With so much news every day about big business deals among the world's largest 3PLs, it is easy to assume that these global players are dominating the logistics industry. While the 12 percent annual growth that global 3PLs as a group enjoy is outstanding by normal corporate standards, it does not come close to the burgeoning growth rates of many mid-sized 3PLs. According to Ben Gordon, principle in BG Strategic Advisors, which helps mid-market logistics companies evaluate their merger and acquisitions options, annual growth rates in this sector are two, three and even four times higher than the global 3PL sector.

"We are working with a couple of niche 3PLs that specialize in the high-tech sector and they are growing 50 percent each year," says Gordon.

So who are these dynamic 3PLs with dynamite growth?

Mid-market 3PLs have annual revenues from $100m to about $500m. They include warehousing and distribution companies, transportation management and freight brokers, import consolidators, international freight forwarders, and a wide variety of value-added players in niche markets. Gordon estimates the growth rates for each group as follows:

• Non-asset based freight management 3PLs: 15 percent

• Low-asset based cross-dock/consolidation 3PLs: 15 percent

• Global freight forwarders, particularly those that specialize in the Asia-to-U.S. trade: 15 to 20 percent

• Port-based logistics services offering container consolidation and deconsolidation: 20 to 25 percent

• Warehousing and distribution 3PLs with value-added services: 20 percent.

But whether the 3PL is involved with warehousing, transportation or other logistics service, there is one overall reason that so many mid-sized provides are doing so well. The most successful companies tend to focus on mid-sized customers rather than trying to go head-to-head with very large 3PLs for customers in the ranks of the Fortune 500.

"Our company was conceived on the idea of leveling the playing field for mid-market companies by giving them the shipping economies and technology capabilities that their larger competitors have," says Dina Kundar, vice president of business development for CaseStack, a Santa Monica, Calif.-based 3PL that handles warehousing and distribution for mid-sized consumer packaged goods companies.

She explains that CaseStack customers generally do not have logistics departments, and they need help to be competitive in the marketplace. Their competitors are large CPG companies like P&G that have very sophisticated logistics systems, large supply chain staffs and the volumes to move full truckloads across the country at very low rates.

"The mid-market CPG companies have to compete penny for penny with rivals many times their size, but they have the disadvantages of longer lead times, more inventory in transit and a higher costs per case," says Kundar.

While mid-sized companies have to compete on a cost basis, they need the operational capabilities that the big companies have to provide: supply chain visibility and optimized transportation.

	"We are working with a couple of niche 3PLs that specialize in the high-tech sector, and they are growing 50 percent each year." - Ben Gordon of BG Strategic Advisors

CaseStack provides regional consolidations that give the shipper full TL costs even though they are just shipping LTL quantifies. They lower transportation costs by 40 percent going from LTL to consolidated TL shipments, reducing lead times. The technology helps them manage their inventory more tightly and move it faster.

"Our web-based logistics systems allows our customers to benefit from real supply chain tools rather than spreadsheets," she says.

This strategy is paying off for CaseStack, which Kundar says is among the fastest growing companies in the US.

"In 2006, we will double 2005 revenue, which was 60 percent higher than 2004, and that growth was a 300 percent increase over 2003," she says.

Regal Logistics, which operates a 1.3 million-square-foot facility near the Port of Tacoma in Fife, Wash., is another warehousing and distribution 3PL that has found success by focusing on mid-sized customers with special service needs. Regal serves manufacturers of toys, shoes and apparel importing from Asia for large retail customers such as Wal-Mart, Target and Kmart. According to Regal Vice President Gary Neeves, his company's mid-sized status is a competitive advantage for its mid-sized customers.

"We are smaller than the global 3PLs that have grown so large that they are not really interested in servicing the mid-tier customers," says Neeves. For instance, Regal is reportedly the largest logistics provider handling toys in the U.S., but it does not handle Fortune 500 companies like Mattel and Hasbro. It works with all the second-tier toy companies, such as Marvel Entertainment and Cranium, that need high quality service to compete with the largest toy companies

"Big public companies tend to choose 3PLs that are also large public companies," he says. "Most of our mid-sized customers need our level of service to be more agile and less bureaucratic. We can bring on a new customer with full electronic data interchange implementation in a couple of weeks, not months."

