At The Logistics Intersection |
By 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. |
|
|
 |
September 2008 |
|
|
|
|
|
|
|
|