In its first full year of operations as a U.S. third-party logistics operator, Echo Global Logistics took in $33.2 million in gross revenue from 677 customers. That was 2006. Four years later, Echo counted 22,765 customers and $426.4 million in annual revenue.
The enormous growth, which came despite the deepest economic recession in generations, suggests an underlying change in shipping patterns as a result of that downturn and the moves by cost-cutting carriers to put their capacity under tighter control.
In the dash to secure space, more shippers appear to be turning to companies that own few transportation assets, or none at all.
Transportation intermediaries — whether they’re called brokers, freight forwarders, non-vessel-operating cargo carriers or third-party logistics providers — are playing a more prominent role in international trade lanes and shorter line-haul lanes as shippers seek to bring more certainty in their supply chains.
NVOCCs’ share of the U.S. containerized import shipping market grew from 24.8 percent in 2006 to 32.7 percent in 2010, according to figures from Journal of Commerce sister company PIERS, and their share of imports from North Asia jumped from 30.3 percent to 39.9 percent in that time.
The biggest among the forwarders appear to be getting bigger. The Top 10 forwarders’ market share grew from 40 percent in 2006 to 44 percent last year, according to research analyst Transport Intelligence. The largest of them, Kuehne + Nagel, expanded its net profit 11 percent in the first half of 2011. The forwarder’s revenue actually slipped 4 percent, but K+N said that was because of unfavorable currency adjustments, and its ocean volume grew 12 percent over the first half of last year, twice the market growth.
In the United States, where trucking and rail carriers have grown highly disciplined in deploying capacity, intermediaries who have the ability to tap into freight space are growing rapidly. Freight brokers increased their revenue 17.1 percent in the first quarter from the same period a year earlier, the Transportation Intermediaries Association said in its latest quarterly survey. The survey, which included traditional transactional brokers and logistics providers, found U.S. 3PLs grew fastest outside their core truckload business, a sign that shippers are opening more sections of their supply chains to outsourcing.
Logistics companies say they are tapping previously unmined veins of transportation spending as shippers outsource larger portions and multiple strands of their supply chains in a volatile post-recession economy. Some of the growth is simply a push to get one week’s shipments to their destination, but brokers and forwarders say they are taking those transactional deals to deeper levels.
Echo Global, for example, says the vast majority of its clients were transactional customers of its freight brokerage service, but the number of “enterprise,” or long-term, logistics customers increased 27.6 percent in 2010 from the year before, was up more than fivefold from 2006. In 2010, those 148 enterprise clients accounted for 39 percent of Echo’s revenue.
Douglas R. Waggoner, CEO of the Chicago-based company, said Echo’s expansion represents new business rather than a capturing of market share from competitors. “Almost all of our enterprise business comes from companies that have never outsourced before,” he said. “We don’t go out trying to poach business from 3PL competitors. We have plenty of opportunities without doing that.”
Logistics companies are a long way from having to turn cannibal to gain business. “The market as a whole is so gigantic, it doesn’t take a lot to gain market share,” said Geoff Turner, president and CEO of Choptank Transport, a Preston, Md.-based 3PL and freight broker. “If you’ve got capacity, you can get the freight. There are tons of opportunities out there if you can find the equipment.”
Choptank operates its own fleet and has contracts with some 10,000 truckload carriers offering refrigerated, dry van and flatbed services. The privately owned company is adding 8,000 square feet to its headquarters on Maryland’s Eastern Shore.
“We’re being aggressive but growing at our own pace,” Turner said. “We’ll never be C.H. Robinson,” he said, referring to the $9.3 billion third-party logistics and transportation brokerage giant, “but we’ll continue to move
3PLs have been heading in that direction since the early 1990s, enabling the overseas expansion of supply chains in the first great wave of globalization. As Echo Global’s history shows, they were growing rapidly before the financial collapse in 2008 and global recession in 2009.
