Transportation and logistics workers—from the executive suite to professional drivers to the warehouse associates picking orders on the floor—have navigated a period of turmoil and disruption over the past two years unlike any the industry has seen before. “If ever there was a time where ‘survival of the fittest’ was an accurate description of the market, that was it,” says John Vaccaro, president of third-party service provider Bettaway Supply Chain Services, of the pandemic and the world’s journey through seemingly endless Covid mutations.
Yet even through all that turmoil, 3PLs (third-party logistics service providers) continued to step up to the plate, and in many cases delivered—and prospered—as never before, albeit not without overcoming new as well as traditional challenges. Along the way, 3PLs have discovered how they prepare and offer services, determine and price for value, and figure out what customers want—and are willing to pay for—is changing as well.
“It’s in the mindset,” says Vaccaro. “No one has ever talked this much about supply chain before. It used to be invisible,” he notes, adding that “the Covid disruption has affected folks in the supply chain the way the Great Depression affected our grandparents.” He believes the migration of companies from minimal inventory and just-in-time practices to emphasizing more robust inventories and deeper safety stocks is a permanent shift. “A lot of people were scarred by [the pandemic]. It changed their mentality, how they approach the business, and how they evaluate needs, assess risk.”
In some ways, the pandemic accelerated trends already under way: The boom in e-commerce, embraced now across all age demographics. Shifts to smaller, more frequent shipments. Redesigned distribution networks built for speed and velocity. Giant regional warehouses giving way to more smaller, localized warehouses in more places.
Vaccaro, based in New Jersey, shares an example: “For years, big box warehouses were going out to Harrisburg, Pennsylvania, two hours from New York City,” he recalls. “Now, we’re seeing them go up in New Jersey—30 miles from Manhattan. They want more [product] closer. It’s the Amazon effect. You have to fulfill and deliver in a day or less—whether it’s a parcel shipment or a truckload of beverages on pallets.”
IT’S NOT AN ARBITRAGE GAME ANYMORE
What do 3PLs need to do differently? How are they adapting to a market with sustained high demand for services; a critical lack of capacity, whether it be trucks, drivers, or warehouses and their workers; and shippers wanting faster and faster service?
“You can’t wrestle with the carrier to get low rates; it’s not an arbitrage game anymore” for 3PLs, says Satish Jindel, chief executive officer of analytics firm ShipMatrix. “The days of ‘What rates can you give me, Mr. Trucker?’ and then adding a big markup” are fading into history, he says.
Instead, Jindel advises shippers to take a critical look at their logistics and shipping operations, ask carriers to help them root out practices that add cost or reduce efficiency, and then work to eliminate those.
“Identify what you can control: What is it in your operation that adds cost or makes your freight unattractive to the carrier?” Jindel says every shipper’s network has some level of waste. Opportunities abound to eliminate that, he believes. “If the best way is by incurring a few extra dollars to better palletize or crate your shipment, then do that. It will reduce your LTL [less-than-truckload] charges by a larger amount.”
Tom Curee, senior vice president for strategy and innovation at nonasset-based 3PL Kingsgate Logistics, says that one unintended lesson many 3PLs learned was how quickly they can react to change. “We have had to radically and rapidly shift, particularly in how we buy capacity and manage carriers, and help customers make the most of scarce capacity,” he notes. “We have all seen the value of agility, and we’ve learned that when the market—and our customers—demand rapid change and adaptation, we can do it.”
He adds that in the current market, with capacity tight and prices at historic highs, another hard-earned lesson was to focus on optimizing each trailer. “Shippers are to the point where they recognize capacity is going to cost more. They’re not arguing over pennies. So, it’s not enough to tell them ‘I can find you a truck for this load.’ They want you to optimize the value of what is being moved and what you are spending for that truck,” Curee says. “Increasing trailer utilization by 10% to 15% has a huge impact on their capacity needs. That helps everyone across the supply chain.”
ENTER THE DEEP POCKETS
As the market evolves into its next iteration, certainly third-party logistics firms, as well as other intermediaries like freight brokers and logistics technology providers, have their fans. Including ones with cash looking to invest.
Despite the pandemic, the level of venture capital and private equity money flowing into 3PLs, trucking companies, and logistics tech startups has been stunning. What has made this market a magnet for investment cash, and what do these investors bring to the party?
For Geoff Turner, chief executive officer of 3PL and freight broker Choptank Transport, it was two opportunities: First, taking to the next level a company he and his team had spent 20 years building into a $300 million business, and second, access to what every 3PL wants, especially today: more reliable capacity.
Choptank was acquired last fall by David Yeager’s Hub Group, one of the nation’s biggest transportation companies.
