Global Trade Drives Third-Party Logistics Providers' Expansion

The eastward expansion of the European Union. The entry of China to the World Trade Organization. The likely spread of NAFTA to all of the Americas. The juggernaut of free trade and globalization of manufacturing and retail sourcing is unstoppable. But the speed with which this globalization is reshaping supply chains has been startling, especially for the third- party logistics providers whose job it is to support these supply chains.

"3PLs that expect to be competitive with major customers all have stepped up their strategic plans for global expansion," says Richard Armstrong, president of the Wisconsin-based 3PL research firm, Armstrong & Associates. "Their customers are telling them where they need to be to support rapid global business expansion."

This trend has lighted a fire under the world's 3PLs, including the U.S.-based companies that to a large extent have depended on the North American economy to fuel their growth. Until the end of the 1990s, 3PL annual revenue growth in the U.S. alone was climbing at around 10 to 15 percent year after year. International activity consisted mainly of cross-border NAFTA movements or management of export and import freight. In the last two years, however, setting up operations in Europe, Latin America and Asia has become a priority for those U.S.-based 3PLs that want to ride the globalization wave.

"Growth for 3PLs in emerging markets such as China and India should be between 20 to 30 percent over the next few years," says Ken Chay, corporate director of marketing for APL Logistics. "Average worldwide 3PL growth estimates for that same time horizon are only about 10 percent. Everybody knows where the action will be."

Growth Drivers
Global growth strategies for U.S.-based 3PLs is being driven by both their own plans, and by customer demand.

"Customers that we just served domestically are asking us to help them with their growing global activities," says Chay. "It is not just a matter of their being pleased with our domestic service, so they are willing to try our international services. Increasingly, they want to connect their global sourcing and inbound logistics operations with their domestic warehouse and distribution. As a global 3PL, we can bridge those two ends of the supply chain."

Mark Rhoney, vice president of marketing and strategy for UPS Supply Chain Solutions, says customers are coming to his company looking for their own global growth opportunities.

	"Growth for 3PLs in emerging markets such as China and India should be between 20 and 30 percent over the next few years." - Ken Chay of APL Logistics

"Our path to global growth is showing these customers that outsourcing more functions optimizes their global flexibility to react to new market trends," says Rhoney, who adds that global customers are finding this flexibility by having 3PLs streamline vendor management into the manufacturing process, managing supplier compliance and consolidating shipments for easier transport and customs clearance.

At the same time, Rhoney says, UPS SCS is driving its own global destiny. "Global expansion has been part of the company's growth strategy for more than a decade," he says. "The most rapidly growing parts of business, for both package delivery and for supply-chain services, is wholly outside the U.S."

UPS SCS was involved in expanding its global footprint primarily through acquisitions since 1995. These acquisitions of forwarders, customs brokers and other operations around the world were driven by customers asking UPS SCS to be in more places to support them.

"In the early days of the globalization trend, those customers tended to be U.S.-based multinationals," says Rhoney. "Now, the customer base is much more diverse and includes companies with no ties to the U.S."

Chay agrees that the large U.S.-based 3PLs have been preparing themselves for increased globalization for some time.

"We all anticipated the shift to manufacturing in China," he says, "but we were all surprised by how quickly the shift has occurred."

Global sourcing of consumer goods, especially from China, is the center of growth for APL Logistics. This sourcing function takes in many activities throughout the supply chain. At origin, APL provides freight forwarding, purchase order management, quality assurance, vendor-managed inventory, information based services, scanning, documentation and container consolidation. It manages international ocean and air as a freight forwarder. At destinations in the U.S, Europe and elsewhere, APL handles import activities such as customs brokerage, portside flow through warehouses and deconsolidation as well as full domestic warehouse distribution through a system of shared and contract warehouses. At destination points, APL Logistics also provides domestic truckload and intermodal services.
China, however, has increasingly become the big growth engine for APL Logistics. The company has been in the market for more than 20 years, and was among the first to have the so-called wholly foreign-owned enterprise (WFOE) license. Its logistics activities there grew out of the APL liner service to China that goes back 150 years.

