WHAT S NEXT FOR TRUCKLOAD 3PL BROKERAGE PRICING

Transcription

1 OCTOBER 14, 2014 WHAT S NEXT FOR TRUCKLOAD 3PL BROKERAGE PRICING INDUSTRIALS TEAM A CALL WITH Evan Armstrong

2 LEGAL DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice for individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. For more information about Hedgeye Risk Management, including Terms of Use of our information, please go to The presentation is the work of Evan Armstrong and is protected intellectual property. Views and opinions expressed herein do not necessarily reflect the opinions of Hedgeye Risk Management. This presentation is for information purposes and is not intended as investment recommendations. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more detail please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at

3 PLEASE SUBMIT QUESTIONS TO TO BE ANSWERED AT THE END OF THE CALL

4 State of the 3PL Industry - Focus on Domestic Transportation Management Website:

5 Founded in 1980; Supply Chain Market Research and Consulting Services Approximately 25,000 Newsletter Subscribers Current Market Research: Who's Who in Logistics and Supply Chain Management Over 400 Detailed 3PL Profiles; 6,800+ 3PL Customer Relationships Trends in 3PL/Customer Relationships "3PL Brand Recognition, RFP Activity and Expected Profit Margins for 3PLs Trending Up: 3PL Market Predictions for 2014 and 2013 Results" The Business of Warehousing in North America 2 Market Size, Major 3PLs, Benchmarking Costs, Prices and Practices 2 nd Annual 3PL Value Creation Summit, Chicago: October 28-30, Articles & Press Coverage: Air Cargo World, American Shipper, Global Trade, Journal of Commerce, Logistics Management, Logistics Quarterly, Modern Materials Handling, Transport Topics, Wall Street Journal Consulting Services: 3PL M&A Advisory, 3PL Operational Due Diligence, 3PL Strategic Planning, Logistics Outsourcing, Logistics Provider Contracting & Negotiation, Systems Evaluation & Selection, Expert Witness About Armstrong & Associates, Inc. Over 30 strategic planning engagements and 14 closed Investment/M&A deals. Global Resources: U.S. Organization; Eric Xiang, Wuhan China; Latin America, Japan and South Korea Alliance Partners 2

6 A&A has reviewed operations of over 100 3PLs. 3

7 2013 Logistics Costs by Key Regions and Countries as a % of GDP 20.0% 18.0% 17.3% 16.0% 14.0% 12.0% 13.0% 11.9% 10.9% 10.0% 9.2% 8.8% 8.5% 8.5% 8.0% 6.0% 4.0% 2.0% 0.0% Greater China India South America Asia Pacific (ex. Greater China and Japan) Europe North America Japan United States 4

8 2013 Global Logistics Costs by Mode or Function (US$ Billions) 5

9 Drivers of Global 3PL Market Growth Low-Cost Country Sourcing Regulatory Compliance Off-Shoring & Outsourced Mfg. Cost Reductions Focus on Core Competencies Regulatory Compliance Expanding IT Requirements Need Regional & Local Market Expertise 3PLs provide the infrastructure necessary to support increasingly complex supply chains involved in global trade. 6

10 3PLs Expanding Role in the Global Supply Chain Manufacturing Ports Suppliers Customers Distribution Centers Repair Center Customs Carriers Transportation Services: Air Brokerage Operations Dedicated Contract Carriage Freight Forwarding Home Delivery Just-In-time (JIT) Less-than-Truckload (LTL) Sourcing Package Delivery Ocean Shipping Rail Rail TOFC/COFC Small Package Specialized Truckload TRANSPORTATION MANAGEMENT SERVICES Transportation Planning Transportation Execution: Freight Bill Payment: Carrier Mgmt and Contracting Contract File Maintenance Pre-Audit Inbound Shipment Planning Exception handling Post-Audit Outbound Shipment Planning Load Tendering Performed In-house End-to-End Matching Loss/Damage Claims Outsourced Mode Conversion/Optimization Tracking & Tracing Value-Added Services Call Centers Lot Control Reverse Logistics Cross Docking Merge In Transit Store Support Customization Manufacturing Support Sequencing/Metering Inventory Control/Vendor Mgmt Pick/Pack Specialty Packaging KanBan Pool Distribution Sub Assembly Kitting Repair/Refurbish Labeling Returnable Container Mgmt OTHER 3PL SERVICES, SKILLS & HANDLING Consulting/Process Reengineering Purchase Order Mgmt Bulk Commodities Factoring/Financial Services Project Logistics Hazardous Materials Installation/Removal Quality Control Food Grade/Sterile Order Management Union Services Temperature Controlled 7 3PLs are rapidly expanding services to connect global supply chains, taking on more work tasks that shippers don t view as core competencies, providing greater value through economies of scale.