The very large retailers put significant service demands on the mid-sized manufacture, and that is where Regal Logistics provides its value.

"Retailers expect these manufacturers to take the inventory risk and to fulfill orders on a JIT basis," says Neeves. Orders increasingly include many line items, and often in relatively small quantities. Regal breaks cartons and repacks items in sale-ready quantities as the retailer requires. Regal also has its own truck fleet for serving retailers in the Northwest, but most of its distribution is in the eastern U.S. that it handles with its own brokerage service, usually on an expedited basis.

Regal is thriving in part because of these high service demands. Annual revenue growth is close to 15 percent, while annual throughput of import containers has doubled in the last couple of years to 10,000.

Transportation 3PLs
Such success in serving mid-sized customers is not limited to warehousing and distribution 3PLs.

4 Way Logistics is a freight brokerage 3PL based in San Ramon, Calif.

"We invested in far more logistics technology than most brokers, and certainly more than our mid-sized customers could afford," says Michael Rogers, president of 4 Way Logistics. This technology includes a customized transportation management system that provides 4 Way customers with web-based rate quotes and transit times, online bookings and shipment tracing, as well as electronic data interchange capabilities.

"Our TMS systems allows our small- to medium-sized customers to compete with larger companies," says Rogers. "We are a champion for small business."

While 4 Way has customers of all sizes, it is finding great success with smaller companies that need greater logistics capabilities than they can provide for themselves. 4 Way has introduced a program called YTD, or Your Transportation Department,

"If a company is only spending $10,000 a month in transportation, it is not likely to have its own transportation capability," says Rogers. "YTD allows us to act as their transportation department," he says. The program includes such services as freight lane analysis, carrier evaluation and negotiation, freight management and everything else that an in-house transportation department would do.

For example, Rogers says that if a small company is launching a new product, it needs to determine if it needs multiple inventory locations across the country or if it can just ship out of a central facility. One recent client was a pasta company that was using a number of distribution centers.

"We showed them how they could just have one each on the east and west coasts based on their shipping patterns," says Rogers. "We do the planning and the transportation. If a customer needs local warehousing, we will help them make the right contacts."

4 Way has negotiated LTL rates with many carriers based on its total volume that its customers can use, and which are far lower than what most companies can negotiate on their own. For larger customers, 4 Way will negotiate account-specific pricing based on their volumes only. TL pricing is mainly on the spot market because it is so volatile, but 4 Way has the ability to find capacity, even when it is tight. 4 Way earns 60 percent of its revenue brokering LTL freight, 20 percent from TL freight and the remainder from intermodal and other logistics services. This strategy has allowed it to grow its annual revenue by 20 percent in recent years.

Location, Location, Location
Another growth strategy that agile mid-market 3PLs are employing is to locate facilities or service capabilities in high-growth geographies. Targeted locations such as port-based warehousing businesses are achieving much stronger growth than heartland locations.

Neeves says Regal's location near the Port of Tacoma is an important competitive advantage. The company moved its operations to the West Coast from the New York City area about 15 years ago, primarily to accommodate a major customer. Rather than locate in the congested port areas around Los Angeles and Oakland, Regal selected the Port of Tacoma, which was served by major ocean carriers and excellent access to rail and highway service.

"Inbound transit times are only 12 to 14 days, and the stevedores here discharge faster than in California where it can take four or five days to get the containers from the ship into the distribution pipeline," says Neeves. He adds that freight costs from Tacoma to the East Coast are also lower than in California and can essentially pay for a customer's warehousing costs. "As congestion and costs in California ports escalate, we are gaining new business."

Perhaps the most prevalent trend right now is consolidation among 3PLs. For the past several years, the very large 3PLs are aggressively looking for growth by acquiring mid-market players. Private equity firms also see these fast-growing logistics companies as attractive investments.

