There is a clear trend to ever more complex contracts. Fourth party logistics, or lead logistics provider, contracts accounted for some 15 per cent of the total while contracts for just transport accounted for only five per cent. Warehousing contracts accounted for 11 per cent of the total.
Not surprisingly, the two biggest sectors were primary distribution and secondary distribution which each accounted for 18 per cent.
The development of increasingly demanding environmental legislation means that companies need to address the issue of disposing of old products and packaging and there is no doubt that there has been a growing demand for reverse logistics services. However, the survey shows only a couple of reverse logistics contracts signed during the year – although undoubtedly reverse logistics services were included in some of the 4PL contracts signed as well.
Reverse logistics is likely to be thrust into the limelight next year when the much delayed WEEE directive on disposal of waste electrical and electronic products becomes law. This legislation was due two years ago but will not now come into force until 1 January 2007.
Express and home delivery each accounted for about seven per cent of the contracts signed reflecting the growing importance of home shopping.
The survey is now in its sixth year and one trend is very apparent – that is the move away from dedicated contracts towards shared user. In 2001, some 60 per cent of the contracts signed were dedicated to a specific customer often involving dedicated warehouses and liveried vehicles.
But the past few years have seen much more focus on getting costs down. Consequently the emphasis has been on developing shared user services that offer the quality levels associated with dedicated but at significantly lower cost. Last year 55 per cent of contracts were shared user and this year the figure has risen to 58 per cent.
The message on contract length appears to contradict the anecdotal evidence from operators. For a number of years now, logistics service providers have complained that more and more companies have been offering shorter and shorter contracts and this is broadly supported by the evidence from our survey. Between 2001 and 2003 more than three quarters of contracts were for periods of three to five years. This declined in the two years following as the number of sub-three year contracts grew.
However, this year there has clearly been a growth in longer contracts (over five years). This clearly reflects changes in the market with a growth in 4PL or lead logistics provider deals.
The regional breakdown shows a small reversal in the trend evident in the previous year with more UK domestic contracts. Last year there was a noticeable growth in the proportion of international contracts but this year the number has dropped back to previous levels. Of course, this could be masking the impact of larger contracts with greater international content.
There have been a number of very large contracts signed in the past year – perhaps the largest is a £300m five year contract which the Ministry of Defence as awarded to Purple Foodservice Solutions which involves supplying food to the military. In the same area is a £36m contract between Little Chef and Woodward Foodservice.
DHL Logistics won a £75m five year contract with Canon (UK) as well as a £21m three year contract with Network Rail while Nissan renewed its £21m three year contract for parts distribution with TNT.
TDG won the final two regions of Tesco’s fuel distribution giving it the whole business worth £24m a year. It also had a major win in the grocery sector with a £9m a year contract with the newly independent Kwik Save.
Fourth party logistics
The past year has seen the growth in fourth party logistics with a number of substantial contracts being signed. Perhaps the most notable of these was the TDG contract to manage all the transport operations for Corus. Under this seven year multi-million pound deal, Corus’s hauliers will be contracted and managed by TDG. Corus dispatches by road some 1,500 loads of steel products a day from more than 40 sites throughout the UK. To optimise the operation, TDG is creating a centralised planning platform at Scunthorpe using its Integrated Transport Management system to provide core management functions and generate the most favourable routes and loads through its analysis of Corus’ order pool. TDG reckons it can save over a million miles of transport each year, reducing over half a million litres of fuel consumption and its associated carbon dioxide and nitrogen oxide emissions.
For the logistics service provider, this kind of deal has some key attractions. First, although it is dealing with hundreds of million of pounds in turnover, the provider has little of its own capital invested in the operation. This means that although the margins are quite small, the return on capital invested in the operation is very good.
That has particular benefits for a publicly quoted company such as TDG. Third party logistics providers have been coming under margin pressure on the more traditional warehousing and transport contracts and this has made it increasingly difficult to meet the ambitions of city investors in terms of return on investment.
This issue has been highlighted by the fact that TNT put its contract logistics division up for sale at the end of last year and has seen little interest from other publicly quoted companies in the market. TNT is a solid business with a raft of blue chip customers but its rivals have a lot of similar business where the margins are under pressure and don’t see the point of buying more.
For them, it is far more attractive to develop more lead logistics provider work. However, as everyone is aware, the number of such contracts is very limited so they can only play a limited role in an operator’s strategy.
Three business sectors dominate the market for logistics services: Food, drink and tobacco; electricals and electronics; and motor vehicles and parts. Between them they account for about a half of all the contracts signed. And, as they are sectors with a high level of focus on supply chain issues, it is not surprising that they are often the areas producing the most innovative solutions.
The food, drink and tobacco sector is not just one of the largest (accounting for 21 per cent of contracts signed), it is also one of the most innovative. The last year has seen a major deal between Scottish & Newcastle breweries and Kuehne & Nagel, which bought ACR Logistics during the year, under which K&N is taking over all the brewer’s logistics operations. It plans to use the facilities to bring in more third party business. This is a similar to the Tradeteam approach, although K&N stresses that this is not a joint venture – it has total management control of the new operation.
The electronics industry, particularly the computing sector, has been a leader in a number of supply chain developments – particularly in terms of visibility across international supply chains. It is evident from our survey that this trend is continuing with almost half the contracts notified to us being either pan-European in nature or having international scope. It is also noticeable that a number of them fall into the 4PL category reflecting another trend in the market. Some similar trends are apparent in the automotive sector.
Globalisation is the word on everyone’s lips. The dream of cheap manufacturing in the Far East combined with real time visibility across the entire extended supply chain is increasingly becoming reality. There a number of examples of contracts for managing supply chains from the Far East to Europe – for example Jungheinrich and DHL Logistics. This sector seems sure to grow as manufacturers seek to improve their visibility of extended supply chains.
Similarly, home delivery has been a growth sector for a number of years with a number of companies, like Amtrak, specialising in the market. Amtrak has won a couple of major computer delivery contracts as well as adding to its portfolio of wine suppliers.
The Logistics Manager Contracts Analysis provides details of the major third party logistics contracts signed in the year to 31 July 2006. The survey is compiled from information supplied by the major third party logistics service suppliers. If your company would like to contribute to the next survey, please contact editor Malory Davies at: [email protected]