, ranging from steel, machinery, and hazardous materials, to food and iron ore.
"Through each of Mitsui's commercial departments, we've had the chance to directly interact with end users or customers," Katsumata says. "We see first-hand what logistics and transportation demands they have and what problems they encounter."
With all its resources, Mitsui realized it could supply value-added services to outside clients. "We knew we could provide not only transportation logistics, but also inventory financing on behalf of customers who want to reduce the burden of interest or collection and settlement services," Katsumata says.
For one U.S. truck manufacturer, for example, Mitsui procures and owns its production parts inventory. Mitsui Tokyo purchases the parts from Japanese vendors, consolidates them in one place, imports them to the United States, holds them in a warehouse near the manufacturer's production plant, then feeds the parts just in time to the factory production line.
"From the time our customer sends us the purchase order until we complete delivery to the factory, we handle all risks for that account. The customer nets tremendous savings on inventory carrying costs," says Katsumata.
To formalize its logistics service offerings, Mitsui established Tri-net Logistics Management Inc., a wholly owned subsidiary of Mitsui Transportation Logistics Division, to engage in and manage transportation activities for outside clients in North America. Tri-net's worldwide network focuses on five strategic areas: Southeast Asia, China, Japan, Europe, and North and South America. Especially in China, Tri-net and its strategic partners have established an organic logistics network.
The operation is growing and attracting new outside clients, thanks in large part to Mitsui's ability to feel its partners' pain points.
"We can find and address shippers' hidden problems better than traditional logistics service providers because we have the same problems ourselves," Katsumata explains.