In a 3PL market defined by rapid consolidation and growth, shippers and providers are ensuring seamless transitions.
Among the trends that shaped the transportation landscape during 2015, the rapid pace of mergers and acquisitions in the third-party logistics (3PL) market was one of the most notable. XPO Logistics alone purchased four companies with varied capabilities in 2015, including Con-way, making XPO the second largest less-than-truckload carrier in the United States. Other significant mergers last year included C.H. Robinson's purchase of freightquote.com, the acquisition of Coyote Logistics by UPS, the FedEx purchase of GENCO, and the acquisition of OHL (Ozburn-Hessey Logistics) by GEODIS.
Some industry researchers expect the pace of 3PL mergers and acquisitions to remain brisk in 2016. During Armstrong & Associates' annual 3PL Value Creation Summit, industry executives indicated that consolidation within the 3PL market would continue, although they predicted that mid-sized and small acquisitions, rather than the $100-million-plus mergers that were completed in 2015, will dominate 2016.
Similarly, Dr. Robert Lieb, professor of supply chain management at Northwestern University's D'Amore-McKim School of Business, addressed the trend of mergers and acquisitions in the 22nd Annual Survey of Third-Party Logistics (3PL) Provider CEOs, sponsored by Penske Logistics and presented at the Council of Supply Chain Management Professionals' conference in October 2015. The survey notes that consolidating firms need to weather significant industry restructuring, and navigate brand confusion in some markets.
Not all growth in the 3PL market will occur in North America, according to executives speaking at the Armstrong & Associates summit. These leaders anticipate significant growth in the 3PL market in Asia.
"Most Asia 3PL growth will occur to support intra-Asia trade and distribution within Asian countries," according to Armstrong. "Cross-border e-commerce is a hot market in China as increased wealth is driving the demand for products sourced in other countries."
Online shopping has also had an impact on North American-based 3PL companies, accounting for 12 percent of 3PL growth, according to one survey, which anticipates that the percentage will climb to nearly 21 percent in three years.
Reasons for mergers and acquisitions are as varied as the 3PL providers involved. Some common reasons include growing pressure to expand services, increase geographic footprints, and drive scale in particular markets.
Because the 3PL market is highly fragmented, some consolidation is to be expected, according to industry analysts. "Consolidation in the 3PL industry generally facilitates scalability of operations in the merged organization, and should result in higher levels of service to the customer," says Dr. John Langley, professor at Penn State University and noted supply chain academician. "While there could be impacts on pricing, the overall market is sufficiently competitive that pricing should remain the same."
Not only is it important for shippers to choose the best 3PL to meet their needs, but they should also focus on being good customers, Langley notes.
"Perhaps the best strategy for the shipper is to continue to be a desirable customer for the new 3PL," he says. "One of the first steps in any merger and acquisition is that the new 3PL assesses the quality of the newly acquired customers and places the highest priority on retaining the best, most attractive customers.
"Unfortunately, the assumption that all customers of the acquired organization are worth retaining is usually not a good one, as the acquiring 3PL will typically conduct an in-depth analysis of all customers and make decisions accordingly," Langley adds.
What do mergers in the 3PL sector mean for shippers? There will be no shortage of options for customers. For a shipper using a 3PL that has been acquired, however, some initial issues need to be addressed sooner rather than later. For instance, how will day-to-day operations or data transfer be impacted? Does the new provider have a level of expertise in a specific vertical?
Beyond these tactical questions, one key factor to consider is the relationship between the shipper and the acquired 3PL and how the acquisition will change this dynamic.
These issues were top of mind for Johnsonville Sausage when Ryder System acquired Total Logistic Control (TLC) in 2011. Headquartered in Sheboygan Falls, Wis., Johnsonville employs 1,600 people. Its products, primarily sausages and sausage-related foods, are available in 50 states and 40 additional countries. When the acquisition occurred, Johnsonville had been a TLC customer for more than one decade. Ultimately, Johnsonville chose to maintain its relationship with Ryder, and is still a customer today.
"One reason we maintained the relationship was our long tenured, successful partnership with TLC," says Paul Kramer, director of logistics for Johnsonville Sausage. "TLC had always provided great service, and added value to the Johnsonville supply chain."
