A complex landscape

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The world is getting smaller. As supply chains extend across the globe, so managing those chains requires greater focus. But the good news is that visibility is improving. Once, where a manufacturer or retailer considered itself to have competency in managing the flow of goods within a country so today, managing the same flow across several countries, often under pressure from just-intime processes, becomes that much more demanding.

Is outsourcing the answer? In many cases it is the only solution, but that is not to say it is the ‘easy answer’. Rarely can a single logistics service provider (3PL) manage complex pan-European, or even global supply chains, which adds further complexity for the manufacturer or retailer.

If the outsourcing of supply chain operations to a 3PL, or as is often the case, multiple 3PLs, is to be successful, close collaboration and a true partnership approach is required.

Costs are continually being driven down through outsourcing more parts of the supply chain to 3PLs as technological advances make logistics task simpler and more visible. However, whilst it is most certainly true that technology is becoming a greater enabler – having the right people supporting the provision of services is vital.

Logistics service providers are certainly helping to promote their own cause, by improving the way they market their own services to potential customers. Amongst manufacturers and retailers, particularly in southern European countries like Spain and Italy, there is a far greater awareness of the potential benefits of outsourcing – and 3PLs are better placed then ever, from a marketing services perspective, to engage clients and tender for their business.

Logistics markets vary by just about every measure available – size, growth, supply chain complexity, outsourcing culture and sophistication. National markets each have their own specific attributes – both in terms of the logistics markets themselves and the characteristics of the vertical sector markets which the logistics providers serve.

However, a common theme is growth – as manufacturers and retailers recognise the benefits to be had from outsourcing logistics, and warehouse and distribution activities in particular. That said, growth in outsourcing, or outsourcing penetration – as measured by increasing outsourcing rates – does not necessarily equate to growth in contract logistics markets, as 3PLs continue to operate under extreme margin pressures.

The most developed market for logistics in Europe (although not the largest market in overall terms) is the UK. The largest market is Germany, with a lower outsourcing rate. As highlighted in the chart on page 34, one cannot analyse the European logistics industry quickly, as there are various cultural, legal and operational issues in each country which can make a single, universal analysis redundant.

One trend increasingly apparent across the Continent is that customers have become more demanding – buying services on added value, service and continuous improvement, rather than pure price. This has allowed the more innovative 3PLs to flourish, whilst the flip side has seen some companies fall from grace.

The German market is the largest for logistics in Europe. The market will continue to benefit, to some extent, from the migration of manufacturing activities eastwards across the continent, with the country proving a more attractive proposition for EDCs (European Distribution Centres) and transport hubs. This will be balanced, however, by a decline in domestic opportunities as manufacturing activities leave Germany to relocate.

The French contract logistics market has proved particularly difficult in recent years. Price competition, a struggling economy and the 35-hour working week have all contributed. French logistics providers have a more traditional road freight and forwarding history to their makeup, which may explain the less rapid development of contract logistics activities, particularly in Automotive. Foreign acquisitions, on the parts of the 3PLs, have not been as straightforward as first anticipated, with integration and profitability issues affecting performance.

Market conditions are causing companies to postpone decisions on outsourcing logistics services and 3PLs have suffered from declining profitability due to unfavourable economic conditions. The adverse situation has led some logistics companies to either pull out of France completely, or to withdraw from loss-making logistics contracts.

Basic service provision
Whilst Belgian and Dutch logistics markets are less sophisticated in terms of outsourcing, this is not to the same extent as the southern European countries of Italy and Spain. Though less true of the Automotive sector than perhaps retail or consumer, Italy’s contract logistics market is characterised by little development in integrated logistics solutions – combining warehousing and distribution for example, and instead is given to more basic service provision, with road hauliers or warehouse operators commonplace. Whilst this seems to offer significant potential for market developments, this will not be straightforward to achieve.

There is a greater degree of success in the Spanish market, however – though this largely centres on food, drink and tobacco markets, with leading 3PL Logista widely regarded to be leading the ‘development’ of contract logistics. Driven by economic growth and greater sophistication amongst service providers, the Spanish contract logistics market is seeing increasing awareness amongst manufacturers and retailers of the benefits of outsourcing.

Germany, France and the UK are set to continue to dominate European logistics markets over the next five years, though their combined ‘share’ is likely to fall as ‘less mature’ logistics markets embrace outsourcing of logistics services to a greater extent than they have to date.

