With international trade mushrooming and supply chains expanding around the world, third-party logistics providers have taken on an increasingly important role for multinational manufacturers and retailers. Manufacturers need absolutely reliable sources of supply. Retailers need flexible links to suppliers with low-cost production. These suppliers are often in remote regions. At the same time, retailers need rapid delivery channels for an ever-expanding distribution network of consumers. Simultaneously, burgeoning prosperity and intensifying competition for new markets is putting more and more pressure on supply-chain managers to get the job done and find competitive advantage.

Increasingly, the linchpin for successful worldwide supply chains is a core group of global 3PLs that can provide the expertise, reach, reliability and flexibility that multinational corporations need. These global 3PLs provide transportation, consolidation, forwarding and customs brokerage, warehousing, fulfillment, distribution and virtually any logistics and trade-related services that their international customers need.

About 100 3PLs now control almost a third of an estimated $270bn that is spent on outsourced value-added logistics services each year around the world. Within this group of global 3PLs, an elite group of 25 companies account for about one-third of all global 3PL activity. Their annual revenues exceed $79.5bn, and in 2004, these revenues will grow between six and eight percent - twice the world GDP rate.

Europeans Rule
Not surprisingly, the seven largest global 3PLs are all European-based companies. The top seven companies on our list together earned more than $42bn last year, which is more than all of the other 3PLs in the Top 25 combined. U.K.-based Exel holds the top spot on the list with revenues of $8.3bn. The number two and three spots go to Swiss-based Kuehne & Nagel and German-based Schenker, respectively. These two companies, along with Panalpina and DHL's Danzas Air & Ocean operations, have been leading forwarders and transportation management 3PLs in Europe for decades.

History, empire and exports helped create the large European 3PLs. To illustrate this, we can compare revenues of the major players in their home countries. Less than one-third of Exel's revenue is derived from business conducted in its British Isles home base. Kuehne & Nagel derives 45 percent of its turnover in Europe but less than 5 percent of it is within Switzerland. By comparison, 80 percent of UPS's business is conducted in the United States.

European countries, which have always had significantly more cross-border traffic, have relied more on outsourcing than Americans, especially since World War II. Outsourcing rates in Europe are estimated by country to be 26 to 60 percent by Peter Klaus in his "Die Top 100 Der Logistik." 3PL market penetration rates were estimated at 12 percent for 2003 by Armstrong & Associates. German and Japanese 3PLs grew rapidly during the industrial growth of their countries' exporting economies after World War II.

The importance of freight forwarding to supply-chain management is also a key variable in choosing the largest global players. First, the revenues used throughout this article are turnover (gross revenue). These revenues included purchased transportation, a major expense for most of the 3PLs on our list. Second, global supply chains rely heavily on freight forwarding activities for their construction. Most of the key events in any international supply chain are controlled by the freight forwarder. The services that global 3PLs provide frequently include:

• Air Freight Forwarding (door to door)
• Ocean Freight Forwarding (door to door)
• Transportation Network Planning and Optimization
• Transport Execution/Freight Bill Payment
• Carrier Management
• Merge in Transit
• Security Systems and Control
• Incoterm Control - shifting from Ex works (EXW) to delivered duty paid (DDP)
• Letters of Credit/Negotiable Bills of Lading
• Cargo Insurance
• Consolidation/Deconsolidation/NVOCC Operations
• Systemwide Track & Trace/Internet Supply Chain Visibility
• Customs Brokerage and Licensing - Imports/Export/AMS/C-PAT
• Duty Drawback
• Value-Added Warehousing, Inventory Control and Supplier Management

Over the last few years nearly every company in Europe has been able to take some advantage of the free movement of goods across borders. This shift has been good for the large European 3PLs, but cultural differences still prevent centralization of operations at U.S. levels. Most 3PL operations in Europe still have to be designed on a country-by-country basis to be effective.