11 2013 3PL Revenue by Key Regions and Countries (US$ Billions) $200.0 $180.0 $160.0 $140.0 $176.2 $158.1 $146.4 $134.8 $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $66.5 $54.3 $44.9 $17.4 $- North America Europe United States Greater China Asia Pacific (ex. Greater China and Japan) Japan South America India 8

12 3PL Revenue Growth (CAGR by Region) 12.0% 10.0% 9.6% 8.0% 8.6% 8.8% 8.1% 6.0% 4.0% 4.8% 6.4% 5.5% 5.8% 5.7% 4.5% 5.0% 3.7% 3.8% 2.0% 1.5% 1.4% 1.2% 0.0% India Greater China United States Asia Pacific (ex. Greater China and Japan) North America South America Japan Europe E 9

13 Gross Logistics 2013 Rank Third-Party Logistics Provider (3PL) Revenue (US$ Millions)* 1 DHL Supply Chain & Global Forwarding 31,432 2 Kuehne + Nagel 22,587 3 DB Schenker Logistics 19,732 4 Nippon Express 17,317 5 C.H. Robinson Worldwide 12,752 6 CEVA Logistics 8,517 7 DSV 8,140 8 Sinotrans 7,738 9 Panalpina 7, SDV (Bolloré Group) 7, DACHSER 6, Toll Holdings 6, Expeditors International of Washington 6, Geodis 5, UPS Supply Chain Solutions 5, GEFCO 5, J.B. Hunt (JBI, DCS & ICS) 5, UTi Worldwide 4, Agility 4, Yusen Logistics 4, IMPERIAL Logistics 3, Hellmann Worldwide Logistics 3, Hub Group 3, Damco 3, Burris Logistics 3,119 Top 50 Global 3PLs *Revenues are company reported or A&A estimates and have been converted to US$ using the annual average exchange rate. 10 Gross Logistics 2013 Rank Third-Party Logistics Provider (3PL) Revenue (US$ Millions)* 26 Schneider Logistics & Dedicated 2, Norbert Dentressangle 2, Kintetsu World Express 2, Kerry Logistics 2, Pantos Logistics 2, Sankyu 2, Ryder Supply Chain Solutions 2, FIEGE Group 2, Coyote Logistics 2, XPO Logistics 2, BDP International 1, NNR Global Logistics 1, Wincanton 1, Total Quality Logistics 1, Logwin 1, Nissin Corporation/Nissin Group 1, APL Logistics 1, Americold 1, Menlo Worldwide Logistics 1, GENCO 1, BLG Logistics Group 1, Transplace 1, FedEx SupplyChain/FedEx Trade Networks 1, Landstar 1, OHL 1,290

14 Top Global Fortune 500 Buyers of 3PL Services Source: Armstrong & Associates, Inc. Report Trends in 3PL/Customer Relationships (An analysis of 6,398 3PL/Customer relationships). 11

15 Transportation and Warehousing Services Dominate 3PL Demand Transportation Management 23.7% 4,172 Warehousing Value-Added TM or WM 19.6% 18.8% 3,455 3,312 Integrated Solutions International 9.5% 8.1% 1,422 1,677 Supply Chain Management Dedicated Contract Carriage Other Intermodal Lead Logistics Provider 5.6% 4.5% 4.1% 3.3% 3.0% ,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 Primary 3PL services provided are led by transportation management (23.7%), warehousing (19.6%) and value-added services (18.8%). Source: Armstrong & Associates, Inc. Report Trends in 3PL/Customer Relationships (An analysis of 6,398 3PL/Customer relationships). 12

