logo
 
Sponsors                                   
    
banner
 
    

At The Logistics Intersection

larry woelkBy Larry Woelk, George Henderson International

The dynamics of moving goods through the supply chain has changed dramatically over the past couple of decades. It used to be that freight forwarders moved freight airport to airport or port to port by using shipping and air lines; customs brokers only did customs clearance; hauliers picked things up and delivered them to ports and airports; 3PLs took care of warehousing and distribution and integrators didn't even exist. Logistics providers are no longer sector specific. In the 21st Century, everyone is doing, or at least trying to do, everything. Supply chain service providers are 'meeting in the middle'.

Freight forwarders are providing distribution and warehousing; third party logistics providers, or 3PLs, are moving freight from one side of the world to the other; and shipping lines are providing multimodal end to end services. In fact, freight forwarders aren't even called freight forwarders anymore - they're called 'logistics' companies. Participants in all service sectors provide services they didn't understand, or weren't interested in, before the meeting-in-the-middle movement started.

With industry consolidation and expansion of services, it's interesting to take a look at who might get to the middle first - although some might argue they are already there. Logistics providers roughly fall into two categories - asset based or non-asset based. Third party logistics companies, or 3PLs, are asset based. They take over their customers' logistics functions, such as warehouses, distribution centres, vehicles, IT systems and the like. It's not this black and white and indeed 3PLs do a lot outsourcing themselves. But basically, they sign long term contracts which commit themselves to fixed assets. Shipping lines, airlines, express integrators and trucking companies are also asset based. These service providers move things around by owning whatever is doing the moving.

Freight forwarders, on the other hand, are non-asset based. Of course they have warehouses and vehicles but generally they avoid at all costs fixed assets. Freight forwarders don't own planes and ships. The newest service sector is 4PL, or 4th Party Logistics Provider. 4PLs are virtually asset free. They 'manage' supply chains using the asset based and non-asset based providers to do the work.

It is fair to say that asset based companies and non-asset based companies did not, at least in the early days, understand each other. 3PLs and carriers make money by 'sweating' their assets. Using them around the clock if necessary and being better at sweating them than their customers. Otherwise the customer would do it for himself. Freight forwarders make money by avoiding assets at all costs. But they know which carriers to use for what to get the best service - and rates. Because they have so much freight to move around they get huge discounts from the carriers and are very good at negotiating low rates.

Learning how to manage services on the other side is indeed challenging. It requires managers and executives with entirely different skill sets. It also requires understanding a different kind of balance sheet. If you are a freight forwarder and you have a light asset based balance sheet, it takes a different mindset to understand and manage one that is full of fixed assets, and vice versa.

Margins are another challenge in getting to the middle. Express integrators and freight forwarders are a good example. Integrators have high margins when compared to freight forwarders. Express shipments are light and the revenue and margin per kilo is high. Freight forwarder shipments are heavy and the revenue and margin are small. If you're an express integrator, or a 3PL for that matter, and you acquire a freight forwarder, your margins are going to tumble - something that shareholders and the City don't like. 'Meeting in the middle' might look good strategically but may negatively impact the balance sheet.

Another challenge to getting to the middle, even if you do understand the other side, is managing services you're not familiar with. The acquiring company tends to keep their managers and not the acquired ones. If a manager is used to managing assets he's not going to do a very good job managing services that don't use assets. In fact, all too often, even acquisitions in the same sector fail, or at least struggle, because the acquirer's managers prevail and the acquired ones leave. A lot of talent that is needed to manage the combined company walks out the door.

Combining companies from different service sectors, such as freight forwarders, express and 3PLs offers additional challenges. Finding a CEO who understands and can manage different sectors is the first. Such individuals are hard to find and often they have a 'bias' for the sector they know best. Freight forwarders who acquire 3PLs have a better record of making it work. This could be because the nature of freight forwarding is to push the service boundaries so they are better at going into new territory. 3PLs who acquire freight forwarders on the other hand, don't seem to fare so well.

Business development is the next challenge. You would think it fairly easy to sell end to end, we can do everything, services. Wrong. First of all, it's hard to find sales people who know the whole supply chain. A bigger problem is having a transparent, one contact, connected approach to the customer. All too often customers have to deal with several, sometimes as many as 4 or 5, representatives - one from each service sector. Another problem is getting the different divisions to 'cross over' sell. This means selling the services of the other divisions. As an example, the 3PL account manger may push back and say, 'what if I bring in our freight forwarding side and they mess it up? Then I'm going to lose my account.' If that happens he's going to lose revenue. CEOs don't seem to know how to manage this. Rather than say, 'sorry, we've acquired these companies to offer end to end services so you will work together', they tend to retreat into focusing on each division's bottom line.

Does 'meeting in the middle' actually work? There's a lot of evidence out there that it doesn't. That's not to say it won't eventually but for the time being the best performers are those who have kept focused on their core service. An expert, actually my wife, makes an analogy with the restaurant business. These days, many restaurants have 'global' menus. Individual items come from all corners of the world. However, if you want good French food, you go to a French restaurant; Italian to an Italian, Indian to an Indian, etc. I've never heard any one say, 'I feel like French tonight, let's go to a Harvester'. Does the same apply to logistics? E.g. if you want your freight moved you go to a freight forwarder; warehousing and distribution to a 3PL; etc. interesting analogy.

Provider capability has become so complex that 4PLs have emerged on the scene. 4PLs manage the end-to-end supply chain for the shipper. They have considerable expertise in knowing who the best providers are for which services and areas. Providers included 3PLs, freight forwarders, shipping lines, hauliers, customs brokers, express integrators and everything in between. 4PLs maintain that the 21st century supply chain is so complex that it needs to be managed by an expert. With the provider sectors 'meeting in the middle' and many exclaiming that they can do anything anywhere, or more accurately, everything everywhere, shippers are offered a one-stop shop solution. This is good for the 4PLs because they can manage a global supply chain using a variety of providers.

Some have stated that it is very difficult for a 4PL to gain the comprehensive intelligence needed to make critical decisions for the shipper. This is easily remedied by the placement of 4PL personnel inhouse with the shipper.

Many shippers have reduced their logistics staff and many no longer have the internal expertise to manage their supply chains. Additionally, service providers are looking for people with expanded skill sets. As an example, freight forwarders want people who understand third party logistics; 3PLs want people who know freight forwarding; and shipping lines want people experienced in logistics. At the end of the day, 'meeting in the middle' depends on finding the right people.
 
About the Author:
Larry Woelk has spent almost all his career in Europe and held senior executive and board level positions with Airborne Express, BAX Global, John Menzies, LEP International and Pinkerton Security. He has run companies and divisions in supply chain security; logistics operations and communication; 4PL management; and freight audit and pay processes. His career gives him extensive experience of the wide-ranging logistics industry, including air, ocean, road transport and courier express, in domestic and international markets.

Larry holds university degrees in mathematics and French as well as an MBA. He is a Fellow of the Chartered Institute of Logistics & Transport and a member of the Logistics Directors Forum and ELUPEG.

Larry is one of best known industry experts in all modes of international shipping. His advice has been sought by some of the largest forwarders and integrators in the world. His network of contacts spans the globe. Larry joined George Henderson International in 2007 to head up the international division.
 
logo
September 2008
 
 
 
 
See the recipients of the 2009 Top 25 Supply Chain Executives Award.
 
Post_Audit
 
POHorizon
 
CTPAT