3PL, 4PL, LLP - is there a real difference and what is the future

Martin Williams - Director, Bisham Consulting

Coventry March 2006

The following presentation was made by Martin Williams to an invited audience in Coventry in March 2006

Agenda
Terminology The market The main players Profitability Customer perceptions Strategic Options Delivering the Basics 4PL Opportunities Future demands and a strategic shift Conclusions

Bisham Consulting
Established 15 years ago Supply Chain & Logistics consultants Strategic and Tactical Key Service Provisions include:
DC location and property development Warehouse design and layouts Automation and materials handling Transport and carrier management Inventory and stock planning Operational systems specifications Tender process management Fleet management and maintenance Project and Implementation management

Developing Supply Chain Strategies Network configuration Outsourcing programmes Sourcing and procurement reviews Auditing Supply Chains Supply Chain process mapping Business modelling Risk management reviews Supply Chain training

Life used to be so simple!

Warehouse keepers, transport companies Shipping companies, forwarders Distribution companies, NVOCCs Integrators , Logistics 3PLs, LSPs 4PLs, LLPs 1960s

1970s 1980s 2000s

Which means?
Global 3PLs seek to manage all the key manufacturer/ links in a clients supply chain, retailer mainly focusing on primary transport, warehousing and secondary distribution. It will own 3PL 3PL a good percentage of the fixed assets, plus managing a variety of 3PL subcontractors. There will be much emphasis on value added services, Forwarder Warehouse but they will tend to the simple. operator They will have geographical Haulier Sea/airfreight company boundaries. There will be a relatively sophisticated IS/IT offering

Which means?
LLPs seek to manage a range of 3PLs. They will provide the overarching systems infrastructure. They will have a global reach. They may or may not own any fixed assets. Concept of best in class. There will be a more advanced value added service offering. Emphasis will be more on strategic partnerships and the sharing of gains. There will be a consulting option. There will be neutrality issues.

Global manufacturer/ retailer

LLP
3PL 3PL Transport company Warehouse operator Forwarder Sea/airfreight company 3PL

Which means?

4PLs are similar to an LLP, but often will directly provide many of the supply chain operations and be 4PL an asset owner. They may have 3PL some geographical limitations and 3PL thus employ 3PLs for some 3PL operations. There will be a key Transport focus on extending the range of Forwarder company services offered covering all Sea/airfreight aspects of the supply chain Warehouse company operator including procurement, demand forecasting, inventory management etc etc.

Global manufacturer/ retailer

European Market for 4PLs/LLPs

Revenues ( Million 14,000 Euros)
12,000 10,000 8,000 6,000 4,000 2,000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total European 4PL Market

and in time

Big and fragmented

Global supply chain market = 300bn? DP/ Exel market share < 4.5%

A Changing Landscape
The last 6 months has seen a frenzy of mergers and acquisitions. DP Exel K&N ACR DB Bax Global DFDS Frans Maas ? - TNT Logistics

Because size matters

Global reach Global Supply Chains

Where are they now?

Nedlloyd Districentres T&B Hays/ACR Caliber Logistics Danzas Fritz ASG AEI Taylor Barnard Exel P&O Distribution TNT Logistics Frans Maas?

All acquired

but paying high premiums..

Acquirer Fedex DPWN Ocean DPWN DPWN Stinnes UPS Ocean TPG Wincanton Exel K&N DPWN Target Date Enterprise value(m) USD 2599 EUR 789 USD 191 EUR 323 EUR 968 SEK 8066 USD 510 GBP 1731 USD 650 GBP153 GBP 345 EUR 440 EUR 5600 Price/Earning 18.8 26.1 20.6 39.2 33.0 12.3 25.3 28.0 29.0 n/a 35.6 7.3 32.9 Caliber 10/97 Danzas 12/98 Mark VII 2/99 ASG 4/99 AEI 11/99 BTL 2/99 Fritz 1/00 Exel 2/00 CTI 9/00 P&O 12/02 T&B 8/04 ACR 10/05 Exel 12/05

P/E industry average = 21.5

Source: Datastream

Poor returns
Turnover Exel DHL Logistics TNT Logistics Wincanton DB/Schenker ACR Kuehne & Nagel T&B Chr Salvesen TDG Panalpina 6344m E6786m E3556m 1652m E1046m E1200m CHF1171m 849m 846m 512m CHF6120m Pre-tax profit 170m 281m (17)m 37.4m n/a 60m 49.0m 3.2m 17.1m 4.3m 212m Margin 2.68% 4.14% 0% 2.26% 5.00% 4.20% 0.38% 2.02% 0.84% 3.46%

E B IT A M A R G IN S

9% 8% 7% 6% A C R /H a y s 5% 4% 3% 2% 1% 1997 1998 1999 2000 2001 2002 2003 K&N DHL Exel W in c a n to n S a lv e s e n T&B 2004

 and the ROIC* is falling

12.7%

13%

8.5%

8.1% 7.0%

1998

1999

2000

2001

2002

* Return on Investment Capital

Source: GV., Bloomberg, McKinsey

But is size everything?