U.S, Asian 3PLs to Expand
Only three of the companies on the Top 25 list are Asian-based, which reflects slower adoption of third-party logistics in that part of the world. Japan especially has been an enigma. Most major Japanese companies are still hesitant to outsource more than basic transportation to 3PLs. The slowdown in the Japanese economy and pace of change for traditional business practices reflects in the conservatism of Japanese 3PLs. Companies like Yamato, Nippon Express and Kintetsu are leaders in Japan and with Japanese companies all over the world, but they have been slow to expand dramatically into non-Japanese connected western markets. NYK's new direction is an exception to the rule. However, these companies are now making aggressive efforts closer to home, in China. Singapore-based SembCorp Logistics, on the other hand, has taken a progressive approach to becoming to global player. SembCorp owns 20 percent of Kuehne & Nagel, and it is expanding rapidly in India and China.

Leading the global 3PL expansion are UPS, FedEx and DHL. These multibillion-dollar enterprises already service most of the world on package shipments and are expanding their offerings to give similar results for less-than-container-load and container-load shipments. UPS SCS and DHL/Danzas are tied to corporate parents with large free cash flows to fuel expansion.

In the U.S., for the ninth consecutive year, growth in the 3PL services market exceeded overall economic growth. Total 3PL turnover increased by 8.2 percent to $76.9bn. Net revenues for FY 2003 grew by 6.1 percent to $32.9bn following 7 percent growth for FY 2002. Net income increased to 3.9 percent of net revenue from 3 percent in FY 2002 and 1.7 percent in FY 2001.

Individual company results varied with select companies posting strong results. The largest U.S.-based 3PL is UPS Supply Chain Solutions (SCS), which has reached $4.1bn in turnover. UPS SCS was profitable in all four quarters of FY 2003. Standard UPS operating efficiencies are apparently taking hold. Value-added transportation manager C.H. Robinson continued to improve its best-in-class results by increasing net revenue by 12.6 percent to $545m. Its net after-tax income margin increased to 20.9 percent. Turnover was $3.6bn. Net income was $114m.

International transportation manager, Expeditors International, maintained its excellent operations. Net revenues were up 10.1 percent. Profitability continued at high levels with net after-tax income margins of 16.2 percent.

Among value-added warehouse distribution providers (VAWD), Exel and UPS SCS continue to be the major players and both had good growth and improved profitability. Among mid-sized VAWD 3PLs, such as Kenco, Genco, Jacobson and DSC, revenue growth exceeded 10 percent.

These mid-sized, privately held VAWD 3PLs are often very competitive and are gaining business quickly. They all also increased their profitability. These companies are improving their core warehousing offerings, adding more value-added options, expanding their transportation offerings and improving integrated solutions. They are not yet among the global players.

The trend overall is for more integrated, technical and velocity-driven solutions for all 3PLs. Web-based inventory tracking and event management are necessities. In recent research done by Armstrong & Associates on the VAWD segment, the most requested value-added services were reverse logistics, vendor/inventory management and customization/subassembly. With regard to transportation value-adds, the major requirements are for international transportation/ customs brokerage assistance, expanded IT/visibility and domestic transportation network management. These value-added preferences reflect the global trends to overseas outsourcing, longer supply chains and better information control.

The ranks of these global players will continue to concentrate in the near future. Three important trends are driving this path to fewer and larger global 3PLs:

1. The world's largest manufacturers and retailers have solidly adopted the logistics outsourcing concept, and they prefer to do business with other larger companies, including their 3PLs.

2. While more and more manufacturing, sourcing and other supply chain activities are happening in places like China, India, Latin America and other emerging markets, required logistics capabilities often do not yet exist in these regions. The Global 1000 companies operating in these markets want global logistics providers that can expand operations wherever they are needed and move from region to region as manufacturing sources change.

3. To quickly grow in size, capability and geographic reach, global 3PLs must expand by acquisition. The big 3Pls that intend to be among the handful of truly global players are under great pressure to eat or be eaten by their competition.