Underlying sector growth will underpin growth in logistics markets across all countries and sectors, though rates will of course vary. Whilst there is indeed significant potential for growth in many markets, boosted by external factors such as impending environmental legislation, it should be remembered that a large proportion of the in-house market is taken up by small manufacturers and retailers, which would not realise sufficient benefits from outsourcing their logistics activities. Conversely, pressures to reduce logistics costs will restrict revenue growth in contract logistics markets. Perhaps more so than most, the hi-tech sector has become adept at removing unnecessary stock-holdings and inventory from their supply chains. This is largely driven by the implementation of sophisticated supply chain technologies. There is wider acceptance of just-in-time, build-to-order and lean processes to remove as much perceived ‘inefficiency’ from supply chains as possible.

Additionally, the internationalisation of trade (especially the migration of production to benefit from lower-cost manufacturing opportunities) may well result in overall growth in contract logistics markets – but it may also adversely impact upon growth in Western European logistics markets as EDCs migrate eastwards.

Margin pressures continue to restrain supply chain innovation, however, particularly in the retail sector. It’s a vicious circle and it’s up to logistics providers, and not the retailers or manufacturers to increase efficiency, and improve the value they add to their clients. At the top of the industry, 3PLs will start to add low skilled manufacturing activities to the range of services they provide.

Smaller, but nonetheless important, growth steps will be made in Western European logistics markets. The emerging markets of Eastern Europe (and beyond) are seen to offer the greatest short-term growth potential for Western European 3PLs. There are certainly opportunities in the former CIS States, the Balkans and even Turkey. Outside of Europe, aside from growth forecast for China and India, South American markets feature high on the target list for 3PLs with global service capabilities.

Against a backdrop of intense competition, rising costs and, in many cases, declining margins, recent years have been most appropriately characterised by consolidation amongst Europe’s logistics service providers, as they position themselves in the new, global, competitive landscape.

Service providers to Europe’s contract logistics industry can be broadly classified into three tiers. Tier One, at the top end of the market, comprises multi-national, multi-sector and multi-service operators with contract logistics revenues in excess of €2.5 billion.

Tier Two providers, slightly more in number, record contract logistics revenues of between €1.0 billion and €2.5 billion, whilst in Tier Three operators see contract logistics revenues in excess of €0.25 billion, but less than €1.0 billion.

Although not as pronounced at the top end of the market, trends of ‘growth by acquisition’ continued throughout 2006 and early 2007 as ‘globalisation’ and ‘strengthening of global capabilities’ continue to be motives driving M&A activity.

Whilst size is not a guarantee of success, one can expect the dominance of Europe’s, and the world’s, leading logistics service providers to be further strengthened, though perhaps not on the grand, acquisition-driven scale of recent years.

Whilst the larger 3PLs have the ability to offer end-to-end supply chain solutions at a distinct competitive advantage, in practice gaps in sector, service and geographic footprints remain. These gaps are likely to be slowly closed as growth is driven organically, supported by merger and acquisition activity to support niche sector opportunities.

3PLs are keen to stress the ‘value add’ they bring to the supply chain, as the service interface between manufacturing, retail and ultimately the end customer. The larger 3PLs are exploring opportunities to take on manufacturing activities (albeit in specific ways) and play a greater role in inventory management, asset control solutions and returnable packaging.

Amongst the larger players, the ability to combine both dedicated and network services, together with the promotion of campus-type solutions to customers will increase in importance. Crucially, these do not ‘cut-off’ the major 3PLs from their smaller customers as such solutions allow smaller customers to have access to best practice.

In terms of account management, it is up to 3PLs to seek greater collaboration with their customers, at both strategic and operational levels.

Whilst smaller, but nonetheless important growth steps will be made in Western European markets, it is the emerging markets of Eastern Europe (and beyond) that are seen to offer the greatest short-term growth potential for Western European 3PLs. There are certainly opportunities in the former CIS States, the Balkans and even Turkey. Outside of Europe, aside from growth forecast for China and India, South American markets featurehigh on the target list for 3PLs with global service capabilities.

The greatest opportunities
Whilst the greatest opportunities for 3PLs lie in the global dispersion of the role of the 3PL, are there logistics providers outside of Europe able to ‘step up to the plate’ to threaten the position of Europe’s leading 3PLs?

Certainly, European 3PLs do not see a competitive threat originating from the US or Asia, certainly not on a global scale, at least in the short term. Whilst operators such as Toll (whose state strategy is continuing growth momentum through organic growth initiatives and strategic acquisitions whilst developing an international supply chain offering with a specific focus across the Asian region), Agility Logistics and Aramex are making significant strides to achieving the critical mass required to execute greater geographic capabilities (across Asia Pacific and the Middle East respectively), there is a widely held belief amongst 3PLs that their customers don’t have truly global supply chain operations at present. When, and only when, teams of buyers at manufacturers and retailers become responsible for the whole globe at each customer, then it is likely that greater global competition from service providers in Asia, the Middle East and the US will materialise.

Mark O’Bornick is director of research and analysis at Analytiqa, analysts in the logistics serviices sector. www.analytiqa.com

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