November 1, 2003
operations insight | 3PL Buying Patterns

A pain in the assets

a pain in the assets

Burned in the past by deals gone sour, 3PLs have become wary of investing in warehouses, trucks and even forklifts. Now they're asking their customers to share the risks.

By Helen Atkinson

In these days of technologically supercharged logistics services, it's almost possible to believe that cargo can be willed across the country by the right software—not hefted onto trucks by forklifts and hauled down dusty highways. Certainly, judging from the way most third-party logistics companies (3PLs) talk, you'd think ownership of assets like distribution centers, forklifts and tractor-trailers was simply too mundane to bother with. In the last three or four years, most 3PLs have advertised an "asset-light" philosophy, strategically shying away from investments in these areas. Capital, it seems, is for growing through acquisition and installing whiz-bang computer systems to help serve the customer better.

BDP International Inc., a freight forwarder turned 3PL, is typical. "Our assets are people and technology, and we look to partner with people with assets," says Richard Bolte Jr., president of BDP International in Philadelphia. "We prefer to concentrate on the things we feel we do best and allow the asset providers to do the same."

But the reality is that most 3PLs still make most of their money by providing warehousing and trucking services. According to industry analyst Dick Armstrong, last year 22 percent of the $65 billion spent on 3PL services went for transportation management, and 21 percent was spent on warehousing services. So-called lead logistics services,where a 3PL takes over the entire logistics operation and coordinates the activities of all service providers, accounted for only 4 percent. "They're still providing basic services," says Armstrong.

Covering their assets
If that's the case, why are 3PLs publicly moving away from owning a fleet of shiny trucks or a well-appointed DC? And what does it mean for customers?

3PLs argue that keeping out of the realty business allows them to be more flexible in the s ervice they provide. There's some merit to their argument: If your 3PL has a million square feet of warehousing in Long Beach, Calif., but you want to shift your receiving operations to Oakland, you don't want your logistics service provider to be a drag on that change.

"Those companies that are getting into warehousing services today tend to lease space rather than purchase their own space, primarily because they want to [be free] to take advantage of growth opportunities and also to add value to their customers' businesses," says Joel Hoiland, president and chief executive of the International Warehouse Logistics Association (IWLA ), which increasingly represents 3PLs. "One of the intangible offerings [of 3PLs] is flexibility, and owning assets doesn't necessarily imply flexibility."

Big 3PLs, such as U.K.-based Exel, do still own large amounts of real estate they can leverage to serve the customer. But any dreams shippers may have had about simply shifting the capital risks associated with logistics operations to their third-party logistics providers are all but gone.

"All of the 3PLs are much less adventuresome about the projects they get into and are much more conservative about having their assets covered," says Armstrong."Back in the mid-'90s, you had 3PLs that were going after really big clients and really got their fingers burned." The public falling-out between Ryder and Office Max is a good example, Armstrong says. In that case, the contract ended over bickering about who was paying for what.

Joel Hoiland sees another reason for the shift. "Twenty or 30 years ago, the entrepreneurs who were getting into the warehousing business were purchasing assets and making fortunes, and then they built strong operations around those assets.But then,in the '90s,the industry began changing. Mergers and acquisitions became prevalent, venture capitalists and investment bankers became interested in the logistics industry, and investors wanted different performance results, which look better without significant investment capital sunk into assets."

When UTI Worldwide bought Standard Corp., a logistics provider, the handover included none of Standard's assets, which are now owned and leased separately. Likewise, USCO divested itself of many of its assets when it was bought by Swiss 3PL giant Kuehne & Nagel.

However, 3PLs are service providers first and foremost and,in a highly cut-throat business,there's huge pressure to provide the car rier and warehousing services the customer wants. As a practical matter, 3PLs shy away from sinking dollars into truck and warehouses in markets where there's plenty of capacity. But when there are problems getting hold of storage space and reliable transport elsewhere, 3PLs are forced to take a more hands-on approach.

Indiana-based transportation and logistics provider Air Road Express is one company that has come to realize that not all assets are dirty. The company specializes in less-than truckload shipments for automotive companies manufacturing in Mexican maquiladoras. Because good trucks that don't break down can be hard to find in Mexico, the company has found itself buying trucks to service parts of that business. "This is a good example of where assets have strategic value,"says Ben Gordon, a logistics consultant based in Boston.