Bigger is Better
Global corporations increasingly want single points of contact for their outsourced logistics. For example, a few years ago, General Motors formed Vector, a logistics management company that it jointly owns with CNF Inc., the parent of Con-Way Transportation, Menlo Worldwide and its subsidiary, Menlo Logistics. This so-called 4PL runs much of GM's supply chain in the U.S., but the actual logistics operations have been subcontracted to other 3PLs, including TNT North America, Penske and several others. The logistics subcontractors are doing the inbound materials management, dedicated contract carriage, cross-docking and other logistics tasks, but Vector is GM's one point of contact.

We are seeing this trend play out as the Global 1000 corporations send out their requests for proposal for logistics services. Often only the very top players are being asked to bid, and the bar for what constitutes a top player keeps rising. The smaller players may be great companies, but they end up performing parts of the total logistics contract as subcontractors. Large corporations are often looking for larger 3PLs with financial stability and wide geographic coverage.

This trend will increase as more companies become virtual manufacturers producing nothing themselves. Cisco, for example, outsources its production operations except for marketing, sales and high level management. Virtual companies use world-class contract manufacturers like Solectron and Flextronics, but they also need the best logistics capabilities to manage their extended supply chains. Increasingly, that means using 3PLs.

In the automotive industry, large 3PLs dominate the market because they can offer a combination of asset and non-asset capabilities. Penske, Ryder and TNT all have a combination of supply-chain management, transportation execution management and planning capabilities, as well as cross-docking and VAWD capabilities. Automotive logistics 3PLs often provide assets for dedicated contract carriage milk runs from suppliers to plants and value-added services on components just before they are delivered to the production line. The financial muscle to afford these capabilities only exists at a handful of 3PLs.

Expanding Coverage
Booming world trade has fostered longer and more complex supply chains, which in turn has created a pressing need for better logistics in all corners of the world. In China, where a few hundred factories manufacture a large portion of the world's garments, consumer electronics and other products, the logistics infrastructure can be quite primitive, especially as one moves inland. The major retailers and manufacturers outsourcing to these factories are using their relationships with large 3PLs to control how their overseas vendors perform their logistics. A few large 3PLs under the control of the U.S. or European buyers handle the logistics from the factories to the ultimate destination. Since these buyers are likely to change their suppliers as cost savings dictate, the 3PLs must be able to manage the logistics flows from any origin to any destination. The actual logistics operations needed currently center on fairly simple operations such as transportation, consolidation and forwarding, but information technology and logistics planning requirements are growing rapidly more complex.

Growing prosperity in Southeast Asia is also building thriving consumer markets. Large 3PLs in Europe, the U.S. and Japan want to ramp up their activities in this region to position themselves for this coming wave. Both U.S. and European operators are looking for local acquisitions to accelerate their capabilities. At least one major U.S. 3PL will announce acquisitions in Asia later this year.

The globalization of 3PLs will spread around the world, although more slowly in many areas where 3PLs have gained limited market entry. The modern outsourced logistics model, where manufacturers and their 3PLs have become business partners with shared authority and responsibility over entire supply chains, has yet to be adopted in many regions. This model is the norm in the U.S., Western Europe, Australia, Singapore, Hong Kong and some parts of Mexico and Brazil. Outside of these areas 3PLs are still treated functionally: The 3PL is hired to perform one task such as warehousing.

In many developing nations, the problem is a lack of infrastructure. For example, in much of Latin America, warehouses are rudimentary. They often lack docks, material handling equipment, and have no IT systems to manage inventory or provide information sharing with carriers or customers. Even in highly advanced parts of the world such as Japan, 3PLs still primarily perform functional roles.

As large corporations expand their businesses and their processes to all regions of the world, the need for better logistics continues to transform 3PLs and forces them to become supply-chain partners. In most cases, this transformation is accompanied by acquisition.

Expanding the Footprint
The acquisition wave is building momentum again. The center of activity is in the developed economies of Western Europe and the U.S. UPS SCS, Penske, Menlo and C.H. Robinson have established footholds in Europe, mainly by acquiring well-established companies in this region. These U.S. companies are now well positioned to grow their European business on an even footing with the big local competitors.

