A Chemical Reaction

A Chemical Reaction

Transplace’s purchase of SCO Logistics is aimed at bringing revenue, expanded services, new customers and new talent to the Dallas-based logistics operator. But it also brings Transplace something increasingly important and scarce: new capacity.

In the U.S., shippers are “absolutely” headed toward a capacity crunch this year that will squeeze them well into 2012, said George Abernathy, executive vice president and chief operating officer at the $800 million logistics company.

That squeeze is reflected in the recent spate of logistics and trucking acquisitions. Third-party companies such as Transplace and Hub Group are buying businesses to build bigger networks that can deliver dwindling capacity to shippers.

“The capacity challenge on the horizon lends itself to a focus on how goods will be moved in 2011 and beyond,” Abernathy said. “Flatbed capacity has already tightened to some level of stress in certain markets, and that’s before the economy truly rebounds. When it does rebound, a company that hasn’t thought strategically about their capacity is going to be in a very challenging environment.”

That’s why the SCO Logistics deal may not end Transplace’s expansion by acquisition and why the company may look beyond its non-asset business model. Although Transplace is “very comfortable” with its model, the company would consider acquiring an asset-based company to secure capacity, Abernathy said.

“We would and are considering the potential for an asset play, if that would expand our footprint for our current customers,” he said.

Vehicle market research firm ACT Research projects a shortage of Class 8 tractors that will grow from about 10,000 trucks today to 180,000 trucks by the end of 2012. The trucking industry skipped an entire purchase and trade-in cycle during the recession, Abernathy notes, holding onto aging trucks far longer than usual.

Transplace is taking a long, hard look at what it expects will be a significant capacity shortfall and searching for innovative ways to secure capacity for its customers.

“We’re running multiple party bids, getting two or more customers inside a particular bid so they can leverage their freight with each other,” Abernathy said. “One man’s head-haul is another person’s backhaul. We’re also getting a lot of new carriers, not just to haul freight today but to be ready to haul freight in 2012.”

The company also is eyeing acquisitions. SCO Logistics is the first purchase for Transplace since CI Capital Partners acquired the company in 2009, but it may not be the last. “We’re very active in looking at other strategic acquisitions,” Abernathy said. “We’re looking at verticals where we don’t already have a broad footprint.”

For example, SCO Logistics gives Transplace access to chemical supply chains. “The chemical market was one of our primary targets,” Abernathy said. “SCO provides a world-class customer list, and the people and processes we need to serve them.”

Compared with Transplace’s consumer packaged goods, retail or discrete manufacturing customers, the chemical industry has unique transportation needs, said Frank McGuigan, SCO Logistics’ president and CEO. “There’s more reliance on rail and bulk truck transportation,” he said. “Overall, the things that trouble supply chain leaders in other industries trouble them in chemicals.” Chemical manufacturers may face more of a capacity shortfall than general dry freight shippers. The equipment used to haul their products is often tank trucks designed to handle specific hazardous materials, Abernathy said. “The more specialized the equipment, the greater the shortage you’re going to see,” he said.

Founded in 2000, SCO Logistics handles about 45,000 shipments a month, said McGuigan, who will stay with the company. Like Transplace, SCO Logistics is a non-asset 3PL that secures capacity through a network of carriers and offers a proprietary transportation management system.

“There’s a lot of alignment in their business models,” Adrian Gonzalez, a director at ARC Advisory Group, said in his Logistics Viewpoints blog. “A key difference is vertical focus.”

Transplace will watch for potential acquisitions in other verticals where the company’s logistics and freight broker business is thinly represented, Abernathy said. “We do some electronics, for example,” he said. “Microsoft is a customer, but we don’t have a broad footprint there.”

The company also plans to expand into new geographic markets. It has a subsidiary in Mexico and plans to be more active in Canada, Abernathy said. “We’ll be broadening our global footprint as opportunity comes along.”

Contact William B. Cassidy at wcassidy@joc.com.