16 Number of Services per 3PL Customer Relationship On average, larger companies with more complex supply chains rely on 3PLs for a wider range of services. Source: Armstrong & Associates, Inc. Report Trends in 3PL/Customer Relationships (An analysis of 6,398 3PL/Customer relationships). 13

17 Most Important 3PL Services by Industry Service Rank Major Industry First Second Third Automotive Trans. Mgmt. (23.2%) Value-Added (18.7%) Warehousing (18.3%) Consumer Goods Warehousing (22.1%) Trans. Mgmt. (21.8%) Value-Added (20.3%) Elements Trans. Mgmt. (27.8%) Value-Added (17.0%) Warehousing (16.2%) Food, Groceries Trans. Mgmt. (25.9%) Warehousing (21.6%) Value-Added (18.4%) Healthcare Trans. Mgmt. (22.1%) Warehousing (21.8%) Value-Added (20.3%) Industrial Trans. Mgmt. (27.0%) Warehousing (16.7%) Value-Added (16.1%) Other Trans. Mgmt. (28.0%) Warehousing (18.3%) Value-Added (17.0%) Retailing Trans. Mgmt. (21.7%) Value-Added (20.3%) Warehousing (20.0%) Technological Trans. Mgmt. (20.7%) Warehousing (20.4%) Value-Added (19.6%) Overall demand of transportation management services has grown since 2008 and it is now ranked slightly above warehousing services for the Healthcare and Technological industries. Source: Armstrong & Associates, Inc. Report Trends in 3PL/Customer Relationships (An analysis of 6,398 3PL/Customer relationships). 14

18 Gross Revenue/Turnover U.S. 3PL Market E (US$ Billions) $170 $160 $150 $140 $130 $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 $30.8 $34.2 $39.6 $45.3 $56.6 $ CAGR = 9.6% $71.1 $76.9 $89.4 $127.0 $127.3 $133.8$141.8 $113.6 $119.0 $103.7 $107.1 $154.0 $146.4 Year 15

19 (US$ Millions) Growth by U.S. 3PL Market Segment 2013 Gross Revenue (US$ Billions) 2013 Net Revenue (US$ Billions) % Change 2014E vs Net Revenue CAGR 3PL Market Segment Domestic Transportation Management % 11.0% International Transportation Management % 13.4% Dedicated Contract Carriage % 7.1% Value-Added Warehousing & Distribution % 12.9% Total % 11.2% 31,000 29,000 27,000 25,000 23,000 21,000 19,000 17,000 15,000 13,000 11,000 9,000 7,000 5,000 3,000 1,000 Value-Added Warehousing & Distribution (VAWD) Dedicated Contract Carriage (DCC) International Transportation Management (ITM) Domestic Transportation Management (DTM) 16

20 U.S. 3PL Market Momentum 17

21 Top 30 DTM/Freight Brokers Ranked by Net Revenue $10,727 CHRW Net Revenue = $1.7B; Next 29 = $2.7B \ 18

22 Trucking Company Cost Categories Transportation Costing and Lane Balance Drives Pricing 19

23 Headhaul versus Backhaul Traditional Backhaul Lane Imbalances: NE to MW S. FL to MW/NE Seasonal Lane Imbalances: Retail holiday inventory build Produce season Christmas tree season Mulch season Summer/winter product demand Other Lane Imbalances: Port disruptions Weather 20

24 Trucking Capacity & Seasonality Trucking Capacity & Seasonality % of Capacity J F M A M J J A S O N D Month Capac ity Demand 21 Copyright 2014 Armstrong & Associates, Inc.