Lessor of two evils?
Asset ownership has also turned out to be advantageous for 3PLs operating in non-U.S. locations, especially the burgeoning trade zones in Asia such as China, Taiwan and Malaysia. " In China, it's not the same kind of business as in the United States" says BDP's Bolte. "It may be difficult to get warehousing in Shanghai, or the warehouse-owning partners there may not be reliable. So there might be times in emerging markets where we take on a long-term lease, but even then we would look for customers to … share the risk."

Neil O'Connell is of the same mind. "We lease warehouses when it's necessary," says O'Connell, who is chief technology officer at Stonepath Group, a Philadelphia-based 3PL started two years ago by Dennis Pelino, the former president of Fritz Cos. "But we don't seek to become a large warehouse lessor."

Bob Voltmann, president and chief executive of the Transportation Intermediaries Association, says he sees a new issue developing, as more and more asset-heavy carriers try to get into the business of providing 3PL services. "The carriers now see that the value-add is in the 3PL service, including information expertise, as opposed to moving a piece of equipment along a fixed rail or roadway. So we're seeing more carriers enter this space, and they are by definition more asset-based. But they need to form themselves on an asset-light basis or they're not performing on the best basis."

Voltmann acknowledges that customers are wary of 3PL services tied to asset-owning parent companies, as they were when the big ship-owning companies like APL and Maersk set up their own logistics divisions. "To be successful, they're going to have to operate as if they didn't have assets," he says. "Some will be able to and some won't."

Spreading the risk
This is the new, complex face of logistics services. A shipper might end up using a 3PL provider that was originally a freight forwarder or customs broker, or perhaps one formed from a conglomeration of several companies' logistics departments. Or it could be a trucking or ocean shipping company that's decided to branch out. Or even a brand-new company funded by venture capitalists, with an entirely different approach to financial management. Tibbett & Britten, the U.K.-based logistics company, creates a whole new subsidiary every time it enters into a major contract with a shipper. "I suppose the issue is that with everybody migrating into the same space it becomes confusing," says BDP's Bolte.

Confusing or not, one clear trend is toward asking customers to take more financial responsibility for the assets they require. Especially in the case of warehousing, a customer might have to take on responsibility for a lease before the 3PL will sign off on it. This is partly because customers need increasingly customized warehousing and distribution as they ask 3PLs to do more for them than simply store and ship products.

"When you take on a half-million square-foot facility, along with the entire workforce, computer systems and everything else involved, it's a completely dedicated, non-leverageable deal, so they have to agree they'll be there for a certain amount of time ," says Bob Bianco, president and chief executive officer of Menlo Worldwide Logistics of Redwood Shores, Calif.

Even investments in technology—an area in which 3PLs have spent a huge amount of their own money—are becoming increasingly deferred to the customer, Armstrong says. "A company like Exel is probably running three different warehouse management systems, but its customers will ask it to use their own systems on the contract, because that's what they have in the rest of their network. So Exel will spend money on these things, but it's usually spending it only if there's a guarantee on the use of the assets," Armstrong says.

Creative teams
The 3PLs talk more and more of entering into partnerships with their customers, based on changes in their needs as well as increased demand for technology-based services such as tracking and order management. As shippers outsource and defer many of their core logistics functions, and especially as shippers ask for more international service,the idea of using a 3PL as a non-asset-owning logistics management partner makes sense. "I think the scale and geographic scope of some of the contracts these guys are signing mean you're not going to be able to own everything yourself. It's just not feasible," says Robert Lieb, professor at Northeastern University in Boston.

Ultimately, shippers continue to benefit from the 3PLs' ability to leverage their buying power into better leasing and service deals from the companies that do own those assets. They're also in a good position to pick and choose cutting-edge technology for better transportation management.

"There are a lot of creative solutions out there," says IWLA's Hoiland. "Our mem bers come in as solution providers, which means they need to be creative and definitively add value for the customers. The assets become somewhat irrelevant." If a 3PL happens to own a warehouse that would be useful to a customer, then it's a boon. But if not, the 3PL will find warehousing elsewhere.

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