Increasingly, mid-market 3PLs are also merging among themselves to become more dominant players in their own sectors and to provide broader geographic and service offerings.

"3PLs need to consolidate because customers want to reduce the number of logistics providers they use," says Gordon. "This consolidation strategy is necessary to achieve national scale."

For example, CaseStack recently announced a merger with AtomicBox Logistics, a mid-sized 3PL based in Ohio, that does warehousing and consolidations for general merchandise customers serving large specialty chains such as Bed Bath and Beyond, Linens 'n Things and Home Depot.

DC in China
According to Kundar, the merger is more than just the combination of AtomicBox's Midwest and West Coast facilities and CaseStack's footprint in Los Angeles, Portland, Chicago, Dallas, New Jersey, and Atlanta. CaseStack primarily does case level orders for large discounters, while AtomicBox focuses on less-than-case level fulfillment and display building for specialty stores. AtomicBox also has a distribution center in Shenzhen, China, that will allow the combined company to work with consumer goods companies at the front-end of the supply chain to include inbound logistics consolidation and value-added services.

"The two companies now provide full supply chain retail-driven consolidation and retail-compliant fulfillment for consumer goods companies," says Kundar.

According to Gordon, operational expansion is just one reason for the explosion in 3PL mergers and acquisitions.

"We are in a bull market for mergers and acquisitions among mid-market 3PLs," he says. "The main driver is that we are at all-time highs in valuations."

Ten years ago, the average logistics company was valued at three to five times operating profit as measured by earnings before interest, taxes, depreciation and amortization (EBITDA). Today, that valuation is at five to seven times. Great niche businesses or category leaders are getting valued at even higher levels.

"Our clients have generally achieved valuations in the range of eight to 14 times EBITDA," says Gordon, though he adds that he doesn't believe this age of premium valuations will last forever.

"This year has been an outstanding one for mid-sized logistics companies," he says. "Many 3PL CEOs are taking a hard look at selling to take advantage of these record high valuations. Consolidation is the name of the game today."

