Still waiting for shake-out to deliver on expectations

In attempting to exert market power, the major logistics providers are forcing customers to search for alternatives, says Braithwaite. Each time the market consolidates, the smaller players win market share as the barriers to entry are so low.

However, Ulber believes that consolidation has been successful, because the global players are increasing their market share. "A number of those organisations that now offer global coverage across all aspects of logistics clearly outperform the market in terms of growth. This means shippers actually choose these companies as partners rather than smaller or medium-sized companies with incomplete geographical coverage or limited service offerings, " he says.

Indeed, there are some encouraging examples of consolidation having delivered benefit, says Carroll at Dyson.

"We have been with service providers that have definitely become much better by joining forces." Carroll believes that Dyson benefited when its mainland European fulfilment provider Exel was acquired by DHL, thus adding its superior European distribution network.

However, Dyson has seen less benefit from integration within its forwarding providers, as much of this activity has related more to scale than capability.

Ulber says: "Shippers that are negative often expected that industry consolidation would lead to significantly lower transactional cost. In some cases, in particular where the acquirer was buying companies strictly for size rather than enhancing the service capabilities and offerings for customers, there was little or no advantage for the shipper at all."

But some 3PLs have managed to extend capability without going out on big spending sprees. For example, Expeditors has not been a player in the consolidation of the industry, preferring to focus on organic growth and piecemeal acquisitions.

These examples aside, have the global providers succeeded in capitalising on their extended service capability and the much sought-after market for one-stop shopping?

UPS is one of several consolidated giant
logistics providers

The major global providers have invested heavily in seeking to exploit this trend, through cross-selling of different services. "Cross-selling has contributed to a significant part of our growth and there are some simple reasons for that, " says Ulber.

"It is easier and faster to sell to an existing customer than it is to start a relationship from zero, and it is a strategic advantage if you can do that."

Cross-selling

The holy grail for logistics providers is to convert these cross-selling opportunities into true end-to-end supply chain solutions that connect the different modes of transport and fulfilment activities into a single offering. Ulber says it is early days for achieving this. "That benefit we are only starting to see, because although intellectually every shipper knows what it should do, it is difficult to put into practice."

As a result, although these acquisitions have expanded the amount of services a shipper could have with a single 3PL, it has not necessarily translated into greater value for money.

Some 3PLs are still grappling with their various integrations and trying to break down barriers between the various acquired entities.

Internal barriers plague all organisations, both providers and shippers. The ability to manage holistically across such divides is the goal of all supply chain management practitioners. Little wonder that the concept has proved so challenging for both providers and shippers alike - but this is the aspiration of many in the industry, as Pennington from Dell confirms.

"I believe that there is now much greater dialogue and interaction between functions, and the advent of e-auctions will continue to ’bundle’ these opportunities together, even if they are managed separately once the operation is live, " he says.

Evidently 3PLs have some way to go in this regard.

"Shippers are looking for something more tangible than a unified brand, such as genuine economies of scale, " he adds.

Perhaps this is the point. Will shippers use greater centralisation of logistics procurement to drive down costs, thereby effectively commoditising 3PLs’ offering, or use their providers’ expertise to create more value out of their supply chain? Inevitably, the current economic environment is driving most shippers to focus on the former. "Understandably, certain shippers are saying they know they have to think strategically about this, but before we talk we have to cut our costs, " says Ulber. "But this is a short-term issue, as it is for the whole of industry."

So has consolidation delivered the financial returns the major players were anticipating, and what about the fate of smaller providers?

Now is not the best time to judge any company’s financial performance, but based on trading up until the middle of 2008, the picture is mixed.

"With a few exceptions, the anticipated results have not been experienced, as margins have continued to fall, " says Braithwaite of LCP. "This has been due to tough negotiations with customers, and to poor commercial control by companies trying to increase market share at any cost."

Ulber believes a good indicator of financial success is the fact that the major global players have been growing faster than the market. "If ever you have one sector of industry that is outgrowing the rest, that is usually good news for shareholders, " he says.

However, Braithwaite thinks those providers that have focused on organic growth have managed to maintain more impressive margins. "Providers earning 7-8% margins are few, and probably operate in specialised niche markets that are prepared to pay a service premium and for which the barriers to entry are higher, " he says.

Dyson’s Carroll believes that there is an opportunity for smaller operators to find their niche and use their position.

"Not everyone wants to do business with the biggest service providers, as they seek a more service-orientated and intimate relationship, " he says.

Dyson works with both global and local providers to support their supply chain needs.

Van der Jagt of ECS agrees that for many shippers, dealing with smaller or regional 3PLs is preferable. "Many shippers prefer to deal with smaller niche LSPs and forwarders, to guarantee the personal touch and almost guaranteed attention to service quality, " she says.

However, Ulber feels that mergers and acquisitions have spread risk within global service provider organisations. "It is risky if you rely on one part of the logistics chain and certain parts of the world, " he says.