The next services that APL Logistics (and virtually all foreign 3PLs) would like to perform in China are domestic transportation and distribution operations. Right now, however, China does not allow foreign investment in logistics operations or domestic 3PL.

"The opportunities for direct 3PL activity in China will be enabled by the World Trade Organization schedule over the next five to 10 years," says Chay. "The logistics opportunities will open up gradually on a laddered basis."

Consultant Richard Armstrong sees these domestic Chinese distribution opportunities as one of the most important competitive battles for the 3PL industry in the years ahead.

"China will become a huge consumer market in which all truly global 3PLs will need to operate," says Armstrong. He adds that likely U.S.-based candidates include all of those companies that have been successful there supporting the export trade, such as APL Logistics, UPS SCS, FedEx and a few others.

"But these U.S. companies will be going up against the big Japanese players such as SembCorp Logistics, Yamato, Nippon Express, as well as the well-known European-based 3PLs," says Armstrong. "It is going to be a donnybrook."

"3PLs that expect to be competitive have stepped up plans for global expansion." - Richard Armstrong of Armstrong & Associates

In the meantime, China still represents opportunities for U.S.-based 3PLs beyond exporting consumer products and electronics to the U.S. and Europe. For example, Joe Mulvehille, vice president of international for C.H. Robinson Worldwide says that although export forwarding from China is its primary business activity in that region, its export to Asia from the U.S. and other parts of the world grew significantly.

"Moving raw materials to China and other parts of Asia to support their manufacturing base is becoming huge," he says. "When the restrictions on foreign ownership and operations within China are reduced, this inbound business will flourish even more."

Beyond China
Ironically, the success of the China trade is helping some 3PLs to expand their businesses in other parts of the world. APL Logistics's Chay says that many customers have learned caution about relying too heavily on China from such events as the West Coast port shutdown, the SARS epidemic and repeated terrorist scares. An increasing number of companies are diversifying their risk, and APL Logistics helps them develop a "plan B" sourcing strategy if for any reason China were suddenly shut off.

"China will remain the dominant location, but many companies want backup plants or sourcing points in places like India, Vietnam, Mexico and farther south in Latin America," says Chay. "When we have a deep customer relationship, we can engage them in discussions about sensitive subjects such as contingency planning."

Asian manufacturing and sourcing are not the only trends fostering global 3PL growth. According to UPS's Rhoney, opportunities abound.

"From a 3PL perspective, there are opportunities in every marketplace," he says. "New consumer markets are growing in emerging economies in Latin America and Eastern Europe. Outsourcing is more accepted in Europe, so there are more opportunities than even in the U.S."

Rhoney also believes that in all geographies, but especially outside the U.S., there are special opportunities for 3PLs in certain industries. He points to high-tech companies that source, manufacture and distribute on a global basis. High-tech has always been a large user of UPS's airfreight and express services because of the importance that speed plays in reducing inventory costs, avoiding obsolescence and introducing new products.

"High-tech is just now beginning to look at outsourcing more broadly to 3PLs," says Rhoney. He says that customers in the high-tech sector are using UPS SCS for vendor-managed inventory, managing inbound supply into contract manufacturers and streamlining post-sales functions such as service parts, returns management and repair and refurbishment.

Picking Winners
Armstrong believes the global winners among U.S.-based 3PLs will be those companies that have both strong financial backing and the capability to broaden services. He says UPS SCS is one such 3PL doing all the right things.

"UPS SCS did over $2bn in sales in 2003, and half of that revenue was earned outside the U.S.," says Armstrong. "They are cross-selling the UPS express services and the UPS SCS 3PL services to move each other forward. This year, they will probably have a couple billion dollars in free cash flow to build their businesses even further."

Rhoney confirms that more than half of the 3PL's revenue is derived from activity outside the U.S. borders by performing more than 60 services, including international trade management, order and inventory management, distribution, supply-chain design and management, transportation network management, and service parts logistics. The company is also growing its global business through acquisition and through partnerships with other service providers.

"We are increasingly the general contractor utilizing our own assets and those of local providers," says Rhoney. "This approach gives the customer more flexibility. Local and regional players still have a role to play because of their niche services or local network but we generally are engaged to play a broader role than just a local market."