Kramer was not concerned about the loss of specialized knowledge or expertise when Ryder acquired TLC. "We knew that TLC was being acquired by Ryder's food and beverage vertical service segment, and that service would continue to operate largely as it had," he says.
Before the acquisition, Johnsonville had a vehicle leasing relationship with Ryder, and was aware of the size and array of services the 3PL provided. "We were excited about the synergies and new opportunities the acquisition would create," adds Kramer.
Ryder provides commercial transportation logistics and supply chain management solutions. Ryder Fleet Management Solutions offers leased truck rentals and related services. Ryder Supply Chain Management Solutions manages the flow of goods from the acquisition of raw materials to the delivery of finished products. Ryder Dedicated provides solutions that combine vehicles, drivers, routing, and scheduling.
One reason Ryder acquired TLC was to expand its presence in the food and consumer packaged goods (CPG) market. "We have typically looked at acquisition opportunities from the perspective of adding a capability we did not have previously, or entering a strategic niche market," says Steve Sensing, president of Global Supply Chain Solutions, Ryder System.
This aligns with Ryder's supply chain business model of focusing on specific vertical markets and developing expertise designed for each sector's specific supply chain needs.The firm focuses on these vertical markets: aerospace and defense, automotive, consumer goods, energy and utilities, food and beverage, healthcare, high-tech and electronics, oil and gas, industrial manufacturing, and retail.
"Before acquiring TLC, a majority of the work Ryder did for the food and beverage industry was truck leasing/rental and dedicated transportation," says Sensing. "The acquisition made it possible for Ryder to rapidly become a big player in the CPG market, as TLC was a leader in that space, offering specific capabilities, such as distribution management, contract packaging, solutions engineering, and temperature-controlled facilities, for CPG companies."
Ryder also brought a number of attributes to the table that benefitted TLC customers. "These included our contacts and name recognition, which enabled TLC to be more competitive than it was on its own," he adds.
"When Ryder acquired TLC, Johnsonville Sausage received several services including transactional transportation and public warehousing," says Sensing. "Today, Ryder operates Johnsonville Sausage's dedicated fleet in the Midwest."
Ryder provides trucks, drivers, and engineering services for the fleet, which moves raw materials from the Chicago area to Johnsonville's production facility in Wisconsin. The fleet then transports finished products to Johnsonville Sausage's distribution center in Chicago, the largest in the company's network. The dedicated fleet includes 10 tractors and approximately 40 trailers.
In addition, Ryder operates a captive maintenance facility for the fleet on Johnsonville property, operated by Ryder employees. Before the acquisition, TLC operated the dedicated fleet and facility.
For Johnsonville, the transition from being a TLC 3PL customer to being a Ryder 3PL customer was smooth. One of the greatest factors for the seamless transition was the relationship between Johnsonville and both TLC and Ryder.
"We trusted Ryder when they told us there would be no adverse impact on Johnsonville," says Kramer.
That trust has resulted in a positive experience for Johnsonville. From Ryder's perspective, the TLC acquisition has also proven beneficial, helping solidify its leadership and fueling 14-percent growth in the CPG market. The process was positive, as well.
"There is no silver bullet to make a transition like this successful," notes Kramer. "The best practice has to be employed long before the transition occurs. It starts with choosing the right logistics service partner in the first place, one with a company culture that is closely aligned to yours and with a proven track record of service excellence.
"Once you select a provider, you then work to establish a trusting, collaborative relationship with them," he adds. "If you have that, and the logistics partner stays true to who they are through the acquisition and transition, it will be successful."
Ryder is committed to making all transitions seamless to customers, Sensing notes. In addition to the tangible assets of a company being viewed as a potential candidate for acquisition, cultural fit is also important.
Not all 3PL providers choose to grow through acquisition. For some, such as niche provider TRIOSE, growth has been totally organic. Based in Pennsylvania, TRIOSE was established in 1999 and focuses exclusively on the healthcare industry. In addition to a variety of services, TRIOSE offers customized solutions designed to help supply chain and materials management teams gain control and visibility over inbound and outbound freight expenses, from small parcel to large cargo.
