Key Takeaways from the
3PL Value Creation North America Summit 2019

On October 15-17th, third-party logistics (3PL), technology, and investment leaders convened at Armstrong & Associates’ 3PL Value Creation North America Summit in Chicago to discuss trends in the $951 billion global 3PL market.

Many of the 3PL panelists reported double-digit growth in 2018 followed by “good, but not great” growth in 2019. E-commerce has continued to stimulate opportunities, but uncertainty caused by trade wars and import tariffs have impacted activity, acquisitions, and decision making.

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Tariffs and International Transportation Management

The trade war with China has generated some shifts in international supply chains and conservative decision-making approaches by customers.

  • The start of 2019 was soft for International Transportation Management (ITM). Both air and ocean forwarding from China to the U.S. has decreased due to increased political tensions. It has also negatively impacted intermodal rail.
  • Within all ITM, conservative shipper behavior has led to an increase in air freight forwarding. Companies are waiting until the last minute possible before importing goods.
  • Shipper’s supply chains are in flux. They don’t know if they should pull more inventory in or not. A major project that was planned for China may shift overnight and end up delayed while moving it to Korea.
  • Tariffs have led to some supply chain shifts to Southeast Asia (Vietnam, Taiwan, and India) and western Europe. Large companies like Samsung or Yeti can quickly pivot their supply chains from China to Vietnam. But heavily integrated supply chains in China, or smaller competitors are at a disadvantage. It’s harder for them to identify a new supplier and then design and test the potential supply chain.
  • Inter-Asia is experiencing growth from China to Southeast Asia. Multimodal capabilities have become critical.
  • While Southeast Asia is a growth opportunity, Mexico and Canada could become long term beneficiaries in the tariff disputes. Shippers are looking for facilities in Vancouver and Toronto, Canada to side-step issues between China and the United States.
  • 3PL providers can add value by proactively helping customers address the negative tariff impacts.
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E-Commerce & the Amazon Effect

E-commerce has become a growth driver in all 3PL segments and working with or against Amazon remains a hot topic.

  • Panelists agreed that e-commerce remains a strong growth driver for the third-party logistics industry, even amongst ongoing tariff concerns. Armstrong & Associates estimates 2018 U.S. e-commerce logistics costs were $141.6 billion, with no immediate signs of slow down.
  • E-commerce presents many opportunities for 3PL providers. E-commerce business is also bringing omnichannel business with it. E-commerce can result in higher margins for 3PL providers, and its volatile volumes play well for non-asset-based companies.
  • Manufacturers and 3PL providers strategize how to work with or against Amazon. Many are following FedEx’s challenges after its recent decision to discontinue direct business with Amazon.
  • Another move to watch is Amazon’s purchase of customs broker and technology startup, INLT. The addition of INLT allows Amazon’s marketplace to more effectively navigate customs clearance on international shipments.
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Financial

Tightening on the lending side and uncertainty in the market has slowed down M&A activity in 2019. Investments and acquisitions are still occurring for organizations that offer a strategic service, human capital, or technological synergy to the partnership.

  • Deals are being discussed but not closed. Sellers have been looking for higher multiples because of growth in 2018, which has not been repeated. The volume slowdown in 2019 has led buyers that were looking for small to mid-sized family-owned companies to “buy and build” to push back M&A discussions until December 2019.
  • Buyers are seeking out companies with acute specializations that can be used to attract new customers or cross sell to existing customers with a new service.
  • Buyers and investors also want companies with strong management teams, cultures, and training. A faster growth ramp-up time is especially attractive to private equity investors.
  • Another factor that impacts the acquisition or investment is a company’s technological competitive advantage (or disadvantage).
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Technology & Innovation

Technology and innovation vary tremendously by customer need. Value can be added through systems already in use or by seeking out a new solution.

  • Blockchain offers the potential value of connecting hundreds of different information systems together and in a highly secure way.
  • Big Data/Analytics/AI are still key areas of interest. With increasing labor, hiring, and training costs in warehousing, robots offer an even greater return on investment.
  • Drones are a delivery point solution. UPS is testing delivery drones in North Carolina.
  • Technology has changed dramatically over the last five years. 3PL providers can look at tools they have in place now and make sure they are fully utilized. There may be additional features that can be readily implemented.
  • Innovation is different to each customer. Leading 3PL providers with innovation labs work to find creative value adds for customers and get paid for it.
  • In terms of M&A, core operating technology is table stakes. Buyers and investors assess technology in use and its ability to help scale a business. Home grown technology with fewer capabilities than off the shelf solutions can be a negative. Off the shelf systems are generally seen as more trustworthy and easier to integrate. The highest multiples are going to 3PL providers with solid integrated technology platforms which drive operational efficiencies.
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Value-Added Warehousing and Distribution

A record 2018 has been followed with a “good” 2019 with fewer projects in the pipeline and pent up activity. Value-added services offer a way to differentiate.

  • The industrial real estate market continues to boom. Space is becoming an issue, leading to speculation on where future growth will be – underground (seen in Tel Aviv) or up high. Major consolidation is occurring from bigger owners such as Prologis and Blackstone.
  • 3PL providers are writing warehouse capacity and its impact on service levels into commercial contracts.
  • The high cost of labor requires 3PL providers to be wise with warehouse utilization, headcounts and labor analytics. 3PL providers focus on paying well and leveraging strong cultures to drive employee retention.
  • 3PL providers differentiate and see growth in value-added services such as embroidery, engraving, retagging, and gift wrapping.
  • With the trade war, demand for free trade zone space has jumped this year compared to the past.
  • Cold storage mobile racking is popular in Europe and is growing in the United States.
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Domestic Transportation Management and Digitalization

While growth has softened compared to 2018, many feel that 2019 will finish well. Industry changes, trade wars, the looming election, and rising competition have led to a feeling of general uncertainty going into 2020 and beyond.

  • Most of the growth in 2018 was in truckload domestic transportation management and spot market activity surged, 2019 has tipped to more contract business. Final mile transportation is hot.
  • The final ELD deadline in December 2019, rising insurance costs, and the drug and alcohol database may result in less carrier capacity in 2020.
  • Some customers are moving bids up earlier and doing them twice a year instead of annually.
  • Competition continues to grow within this area. Amazon is building up its own asset base. Uber Freight bought an auto trucking company.
  • Digital freight matching is a catalyst for major change in the industry. Digitalization shifts the power back to the carrier in ways most convenient to them at that time. But it also finds ways to reduce cost (e.g. time spent reading emails, making phone calls to broker a truck, etc.) and adds efficiency to supply chain networks.
  • Many expressed that there is room in the market for all players. GlobalTranz and others have been doing truckload and less-than-truckload freight matching for ten years. It just hasn’t had the same level of focus or branding efforts.

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To receive information about the 3PL Value Creation North America Summit 2020, please email cheri@3plogistics.com.

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