That expansion is accelerating as manufacturers and retailers seek more shipping security in an uncertain recovery. Logistics spending by shippers jumped $114 billion to an estimated $1.2 trillion last year, according to the Council of Supply Chain Management Professionals’ 2010 State of Logistics Report.
With transportation costs and inventories rising on a choppy trajectory, logistics spending is likely to outstrip GDP growth for the next several years, said Rosalyn Wilson, senior business analyst at Delcan and author of the report.
One sign of U.S. brokers’ more significant role was the TIA analysis showing the strongest shipment growth for 3PLs came in the less-than-truckload market. LTL revenue soared 28.6 percent at the companies surveyed. LTL sales still represent only 8 percent of the revenue of the surveyed companies but the figures suggest logistics companies are reaching into different types of services and transportation modes.
That’s a significant step for shippers because LTL business often represents the last mile of last-minute delivery, the goods that are more time-sensitive so tied more directly to a shipper’s bottom line than the truckload delivery that generally goes more to brokers and is more a part of a shipper’s basic, nuts-and-bolts warehouse fulfillment.
“Fifteen years ago, you probably would have struggled to name a third-party logistics company involved in LTL trucking,” said Jack Holmes, president of UPS Freight. “Now you would be able to name 15 off the tip of your tongue.”
The same can be said for LTL carriers in logistics. UPS Freight itself is part of UPS Supply Chain Solutions, the trucking, forwarding and logistics arm of $50 billion package giant UPS. As truckload and LTL carriers push deeper into freight brokerage and logistics, the lines dividing non-asset and asset-based transportation become more blurred.
“We partner with some 3PLs and we compete against others,” Holmes said. “At the end of the day, they control some spend, and you have to ask whether you want to participate in moving that spend. If you don’t, you’ll have smaller market share.”
Holmes calls the 3PL-carrier relationship an “evolving dynamic” that “LTL companies didn’t spend much time thinking about 10 years ago. It’s a dynamic the typical LTL trucking company spends a lot of time thinking about now.”
England Logistics, a subsidiary of truckload carrier C.R. England, started out as a pure transactional freight broker, but like many counterparts moved deeper into providing third-party logistics services for its parent company’s large customers.
Those Fortune 100 and Fortune 500 businesses continue to outsource more transportation and logistics functions to 3PLs, said Jason Beardall, vice president of the Salt Lake City-based logistics company. “Seven years ago, 40 percent of the Fortune 500 companies were using 3PL services,” he said. “Now it’s upward of 90 percent.”
Those businesses are using multiple 3PLs in an increasingly complex array of networks, domestic and international. “We’re doing business right now with a large Fortune 100 company that is in the midst of looking to outsource” inventory management, Beardall said. “They’re going to pick four providers. They’re telling us, ‘We’re not going to tie ourselves to one player only.’ The larger companies like diversification, and frankly, it’s healthy.”
Smaller and midsize shippers, however, are the 3PL’s “bread and butter,” Beardall said. “They need a good, healthy 3PL partner to get capacity.”
Since the recession, that’s also true for some larger shippers. “Shippers in many cases were forced to reduce headcount through the economic downturn, and they do not have the resources to drive functions such as carrier procurement,” said Kerry Byrne, executive vice president of Total Quality Logistics in Cincinnati. “That’s particularly true given that regulations and insurance requirements are changing, and the fact that (truck) capacity is tight and will be tighter going forward.”
Smaller and midsize customers fuel Echo’s rapid growth, Waggoner said. “They may not have transportation departments or execution systems, and lack the ability to get truck capacity in the market at the correct price,” he said. “It’s not a core competency for them, but it is for us, and it makes sense for them to outsource.”
In the end, however, it comes down to access to space. “We’re allowing these largest shippers to access small to medium-sized carriers without having to manage 200 to 300 carrier companies,” Beardall said. “They’re reaching deeper into the market to secure more capacity at acceptable rates.”