"We have been methodical in our approach to growth," says Ira Tauber, president of TRIOSE. "We did not want to let growth impact our ability to deliver for our customers."
TRIOSE provides customized solutions to an industry with unique supply chain requirements. For example, one hospital may have 6,000 to 7,000 suppliers, and between 50,000 and 90,000 SKUs. In contrast, an automobile manufacturer may have a supplier base of 200 to 1,000 vendors, and manage anywhere from 2,000 to 5,000 SKUs when manufacturing a car. Additionally, the healthcare expertise is distinctive.
"In healthcare, product accountability is critical," says Tauber, including chain of custody in some instances.
TRIOSE added value early in its relationship with Rockford Health System by developing consistent processes for purchasing, using, and measuring freight transportation costs. "Freight was something that just happened and was not monitored," says Chip Geiger, purchasing manager for Rockford.
Rockford Health System, located in Rockford, Ill., is the largest health system serving northern Illinois and southern Wisconsin. It includes a 396-bed tertiary care hospital; numerous clinics with locations throughout the region; a 55-bed in-patient hospital offering a full range of rehabilitation services; and a visiting nurses' association providing a variety of home healthcare services to patients of all ages.
The health system selected TRIOSE as its 3PL provider following a complete review of its supply chain process, conducted with the help of an external consultant. Implementing a freight management program was among the 53 cost-saving measures TRIOSE identified.
"One big challenge for Rockford was the need to educate its health system workers and executive leadership on how freight impacts the bottom line," says Tauber. "Rockford management needed to find a way to bridge its finance and accounts payable personnel with its purchasing staff to better manage all costs."
While TRIOSE provides freight management services to many healthcare providers, one area of customization is reporting and access to data. Recognizing that each hospital or healthcare system is unique is one reason that the TRIOSE implementation program with Rockford was smooth and seamless.
"We used few internal resources, and implemented the program quickly," says Geiger. Rockford saw measurable results within the first month. The first year produced $51,886 in savings as the system ran 43 percent of its freight spend through TRIOSE. Rockford currently has 70 percent of its freight spend through TRIOSE.
"By implementing the program, we brought a new and more comprehensive focus to freight," says Geiger. "Instead of a necessary evil that no one wanted to address, we were able to install a consistent monitoring program that everyone from our receiving dock to accounts payable departments understands."
Rockford has been a TRIOSE customer for more than seven years, and after the initial onboarding with TRIOSE, "we never looked back," says Geiger. Although some larger supply chain firms have healthcare vertical teams, Geiger does not always believe that bigger is better. "Low prices do not necessarily equal low cost," he notes.
Rockford and other healthcare providers deal with patients in operating rooms that need specialized products. When lives are at risk, a late or missed delivery is not just an exception on a report, but a potentially catastrophic event. Geiger counts on TRIOSE to establish and monitor carrier relationships and ensure that service levels are acceptable. If there is a problem, rather than making many calls, Geiger has only one call to place—to TRIOSE.
Rockford has been pleased with the level of customer service TRIOSE provides, and the ability to customize reports and other data needed to manage its supply chain. The company is also impressed with TRIOSE's in-depth understanding of both freight management and the healthcare industry.
"I go to TRIOSE with my goals, and they develop a program that meets my needs," says Geiger. "I do not have to be an expert on freight standards." At times, TRIOSE provides services that eliminate the need for Rockford to hire two full-time equivalent employees, he adds.
Consolidation in the 3PL industry is not a surprise, Geiger says, and merger and acquisition activity in healthcare is also on the rise. And, much like the healthcare industry, it is important that companies that grow through acquisition not only leverage their expanded scale, but also deliver high levels of customer service.
As the 3PL industry continues to evolve, shippers will have many choices. For non-asset-based providers, the cost of entry into the market is relatively small, notes Satish Jindel, founder of SJ Consulting Group. He does not find the recent flurry of acquisitions as surprising or as something that is likely to limit options for shippers.
Shippers choose to contract with 3PL providers for many reasons: to focus on core competencies, reduce overall transportation or logistics costs, or to better manage inventory. As shippers evaluate existing, merged, or new 3PL providers, they should also be aware of their own processes and approach to vendor relationships and choose partners that best align with their strategies and needs.