Being asset-poor has long been the path to riches. But as truck users face what may be a lengthy period of supply contraction, will a new type of intermediary come to rule the roost?
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.
For more than 30 years, nonasset-based third-party logistics service providers (3PLs) have been on the right side of virtually every meaningful trend. A multidecade buyer's market for truck capacity has given 3PLs enormous pricing power and the flexibility to match carrier supply with shipper demand. Producers, recognizing they weren't logisticians, began offloading many logistics-related functions to 3PLs. An increase in offshore production required a deeper understanding of long-distance supply chains and regulatory compliance, responsibilities that companies were all too happy to relinquish to their 3PL partners. As technology requirements expanded, shippers turned to 3PLs to manage IT networks and build value through automation.
All this converged to usher in what has become a golden era for 3PL services. Since 1996, domestic 3PL revenue has grown at a 10-percent compounded annual rate, according to Armstrong & Associates, a consultancy. Armstrong estimates U.S. 3PL revenue will exceed $150 billion this year, which is five times higher than in 1996. Over the past 17 years, only once—in recession-wracked 2009—did the domestic sector report year-over-year declines in revenue, according to the firm. Tompkins International, another consultancy, expects 3PL growth in 2013 to range between 7 and 10 percent, three to four times that of growth in gross domestic product. Since January 2000, equity values of publicly traded 3PLs have outperformed the Russell 2000, a diversified basket of smaller-capitalization stocks, by 400 percent, says Robert W. Baird & Co., an investment firm.
3PL use today appears as strong as ever. Of the top 100 firms in the **ital{Fortune} 500 index, 96 use a 3PL, according to Armstrong data. Of the remaining 400 companies, 80 percent engaged a 3PL in 2012, up from 65 percent in 2008, according to Armstrong.
The factors that goosed 3PL demand initially show little signs of abating. The question is who will reap the spoils of future growth. Until now, the nonasset-based players have been the prime beneficiaries. But there are some who argue the pendulum could be swinging toward providers with physical assets that can also bring a nonasset-based component to the table.
According to those who share that view, the catalyst will likely be a capacity crunch brought on by the chronic shortage of drivers and the reluctance of fleet operators to invest in equipment that will boost capacity rather than just replace aging iron. Baird estimates that trucking supply, which grew 3 percent a year from 1992 to 2006, has shrunk by 10 percent since then as a freight recession and the subsequent economic downturn caused shipper demand to contract. Carriers struggling with the subpar economic recovery and a host of escalating costs from fuel to tires to engine replacements, driver availability, and government regulations have spent the past five years playing it safe. Benjamin Hartford, lead transport analyst at Baird, said in an October research note that carriers are "managing from the trough," analyst lingo for adopting a minimalist approach to their operations.
As their traditional haulage business stumbles along, carriers looking to generate new revenue streams have been expanding into nonasset-based services, Hartford says. The resultant convergence of asset- and nonasset-based coverage is causing problems for the nonasset-based players, especially those without sufficient buying power or a unique product niche, Hartford says. Shippers worried about reliable access to truck capacity are now more willing to utilize asset- and nonasset-based providers, the analyst added. This reflects a change in mentality from previous cycles, when shippers tilted toward nonasset-based firms that were more "carrier neutral," Hartford says.
IS "RANDOM-ROUTE" PASS�??
Jonathan Starks, director of transportation analysis for consultancy FTR Associates, says shippers seeking capacity stability are reducing the amount of "random-route" freight they tender in favor of a dedicated contract carriage strategy, where a carrier dedicates capacity for a multiyear period in return for a volume commitment. Because the random-route traffic is a broker's bread and butter, this migration is bound to slow broker growth, Starks reckons. The continued tightening in supply will accelerate the shift, which has been under way, albeit gradually, for about a decade, he adds.
Ryder System Inc., the Miami-based trucking and logistics giant, is one of those straddling both sides of the fence. Ryder has fused its brokerage services with its "dedicated" trucking unit. The program operates under one contract with a uniform set of terms and conditions, and a single point of contact at Ryder, according to Steve Martin, the company's vice president of dedicated.
Martin says Ryder's model gives customers both flexibility and capacity assurance, depending on their situation. It will also have the effect of siphoning off supply that would normally be available to nonasset-based providers through the non-contractual, or "spot," market. As a result, "running a business on the basis of spot market activity will become more challenging," Martin says.
Not surprisingly, those on the other side of the debate—notably the nonasset-based providers—haven't gotten the memo about the sun setting on their business. They note that the widespread capacity shortages that many have been warning about for five years or so have yet to materialize. "We're not seeing the needle move very much" on supply constraints, says Chris Pickett, chief strategy officer at Coyote Logistics, a nonasset-based 3PL in Chicago.