4 Way Logistics Is a Consistent Winner for West Coast Novelty

The morning after every championship game-whether its a Super Bowl, a World Series, a NCAA basketball final or a much more regional event-avid sports fans line up at their local retailer to buy souvenirs to commemorate the victory. Team hats, shirts and other memorabilia appropriately emblazoned with the event and the victor are always ready for sale when the doors open the next morning. How do they do that so fast? West Coast Novelty, the country's largest distributor of licensed sports products for the NFL, NBA, Major League Baseball and numerous college teams, provides the vast majority of these items, and it depends on 4 Way Logistics to have merchandise in the hands of the retailer within hours when fan enthusiasm is still at fever pitch. "We call these events hot markets, and we have a special plan for meeting these sudden demand surges," says John Bragg, vice president of distribution for West Coast Novelty, which is based in San Ramon, Calif. "4 Way is the key to meeting the demand challenge." Bragg explains that blank shirts and caps are staged on the production lines of embroiderers and the silk screeners near the hot markets. The minute the game is over and the winner is known, vendors start production. West Coast Novelty crews are in airports watching the game on television and fly directly to the markets where production and distribution will be the hottest. 4 Way Logistics, which has already lined up truckers, express carriers and airfreight companies, expedites the product right off the production lines to the local stores. The West Coast crews oversee the process and make sure the product is fairly distributed so all retail customers receive enough product to fill immediate demand. "These hot market events are challenging, but with the help of 4 Way, we have achieved great success with these, both for us and for our retailers," says Bragg. Success is what this 85-year-old sports products distributor is all about, and West Coast Novelty has built its business by providing sports-related licensed merchandise to fans all over the country through many retailers, including team shops, sporting goods stores, theme parks, high-traffic retail locations and large discount retailers. It has achieved annual growth of 27 percent in recent years by being the sales link between entrepreneurial manufacturers and all possible retail channels. The two largest categories of merchandise are head wear, which is manufactured in Asia, and apparel which is made primarily in the U.S. by small and large manufacturers. Head wear alone accounts for sales of nearly 15 million items, which are shipped in full containers from Asian suppliers to the company's distribution operations, which were recently centralized in Memphis. The new DC uses state-of-the-art customer service, inventory and accounting software that can instantly see the company's entire inventory and order flow. Distribution staff uses the latest in hand-held computer scanners to process orders and to relay current stock information back into the database that helps to expedite orders. In-house tracking software monitors each order throughout the order shipment process until it arrives at the retailer's door. Since West Coast Novelty handles many sports overall order activity is strong all year. Order demand for each sport is highly seasonal, and demand for each team's merchandise is highly regional. New York Yankee baseball hats do not sell well in Boston. The success of a team at any particular time also impacts demand. Forecasting is a difficult task, and it is made even harder by the long lead times for head wear and other items made in Asia. "We try to hold off on issuing POs to the factories until we have the lion's share of the orders from our major retail customer, but the factories only give us a narrow window of opportunity to book our orders," says Bragg. "Since the lead times from Asian suppliers can be four to five months plus weeks in transit, we have to do a lot of estimation." Apparel has much shorter lead times because it is made in the U.S., but the shipping schedules to the retailer are no less critical. Large discount retailers are West Coast Novelty's biggest customers, and the most demanding. They want initial orders in the stores well before the season begins for each sport. "For NFL merchandise, our major customers want orders delivered on July 15-not the 14th and not the 16th," says Bragg. "We have short shipping windows from receipt of the product at our DC until it is delivered to the stores." For Wal-Mart, West Coast Novelty ships directly to 3,000 stores by LTL to avoid the delay of going through regional DCs. "Because of the highly regional nature of our product, we are one of the few vendors that direct ship to the Wal-Mart stores," he says. Getting reliable capacity to so many stores on time is difficult, so West Coast Novelty relies heavily on 4 Way Logistics to make sure orders are picked up and delivered on time. West Coast Novelty gains the benefit of 4 Way's volume rates that are generally lower than any single company can negotiate. The 3PL also has the relationships with many carriers, so finding capacity is not an issue. Since West Coast Novelty moved its DC operations to Memphis from Alameda, Calif., transit times have also improved significantly. "We can hit 75 percent of our retail customers with two-day ground service," says Bragg. "It used to take up to six days when we shipped out of Alameda," he says. Large grocery and drugstore chains have become big volume customers for West Coast Novelty, and delivering to their huge DCs can be quite challenging. "4 Way arranges the delivery appointments and meets their tight delivery schedules," says Bragg. "Whether we are shipping LTL or multiple truckloads to these DCs, everything has to be done according to their rules. 4 Way handles it all." Handling inbound shipments of apparel from a growing list of domestic suppliers is another logistics task that West Coast Novelty has handed over to 4 Way. When one of these suppliers has a shipment of more than 200 pounds, it simply calls 4 Way and the 3PL routes and books the shipment. Even when the shipment is less than the 200-pound threshold, 4 Way will arrange a pickup through an express carrier to avoid the LTL minimum charges.