Another 3PL that Armstrong sees making strides in the global arena is Penske Logistics, the subsidiary of Penske Truck Leasing, which is a joint venture of General Electric and Penske Corporation.

Vince Hartnett, president of Penske Logistics says that his company will derive about 25 percent of 2004 revenue outside the United States. European operations are the most important international market segment for them, followed closely by Mexico and the rest of Latin America. The Asian business is just developing.

"We see a convergence of services, not just specific functions such as warehousing or transportation management," says Hartnett. "Customers have complex supply chains, and they want a 3PL that can provide integrated solutions."

With customers such as Ford, Detroit Diesel, Whirlpool and many others, the company is finding that automotive and industrial manufacturers are among the most promising targets for their global efforts.

"We have a lot of experience supporting their complex supply-chain activities, such as managing inbound flows of components and materials," says Hartnett, who says that this customer base increasingly is looking far outside of the U.S. for sourcing and manufacturing. "This surge in demand for global sourcing services has happened just in the last 24 months," he says.

Becoming a global 3PL requires companies to acquire new capabilities and to provide new services. For example, Hartnett points out that nearly all of their customers' supply chains used to be limited to specific regions, such as North America, the European Union or the Mercosur countries of Argentina, Brazil and Chile. Cross-border procedures in each of these regions are well established and relatively trouble-free.

"Now we are seeing companies extend their sourcing base outside of these regions, especially to Asia, where cross-border movements are more difficult," says Hartnett, who adds that the company is expanding its capabilities to meet these needs in two ways. First, Penske Logistics is developing additional skills and expertise internally to provide what its customers need for inter-regional operations in areas such as customs and duties. "We also excel at providing lead logistics management of other best-in-class service providers to handle tasks beyond our core competencies."

For example, in Brazil, Penske has a joint venture with Cotia Trading, which has been in the international trade financing business in that region for 25 years. The Cotia Penske operation in Brazil has customers such as Ford and French retailer Carrefour.

"We tap into the expertise of partners where it provides the exact services our customers need," says Hartnett. "This lead logistics approach also allows us to grow more rapidly in the global sphere."

More Acquisitions
Armstrong also expects to see more U.S. 3PLs growing their global businesses by making strategic acquisitions, especially in Europe where there is an abundance of mid-sized, private 3PLs with solid market niches.

"These companies are more affordable than the very large global companies, and often do better financially," says Armstrong. "These acquisition allow U.S.-based 3PLs to gain new skill sets and to expand geographic coverage very quickly."

One U.S.-based 3PL that has developed through acquisitions is C.H. Robinson Worldwide. It has made its mark in global logistics through acquisitions such as its purchases of international freight forwarder C.S. Greene in 1992, European motor carrier Transeco in 1993, South American 3PL Comexter Group in 1998 and French 3PL Norminter in 1999.
According to C.H. Robinson's Mulvehill, global logistics revenue from outside the U.S. borders is now about 14 percent of the company's total logistics top line.

"This international business is growing faster than the domestic portion, but from a much lower base," says Mulvehill.

While he agrees that acquisitions such as Norminter have been important, he points out that the company is also growing simply by offering more services to more points around the world. The company already has 12 offices in Western Europe and two in Eastern Europe that provide truckload service and pan-European distribution capability.

	Moving raw materials to Asia for manufacturers is 'becoming huge.'

"Our core competency is over-the-road truckload service," says Mulvehill, "but we are also expanding ocean and groupage services worldwide. One of the cornerstones of our growth strategy that has communicated to our investors is that we are aggressively expanding our global network."

Economies in Latin America have been volatile for the last three years, so Mulvehill says that the 3PL business there has been flat. C.H. Robinson provides trucking in the Mercosur countries, but the largest part of their Latin American business is still import and export air and ocean freight forwarding.

"Brazil is probably our strongest Latin American market, but this business is still not growing at the high rates we are enjoying in Europe and Asia," says Mulvehill.

In growing the global 3PL business, Mulvehill says, the company has learned how to operate differently from how it does in the fast-paced U.S. market.

"Operations tend to be more manual," he says, "and the infrastructure is not as well developed as in the U.S. and Western Europe. We have learned patience, and we have learned that customer relationships are often more important that the written contracts."