Pickett says nonasset-based providers with the carrier contacts and network scale have the agility to quickly procure capacity during seasonal spikes such as in produce season, or in markets like retail and so-called fast-moving consumer goods (think toothpaste and toilet paper) that are staple items but where velocity of end demand can shift on a dime. "These are unpredictable and volatile markets, and it's tough for a shipper to leverage asset-based carriers that operate on static schedules," he says.
John G. Larkin, lead transport analyst at Stifel, an investment firm, says asset-light 3PLs will continue to play a vital role in optimizing fragmented networks on both sides of the transaction. Larkin added that shippers aren't as concerned about the prospect of supply constraints as the conventional wisdom might hold.
"When capacity really does tighten to the point where shipments are left on the dock, then the asset-based carriers with brokerages might be more comforting to shippers," says Larkin. "But we have been anticipating the 'mother of all capacity shortages' for a half-decade already, and the 3PLs still are shooting the lights out with growth way above the rate of freight growth overall."
EVEN GREATER VALUE
A nonasset-based provider's load-matching skills could stand it in even greater stead during a prolonged period of tight supply, according to Valerie Bonebrake, who has worked for asset-based and nonasset-based providers, and now heads the 3PL unit at Tompkins. Perhaps for that reason, many shippers would rather work through 3PLs than go direct with the carriers even if they had the resources to avoid an intermediary, according to Bonebrake. "The nonasset-based 3PLs' value proposition will not change as capacity tightens up," she says.
Bradley S. Jacobs, founder and CEO of XPO Logistics Inc., a Greenwich, Conn.-based broker and 3PL, says the nonasset-based category has become bifurcated, with stronger players gaining share at the expense of weaker rivals. "There's a massive market share movement from the smaller brokers to the larger ones. This isn't surprising since the bigger ones have greater capabilities to offer," Jacobs says. "When I ask customers what they value most, it's always some version of lots of capacity, on-time pickup and delivery, and cutting-edge technology."
Evan Armstrong, Armstrong's president, says the leading 3PLs of the next 20 years will possess the broadest and most integrated logistics capabilities, expand their penetration into once-alien markets like less-than-truckload and intermodal, demonstrate network scale (he estimates that $300 million a year in purchased transportation is today's price of entry to play with the big boys), and have the widest geographic scope.
Most important in what may become a long-lasting period of capacity shortages, successful middlemen will "contract with tactical asset-based providers as [capacity] is needed," Armstrong says. The nonasset-based providers "may have assets where they are necessary to support customers, but it will be a more 'asset-right' versus an asset-based model," he adds.
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The U.S. manufacturing sector has become an engine of new job creation over the past four years, thanks to a combination of federal incentives and mega-trends like nearshoring and the clean energy boom, according to the industrial real estate firm Savills.
While those manufacturing announcements have softened slightly from their 2022 high point, they remain historically elevated. And the sector’s growth outlook remains strong, regardless of the results of the November U.S. presidential election, the company said in its September “Savills Manufacturing Report.”
From 2021 to 2024, over 995,000 new U.S. manufacturing jobs were announced, with two thirds in advanced sectors like electric vehicles (EVs) and batteries, semiconductors, clean energy, and biomanufacturing. After peaking at 350,000 news jobs in 2022, the growth pace has slowed, with 2024 expected to see just over half that number.
But the ingredients are in place to sustain the hot temperature of American manufacturing expansion in 2025 and beyond, the company said. According to Savills, that’s because the U.S. manufacturing revival is fueled by $910 billion in federal incentives—including the Inflation Reduction Act, CHIPS and Science Act, and Infrastructure Investment and Jobs Act—much of which has not yet been spent. Domestic production is also expected to be boosted by new tariffs, including a planned rise in semiconductor tariffs to 50% in 2025 and an increase in tariffs on Chinese EVs from 25% to 100%.
Certain geographical regions will see greater manufacturing growth than others, since just eight states account for 47% of new manufacturing jobs and over 6.3 billion square feet of industrial space, with 197 million more square feet under development. They are: Arizona, Georgia, Michigan, Ohio, North Carolina, South Carolina, Texas, and Tennessee.
Across the border, Mexico’s manufacturing sector has also seen “revolutionary” growth driven by nearshoring strategies targeting U.S. markets and offering lower-cost labor, with a workforce that is now even cheaper than in China. Over the past four years, that country has launched 27 new plants, each creating over 500 jobs. Unlike the U.S. focus on tech manufacturing, Mexico focuses on traditional sectors such as automative parts, appliances, and consumer goods.
Looking at the future, the U.S. manufacturing sector’s growth outlook remains strong, regardless of the results of November’s presidential election, Savills said. That’s because both candidates favor protectionist trade policies, and since significant change to federal incentives would require a single party to control both the legislative and executive branches. Rather than relying on changes in political leadership, future growth of U.S. manufacturing now hinges on finding affordable, reliable power amid increasing competition between manufacturing sites and data centers, Savills said.
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.