Ease of contact Balance of power Loss of flexibility Customer relationship management

At the same time, customer satisfaction has fallen dramatically in the past years

Why do so many fail?

60% of outsourced logistics contracts are not renewed 38% of clients are not happy with the experience
Low margins Intense competition Little Investment Risk aversion No innovation Cost focus Commodity services

Faults on both sides 3PL/4PL - failing on the basics Customers - unrealistic goals, incomplete data, no preparation

From the capital market perspective only few players EUR billions, ratio 2000 - 03* have improved performance

Therefore
So we have a situation where the market is large, 3PLs have seen significant growth, the market remains fragmented, profitability is falling and customer expectations continue to rise. On top of this global supply chains are increasingly complex and many organisations have multiple internal systems. To reflect this 3PLs are looking to enhance their service offerings 3PLs have some serious decisions to make...
Low margins Intense competition

Little Investment Risk aversion No innovation

Cost focus Commodity services

..and these include.

Sell up Carry on as before Seek to get bigger through acquisitions Accept that you are offering a commodity and drive down costs Operate as a commodity but also offer a value added services menu with a tariff Seek to find niche opportunities (industry/geographic) Develop from a strong in-house base Get the basics right, understand the opportunities, rethink the strategy and move towards the 4PL/LLC arena
Few companies will be successful in the last choice. Parallels with the container shipping industry.

Some of the key challenges

Delivering the basics Margin improvement Market positioning Responding to global needs Cultural fit

What are the opportunities for a 4PL/LLC?

Integrate and Manage Logistics Network Reduce costs and improve service Work across regions Globally integrated Information Network Visibility and monitoring Connect 3PL with client globally Transportation management Business Process Re-design
Transport company 3PL

Global manufacturer/ retailer

LLP/4PL
3PL 3PL Airline Shipping company

Synchronise multiple sourced shipments Process to accelerate product flow Manage customer inventory levels

Warehouse operator

And what are the problems?

Gain share requirements in the 4PL model are often too high, client is mortgaging their future 4PL more attractive to govt. bodies as it provides a quick step to total outsourcing, a share of future cost savings, release of assets and possible cash inflow LLCs find it difficult to integrate freight and 3PL businesses. Lack of top quality, experienced personnel

And some lessons need to be learned, requiring a strategic shift

high acquisition premiums have often not paid off yet LSPs face larger, more sophisticated customers Enhance pre- and postmerger efforts Rethink customer strategies - needs based segmentation -smarter contracting strategies to escape the ITT dilemma Improve pricing and cost of delivery, more standardised offerings Put more emphasis on making multi-user infrastructure work and professional risk management practices More focussed recruitment

Low average account profitability

Contract risks are increasing, but rarely rewarded

Skill gaps in operations and change management Home market mindset and business portfolio

Establish strong global footprint

Future trends
Customer demands are likely to be influenced by: legislation environment increasing geographical competition transport cost differentiation across the modes collaboration increased insecurity major changes in the sourcing of product eBusiness

Future trends
3PL/4PL services are likely to be influenced by: legislation industry polarisation globalisation changes in purchasing terms eBusiness collaboration multi-modal demands margins

leading to the question, which future lies ahead for LSPs

Scenario Rationale
Industry consolidation creates further financial burdens and high fragmentation will prevail Customers will not recognise any value creation potential and base decisions mainly on price Low barriers to entry and lack of established quality standards will attract new entrants

3PL/4PL providers will not

Situation will not improve and may even get worse
Leading 3PL/4PL providers will shape their own destiny be able to earn the cost of capital Margin pressure will increase, further reducing profitability Outsourcing will slow down as LSPs cannot deliver against sophisticated customer demands LSPs reap higher margins and ROIC Consolidation is successful and players can establish distinctive and differentiating value propositions LSPs will be able to deliver against customer value creation expectations

Successful post-merger management will lead to scale economies and synergies Customers will recognise high value creation potential of high quality players New entrants will have difficulty competing on scale and global reach

LSPs will be able to get back on track

Conclusions
The potential market for LSPs remains huge The market remains fragmented Industry consolidation has yet to prove financially beneficial in many cases Customer expectations are largely disappointed The larger 3PLs tend to be more successful Too many LSPs still fail in the basics 4PLs are rare and tend towards LLPs Successful LLPs will create value for their clients and turn 3PLs into commodities Different 3PLs will make different choices Winners will have adopted new strategies There will always be opportunities for niche players