Armstrong predicts that only a handful of U.S. 3PLs will actually become truly global and compete head-on with the major foreign 3PLs such as Exel, DHL and Kuehne & Nagel.

"Within five years, there will be as few as five or six 3PLs that will offer true global reach, manage shipments of all sizes and provide a complete spectrum of supply-chain management services," says Armstrong. "It is hard to predict how many of these will be U.S.-based companies, but the competition will be fierce."

ASICS America Stays a Step Ahead with the Help of APL Logistics

Staying ahead in the athletic footwear market is no walk in the park. Price competition is brutal. Style trends change overnight. The wrong inventory can shrink thin margins to nothing. That is why Ken Kato, vice president of operations for ASICS America, the U.S.-based subsidiary of Japanese athletic apparel and footwear company ASICS, spends so much of his time worrying about supply-chain efficiency. All footwear production has been done in China for nearly 10 years, but until quite recently, Kato has had little idea of which orders had been filled, when they were shipped and what items were in any particular container. The company's previous consolidator had only minimal scanning capabilities that it could only perform at the Hong Kong pier where containers were stuffed. Shipment and inventory visibility information was erratic and highly inaccurate. Kato decided that visibility had to be far more accurate and had to begin much farther back in the supply chain. Kato sought out a 3PL that could provide supply-chain information of his Chinese operations, as well as the actual logistics of handling U.S.-bound shipments. He selected APL Logistics because of its IT capabilities and its long experience in the Chinese market. Kato now sends his purchase orders to APL Logistics, which in turn provides them over the web to the Chinese factories making his footwear. The factory prints the barcode labels from the POs as the goods come through the production line. After quality assurance processes, the factory scans the goods, so ASICS knows exactly what has been produced and which POs have been completed. When the containers are stuffed, the cartons are scanned a second time. "We get the final manifest as the container leaves the factory in the form of an advance shipping notice," says Kato, who adds that APL cleanses the data before sending it as an EDI message. Besides providing much better supply-chain visibility, Kato says, the highly accurate ASN data has other benefits. He runs the detailed data through an internal accounting system that provides true cost down to the carton level. "We compare this with our standard costs to check for variances," says Kato. "We are working on another application that will compare these actual costs with our projected costs to check for billing errors. "The scan and pack operation and the ASN data lead to many good things for our supply chain," says Kato. APL Logistics handles all of the container consolidation and freight forwarding. The factory calls APL Logistics when production on a particular PO is finished and ready to ship. APL Logistics books the container with carriers according to contracts that ASICS has in place, oversees the consolidations at the factory loading dock and manages the cartage to the pier. When the containers arrive on the West Coast, APL Logistics cross-docks direct shipments to certain customers and trans-loads everything else for trucking to the ASICS distribution center in Mississippi. Kato is now working with APL to set up a more elaborate end-to-end visibility capability that is web-based. APL Logistics is setting up 30 check points along the supply chain from inside the factory all the way to the receipt at various points in the U.S. Any delays out of preset tolerances will produce exception alerts that APL Logistics and ASICS can respond to. All the ocean carriers that APL works with for its Asian customers are already tied into the system. Next to be added will be ASICS's customs broker. The last link to be added will be the truckers moving product to the ASICS distribution center in Mississippi. The new visibility system is scheduled to be implemented this spring and will be fine-tuned over the next year. The new system, as well as the existing scanning system, is being implemented at all of the footwear factories in China that ASICS uses, and will be expanded to Vietnam where additional factory capacity is being contracted for. The web-based system will allow ASICS to add factories as needed and to move from country to country. "We needed a partner who could move quickly for us and implement this system wherever we moved." ASICS has chosen not to expand the scanning system to the apparel side of the business, which is mostly based in Indonesia. The scanning system requires special scanner guns and some degree of system integration, which can take a year to implement fully. "In the apparel business we sometimes change vendors so often that we wouldn't be able to implement the systems properly," says Kato. He says that he expects the partnership with APL Logistics to be a long one. Both parties have put several years of work into these programs, and further innovation will require even more time and collaboration. "After making this commitment, it would be very costly and operationally difficult to change partners," says Kato. "We are confident that we selected the right partner."