“As a nonasset-based 3PL, your scope is somewhat limited,” Turner says. “What our customers have been telling us repeatedly is that they want us to do more, provide more services, and operate in more modes,” he explains. “Now, as part of The Hub Group, we have a logistics platform, intermodal, and over-the-road both dry and reefer, so we can provide a lot more capacity and more complete solutions. It was the right time for the right partner,” he says.
He also cites one other benefit on the brokerage side. Combining Choptank’s brokerage volumes with Hub’s created a brokerage operation with over $1 billion in revenue, providing scale and critical mass that enable it to offer truckers more quality freight in more of their preferred lanes.
FINDING THE SWEET SPOT
Private equity investors, through their infusion of cash, can help accelerate growth for a 3PL as well as expand it into complementary verticals that, as in Choptank’s case, broaden its capabilities and solution set. But that’s not the only advantage they bring to the table.
Bob Bianco, operating partner at private equity firm Calera Capital, notes that the value his firm brings when it invests goes beyond capital and financial acumen. Strategic insight, experience, and subject matter expertise are just as valuable, if not more so. Prior to joining Calera Capital, Bianco spent 30 years with Menlo Logistics and was its president at the time the company was acquired by XPO Logistics several years ago.
“We focus on asset-light companies that are founder- or family-owned; we want to be their first private equity partner,” Bianco says, noting that it can often be difficult for these firms to access cost-effective capital and develop a workable strategy for expansion. One of Calera’s sweet spots is in the supply chain space, particularly mid-market firms in transportation management and freight brokerage. The company has a long history of partnering with company founders and owners in these specific market segments.
Bianco describes an attractive candidate as one that has a track record of growth and success, an excellent workforce culture, and a focus on specialized or differentiated services. “We’re not competing in the commoditized logistics space,” he emphasizes. “We like companies that have great employee retention and low turnover in their customer base.” A private equity partner, he adds, with its experience acquiring companies, also can help a founder expand the business through targeted, strategic acquisitions.
What’s top of mind with the chief executives that Bianco works with? “Getting skilled, qualified workers and retaining them. That’s their biggest battle,” he says. “We’re dealing with the highest wage inflation in 30 years. That has a ripple effect that goes right into the prices you’re asking the customer to pay.”
IT’S STILL ABOUT THE PEOPLE
Dave Beatson, principal at private equity firm ATL Partners, shares some similar observations. A long-time industry executive, Beatson has helmed several logistics software startups and, earlier in his career, was chief executive officer of global freight forwarder Circle International and president of the venerable aircargo pioneer Emery Air Freight during its time under CNF Inc.
One of ATL’s portfolio companies is Pilot Freight Services, a leading player in U.S. last-mile delivery. Over the course of its ownership of Pilot, ATL helped strengthen the company with acquisitions that gave Pilot “middle-mile” capabilities, as well as expanded its last-mile white-glove service capacity. Investments also were made in Pilot’s tech platform that drove better service and efficiency. The strategy enabled Pilot to grow significantly, deliver consistent profitability, and solidify its position as one of the nation’s top three providers of final-mile delivery and logistics services.
The plan worked; Pilot drew the attention of ocean shipping behemoth Maersk, which has announced that it is acquiring the last-mile service provider as a strategic move to bolster its U.S. logistics capabilities.
Success with any private equity investment starts with “good people who are good at what they do and understand the market and what customers are looking for,” Beatson says. “And a strong work ethic and a culture where people are paid and incentivized in the right way.” Also important is “the ability to help management identify and act in a timely manner on strategic opportunities … in new verticals or with other services customers want that complement your core competency,” he says. Lastly, Beatson invokes an old truism: “You have to be close to your customers” and listen to them through regular conversations and feedback.
THROWING DARTS
Not everyone is of the opinion that the flood of cash flowing into logistics and supply chain is necessarily a good thing. “What venture capital people are doing I would not do at all,” says ShipMatrix’s Jindel. “They are destroying the market, throwing money at anything that moves.” His view is that the principal strategy of many venture capital firms is to emphasize growth at any cost, not worry about profitability, and “keep throwing money at it until the valuation reaches a point where they can sell and cash out.” It’s like “throwing darts at a target and if one [hits the mark], then forget about all the others that missed,” he adds.
He contrasts that to the approach of private equity investors, who in his view, “are investing in a business that is going to be solving a problem for the customer.” Jindel characterizes this approach as “investing correctly in businesses that have a good operating model, are delivering measurable value, and are making a profit. The private equity firm becomes a long-term partner in growing that business and helping it expand into more services and new customers.”
What’s the most critical asset a 3PL needs to succeed? Jindel believes it is an active, assertive sales force that’s educated, that’s informed on current and emerging trends, and that combines a consultative approach with accurate data and intelligence to help shippers make the best decisions. And who don’t try to fit the shipper into a predetermined solution.
At the end of the day, regardless of the mode, Jindel says, “You have to know more about [the market] than me as a customer. Otherwise, why do I need you?”
