Scaling Down

Scaling Down

Copyright 2008, Traffic World, Inc.

Companies across a range of industries seem to be getting smaller in response to a smaller American economy, but the biggest casualties so far may be one of the big ideas in the logistics world.

The idea is one that was forged in the heady period of the early 1990s, when the prospect of burgeoning world trade, a new world of technology and robust economies in the United States, Europe and Asia led growth-minded logistics and transport operators looking for shipper gold in what they call the one-stop shop.

Just one service adjustment and an acquisition away, the one-stop shop has been the logistics castle on the hill, a mythical place where inventory is deftly managed, synergies are achieved, transportation is optimized and financial returns are maximized. And for many logistics companies, the only way to get there has been by achieving the sort of scale unheard of in the logistics field.

But the unyielding attention to scale has never looked quite so tattered as it has in recent weeks. That''s partly because of the impact of a pared-down economy, but the truth is the grander theory behind scale was that it would make logistics operators something like the huge post-panamax vessels now filling maritime trade lanes - so big that they are impervious to the shifting economic tides.

That certainly seemed to be the thinking at UTi Worldwide, which little more than a decade ago was a tiny European forwarder and today is a $3.7 billion behemoth bulked up by a long series of acquisitions and a strategy to build up contract logistics services to big customers such as Wal-Mart.

But the retailing giant, too, has seen the limits to its expansive ambitions. A push toward the grocery business has brought Wal-Mart unwelcome attention from organized labor and a new awareness of the tight margins in the supermarket trade. And its attempt to move its clothing line up the fashion ladder fell flat. Not everyone, it appears, wants to do all their shopping at Wal-Mart.

More transport and logistics companies also are finding the benefits of scale aren''t unlimited, and that the one-stop shop isn''t a goal to go after at any cost.

Railroads seemed to learn the lesson late in the 1990s, when several carriers extracted themselves from questionable drives into the forwarding and trucking.

More recently, in contracting, some transportation companies are looking at the expected savings in per-unit costs and comparing to them to the per-unit revenue and finding the figures don''t add up quite the way they''d hoped. That''s going to happen in annual contracting, of course, but there is a broader and growing trend that suggests more transportation companies are taking a deeper look at scale and concluding that the conventional wisdom, that scale''s virtues trump all business vices, needs another look.

YRC Worldwide Chairman Bill Zollars suggests as much when he points to the unbending truth that trucking economics is built on density. That''s why the company''s regional LTL business may not have the same scale next month, but the scale of profitability should look better.