headed for a Brown-out

America's wholesalers and distributors say they have met the enemy, and it is … UPS? Yes, third-party logistics divisions operated by the likes of FedEx, Ryder and Big Brown have already made big inroads into the wholesaler-distributors' traditional market, according to a new study produced by the National Association of Wholesaler-Distributors and Pembroke Consulting. And that competition's not going away anytime soon. In fact, the report, Facing the Forces of Change: The Road to Opportunity, warns that the group's members should expect competition for their core logistics and order fulfillment functions to intensify.

"Third-party logistics companies are on a collision course with distributors for control of the supply chain," says Adam Fein, president of Pembroke Consulting, the business strategy consulting firm that conducted the research.

"Third-party logistics companies and logistics companies [that] provided truck and shed services in the past are now moving inside the brown box to get access to some of the other revenue in the supply chain." Already, he says, 80 percent of the 200 largest logistics companies offer pick and pack services in direct competition with wholesaler-distributors.

What's more, they're finding it profitable. Revenue from value-added warehousing and distribution services reached $17 billion last year, nearly 25 percent of total sales for logistics companies. And those value-added services represent the fastest-growing revenue stream for third-party providers.

Though wholesaler-distributors have been slow to wake up to it, the threat is real, says Fein. Right now, less than half of industrial distribution executives say they expect competition from logistics companies in the future, according to the study. But Fein reports that more than half of the Fortune 500 currently outsource supply chain functions to logistics companies.

A big part of the logistics companies' appeal is flexibility. Compared with their wholesaler-distributor rivals, the logistics companies can offer their clients the following:

• Reduced channel costs. Logistics companies can price their services so that each customer can buy only the services it actually requires. Even though logistics companies may not be able to perform all activities better than wholesalers, manufacturers like being given the option of purchasing only the services needed, such as kitting or labeling.
• More flexibility. Because logistics companies sell their capabilities on an a la carte basis, clients can choose from a menu of options tailored to different customer segments or purchase occasions. For example, manufacturers requiring aftermarket logistics services can elect to receive support that is different from that required by original equipment manufacturers.
• Increased control. Manufacturers are often frustrated by their lack of direct control over the actions of wholesaler-distributors, which typically take ownership of the products they purchase for resale. That's not a problem with logistics companies, which operate on a fee-for-service basis. For example, Ford Motor last year contracted with third-party provider Schneider Logistics to develop a new parts operation, including inventory control and transportation. The two companies worked together to improve Ford's parts operation in terms of costs, availability, delivery rates and shipment quantities. As a result, Ford's OEM parts and services division cut order-to-deliver time from two to five days to less than 12 hours.

Apparently potential customers are taking notice. "Many manufacturers see logistics companies as a viable alternative to wholesaler-distributors for many core activities," says Fein. "Not only is it a viable alternative today, but it will be even more viable in the future."