CaseStack Enables Rapid Growth for Advanced Beauty Systems

A key mission for Advanced Beauty Systems is to "help women live better and feel better every day." Its unstated business goal is to create products and grow markets that will allow it to become a leader in the highly competitive cosmetics industry. ABS is succeeding in both endeavors. Since its 2003 inception, ABS has become one of the fastest-growing consumer products companies in the world. In just three years, ABS has leaped from distributing a limited line of products in less than caseload quantities to beauty supply stores to marketing volume shipments of multiple products through major retailers. This accelerated growth path has also required ABS to rapidly develop better, more sophisticated logistics capabilities. When it sold only through beauty shops, ABS relied on its contract manufacturers to stock inventory, fulfill orders and ship the product. Even with this limited distribution, logistics was a problem. According to Chris McClain, CEO of the Dallas-based cosmetics company, orders were often incomplete, deliveries were late, and freight was damaged or trapped at regional truck terminals. "The quality of our logistics did not match our products," says McClain. In order to expand and develop ABS's share of the health and beauty supply market, McClain needed logistics help far beyond its internal capabilities. "We are primarily a sales and marketing company," says McClain. In fact, ABS was in the process of changing its mix of products to allow it to distribute through Wal-Mart, Walgreen's and other large retailers. To meet the demands of these world-class stores, ABS needed a very different operational solution. Neither its contract manufacturers nor its own capabilities were up to the task. "Outsourcing logistics was the only way to go," says McClain, who began a search for a third-party logistics provider that could: • Reduce overhead by increasing the accuracy of its order fill-rate • Provide on-time delivery and a reduced level of loss and damage on less-than-truckload (LTL) shipments • Consolidate all product inventory in one storage location rather than several warehouses scattered around the country • Meet the very specific operational and technical requirements of its most important retailer, Wal-Mart. • Integrate with ABS's IT system and provide value-added technology capabilities. In the spring of 2005, ABS selected CaseStack, a 3PL that specializes in warehousing and distribution for fast-growing mid-sized companies. CaseStack also had a warehouse near ABS's headquarters in Dallas, so the company could consolidate all of its inventory and distribution operations in close proximity to where incoming product from contract manufacturers could be inspected at any time. CaseStack also has a long history of working with Wal-Mart's very specialized consolidation and receiving requirements. Wal-Mart, for example, requires several highly sophisticated technologies and processes, including advanced shipping notification, electronic data interchange, and radio frequency identification. CaseStack is fully equipped to handle these requirements and has long participation in Wal-Mart's "remix" consolidation program for many of its other clients. ABS already ran a sophisticated inventory control and tracking system and needed a logistics provider that could integrate with its system. CaseStack offered a variety of web-based logistics software that easily integrated with ABS's inventory control/tracking capabilities. "Ease of integration was a major factor in choosing to work with CaseStack," says McClain. "ABS and CaseStack's systems work together very smoothly." Once the computer systems were integrated, CaseStack began the job of transferring inventory from a warehouse in Chicago to the 3PL's distribution center in Grand Prairie, outside of Dallas. Within 7 days the transfer was complete and CaseStack assumed responsibility of all ABS logistics functions. Now every product from ABS's contract manufacturers comes into CaseStack's Grand Prairie facility. When ABS receives orders from retailers its employees enter them directly into the CaseStack web site. CaseStack then manages the entire process of transferring the product from its Dallas warehouse to its final destination. The procedure is completely transparent. At any time during the customer order-to-fulfillment process ABS can use CaseStack's web site to monitor the shipment and check the inventory in real time. The ability to access real-time information online 24/7 dramatically increased supply chain visibility, vastly improving inventory management efficiency. For outbound shipments to Wal-Mart and other large retailers, CaseStack consolidates ABS orders with those of other Wal-Mart suppliers handled in this warehouse. "We pay TL rates even though we are shipping much less," says McClain. "For LTL shipments to other customers, we can use the lowest possible rates that CaseStack negotiates based on its total volume. "For my LTL shipments, I have cut transportation cost by three percent, and for the consolidations the costs have dropped five percent." According to McClain, CaseStack has enabled ABS to reach its business goals. Since working with CaseStack, freight claims have been reduced by 80 percent, while its "must arrive-by date" compliance rate has risen by nearly 20 percent. Additionally, its fill rate has consistently exceeded 95 percent with CaseStack. If the company encounters a problem, employees contact the CaseStack account manager who manages ABS. McClain describes the working relationship with CaseStack as a team approach. "CaseStack has a three-man team that handles our account. One rep oversees administrative issues, one handles trafficking/receiving, and another deals with invoices. We have developed a very close working relationship. Our CaseStack team is always there when we call." The most significant benefit ABS has gained by outsourcing its logistics, according to McClain, is the ability to grow its business more rapidly because of the scaling capability of its 3PL. "We are now focusing on how to increase revenue rather than looking for ways to reduce costs," says McClain. "We used to spend hours tracking our freight. Since CaseStack has taken over ABS's logistics, those problems have gone away, leaving us free to deal with other challenges and take advantage of additional opportunities."