25 Customer Relationship Type Types of Traditional DTM/Freight Broker Relationships Shipper Pricing Carrier Gross Profit Margin Market Risk Transactional Spot Market Spot Market Efficient Daily Supply & Demand (Short-Term) Spot Market Contractual Increasing Carrier Capacity Enterprise Contractual Spot Market Tightening Carrier Capacity (Long-Term) Contractual Contractual Significant Carrier Capacity Shifts Generally for Freight Brokers, Enterprise business provides volume and lane density, transactional customers drive margins. A note about FUM = Freight Under Management, Managed Transportation Primarily systematic network transportation management relationships Shipper holds contracts with core carriers Shipper contracts with a 3PL which gets a management fee Significant Network TM Providers: CHRW TMC, Menlo Worldwide, Penske, Ryder SCS, Transplace 22

26 After-Tax Net Income Margin Trends by 3PL Market Segment 25% 20% 20.3% 15% 10% 5% 0% % 12.2% 10.3% 4.5% 3.3% Year Value-Added Warehousing & Distribution (VAWD) - Asset-Based Dedicated Contract Carriage (DCC) - Asset-Based International Transportation Management (ITM) - Non-Asset Based Domestic Transportation Management (DTM) - Non-Asset Based 23

27 DTM Network Transportation Managers Characteristics of Leaders: Robust TMS for network transportation planning and execution. Heavy EDI/electronic systems interfaces. Some Buy/Sell side arrangements with significant of Freight Under Management. FUM = Freight Under Management, Managed Transportation. Shipper may hold contracts with core carriers. Shipper contracts with a 3PL based a management fee, yielding 5-7% gross margins. 24

28 The Cost Advantage of Mode Shifting The Advantage of Mode Shifting $400 $350 $300 Cost per CWT $250 $200 $150 $100 $50 $- Package LTL TL 25 Copyright 2014 Armstrong & Associates, Inc.

29 End To End Matching Utilization via End-to-End Matching 35% 30% % of MT Miles 25% 20% 15% 10% Median High Low 5% 0% Miles 26 Copyright 2014 Armstrong & Associates, Inc.

30 Typical TMS Optimization Daily Transportation Management Optimization Process Example Daily Transportation Management Optimization Process Example ORDER/SHIPMENT INPUT STRIPOUT/FILTER SHIPMENTS Rail box cars, UPS, expedited loads, etc. RUN CONSOLIDATION ROUTINE Package to LTL, LTL to TL Using real rates (mode shifting optimization) RUN MATHEMATICAL NETWORK FLOW To isolate TL carriers by available capacity RUN MIXED INTEGER PROGRAM To find end-to-end best routes EXPORT RESULTS For logistics engineer review 27

31 3PL Information Technology Trends I.T. is a top reason for companies outsourcing logistics. Solid I.T. is critical to remain competitive and strengthen a 3PLs brand. 3PLs are striving for an integrated core systems backbone that can be deployed quickly. Most 3PL systems suites incorporate purchased off-theshelf programs with proprietary applications. Business Intelligence, web connectivity, and automated data handling are increasingly important. Integration Layer Customer ERP/OMS Transportation Mgt. System (TMS) Warehouse Mgt. System (WMS) Yard Mgt. System (YMS) Visibility / Track & Trace Accounting/ Financials 28

32 Types of Off-The-Shelf Systems Daily Weeks to Months Months to Years Transportation Execution JDA/i2 -TM Oracle - OTM Infor/Caps Lean Logistics MercuryGate Manhattan -TP&E JDA/Manugistics RedPrairie - TM Tactical (Modeling & Procurement) CombineNet JDA/i2 -Trans. Modeler JDA/i2 -TBC Infor/Caps Lean Logistics Manhattan - TP Oracle - OTM Strategic (Network Design) JDA/i2 Strategist IBM ILOG/LogicTools Infor/SCM 29

33 Core 3PL Systems TMS 370 3PLs Surveyed, TMS with 2 or More 3PL Users TMS Brand Total Proprietary 223 No TMS 40 TMW/Innovative Computing 33 RedPrairie/JDA (Manugistics, i2) 28 MercuryGate 19 Oracle 18 Cargowise 8 Descartes/IES 8 McLeod 7 Infor 5 CSA Software 3 LeanLogistics 3 SAP 3 Accellos 2 Cargo GT Nexus 2 Manhattan Associates 2 Sterling Commerce 2 TransCore's Keypoint 2 30

34 Thank You! Milwaukee Wisconsin Office Evan Armstrong Armstrong & Associates, Inc West Lincoln Avenue Suite 207 West Allis, WI USA Madison Wisconsin Office Richard Armstrong Armstrong & Associates, Inc Syene Road Suite 201 Madison, WI USA

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