On the other hand, European 3PLs continue to add to their capabilities in the U.S., which remains the largest and most attractive market. Last year Deutsche Post, through its DHL subsidiary, acquired Airborne to expand its express business. In the near future, we expect Deutsche Post or its competitor, Schenker, to add to capabilities in the U.S. with acquisitions in warehousing, distribution and transportation.

We are also likely to see other European players, and perhaps some Asian-based 3PLs acquire mid-sized U.S. 3PLs that have long been strong players in the VAWD sector. Recent examples include the purchases of USCO by the Swiss-based Kuehne & Nagel and Standard Warehouse by UTI. Companies like Kenco, based in Chattanooga, and Chicago-based DSC receive inquiries continually. These 3PLs, many of which are family owned or closely held, are reluctant to sell because business is good and the owners enjoy what they're doing.

The attractiveness of the U.S. market is not the only reason foreign companies are interested in U.S.-based 3PLs. European 3PLs are coming to the U.S. to make sure that they are strong enough to compete against UPS, FedEx and other U.S.-based logistics providers that are aggressively entering their home markets. It is market positioning on a global scale.

Regardless of where a global 3PL is based, it is going to have to make acquisitions in foreign markets to fill out its offerings, both in terms of capabilities and geographic coverage. If the economy continues to recover worldwide, the acquisition pressure will be intense.

Evolving Payment Models
Of course, the 3PL industry can only grow if it is profitable enough to attract investment capital. At times the growth of segments of this industry has been hampered by inability to make money. In the VAWD segment, large customers have traditionally wanted to pay on cost-plus open-book arrangements. Margins were kept low. In addition, under gain-sharing arrangements 3PLs have often been unable to collect their full shares. In the transportation management sector those who operate on transactional freight bill models have had a particularly difficult time making money.

On the other hand, 3PLs that take full responsibility for all transportation services do much better. These transportation-oriented 3PLs can leverage the volume and freight flows of multiple customers to obtain better rates than any one customer could negotiate. A good portion of these savings goes to the 3PL's bottom line. Good examples of transportation-oriented 3PLs that understand how to make money are C.H. Robinson, Expeditors and Landstar. These profitable companies control the transportation spend. They are not interested in having accounts where they simply provide transportation management and clerical functions on a cost-plus basis.

Conclusion
There will be winners and losers in the global 3PL race. The shakeout that is coming parallels what happened in the U.S. during the 1980s after transportation deregulation. Then, a small group of carriers grew rapidly by out-performing the competition. They won market share. Other primarily higher cost companies either went out of business, or retreated to small, defensible niches. In today's 3PL market, there will be a small group of big operators with global reach and international skills that will dominate worldwide logistics. They will have to grow fast enough to service the largest customers and to avoid being commoditized by those customers. At the other end of the market, there will also be niche players that will often end up working for the global 3PLs. There will be limited room for mid-sized generalists.

Only time will tell who the winners and losers will be. For now, we present a comprehensive analysis of the 25 3PLs that are leading in the global race. This selection has been made on turnover, current coverage, breadth of skills and parent company gravitas.

Top 25 3PLs

Click here for a PDF of the Top 25 3PLs ranked by revenue.

Want more information about Global and Regional 3PLs? Contact Dick Armstrong at 800-525-3915 or dick@3PLogistics.com.

About Armstrong & Associates: Armstrong & Associates Inc. is a supply-chain management consulting firm specializing in market research, mergers and acquisitions and outsourcing. Armstrong & Associates publishes Who's Who In Logistics? Armstrong's Guide to Global Supply Chain Management. Recent research papers include Warehousing in the United States and Global Logistics Services Providers II. In addition, Armstrong & Associates maintains databases of warehousemen, freight forwarders and third-party logistics and distributing companies. Armstrong & Associates, Inc., 100 Business Park Circle, Suite 202, Stoughton, WI 53589; Ph: 608-873-8929; Fax: 608-873-5509; Web: www.3PLogistics.com.