Traditional 3PL versus eLogistics Companies The Wall Street View

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Traditional 3PL versus e-Logistics CompaniesThe
Wall Street View
Laurie Hahn, CFA Deutsche Bank Securities,
Inc. Airfreight Surface Transportation Team
November, 2002
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E-Logistics The Emergence of a New Threat

• During the late 1990s, the e-logistics industry
  was born and roared onto the competitive
  landscape.
• In little less than 12 months, over 100
  e-logistics companies appeared.

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E-Logistics The Emergence of a New Threat

• New participants were well-funded
• Venture capitalists were constantly looking for
  new technology driven investment opportunities.
• Provided start-up/seed funding enabling
  first-to-market.
• IPO/Investment banking provided access to capital
  markets and an even larger pool of funding.

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E-Logistics The Emergence of a New Threat

• Transportation/Logistics industry was a logical
  choice for investment.
• Information was becoming increasingly important,
  necessitating the need for improved technology.
• For many shippers, transportation function was
  last frontier of rationalization, technology
  appeared to be the answer to lower costs and
  improved productivity and efficiency.

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E-Logistics The Emergence of a New Threat

• E-logistics firms had goals
• creation of value by eliminating the middleman
  (i.e. the 3PL)
• creation of value by commoditizing the services
  of traditional transportation providers
• Truckload Carriers
• Less-than-Truckload Carriers
• Airfreight Providers
• Ocean Freight Providers

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E-Logistics The Emergence of a New Threat

• In our opinion
• More HYPE than Reality!!!
• We viewed the e-Logistics participants as little
  more than a minor annoyance for the traditional
  3PLs.

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E-Logistics The Emergence of a New Threat

• Market size was ample for new entrants without
  disrupting the growth prospects of the
  traditional 3PL.
• Only 15 penetration into shippers
  transportation operations.
• Only 7 penetration into shippers distribution
  operations.
• Growth of transportation/logistics/SCM
  outsourcing fueled 20 annual industry growth for
  better than 10 years.

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E-Logistics The Emergence of a New Threat

• Shippers facing increased pressure to
• OUTSOURCE
• non-core corporate functions.

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E-Logistics The Emergence of a New Threat

• Increasing complexity of supply chain due to
• globalization
• inventory practices
• Just-In-Time
• Just-In-Case
• search for productivity and efficiency
• increasing need for continual information flow
• Glass Pipeline - the Holy Grail of SCM

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E-Logistics The Emergence of a New Threat

• More appropriate uses of managerial, intellectual
  and financial resources
• Research Development on core product offering
• Organic Growth
• External expansion via market share gains or
  acquisition/merger
• Improved financial performance via earnings
  growth and increased returns on invested capital
• Creating additional shareholder value.

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E-Logistics The Emergence of a New Threat

• As the complexity associated with the outsourced
  tasks increased, the need for
• Experience and Value-Added Ideas
• increased in importance.
• Created growth opportunities for the mature
  participants.

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E-Logistics The Emergence of a New Threat

• Funding for new entrants was at the whim of
  outside parties
• so many ideas floating around, investors had
  options.
• Technology diminished the importance of the 3PLs
  transactional business
• However, transactional business generated
  predictable stream of revenue/cash flow from core
  operations.
• Cash flow was more than adequate to fund growth
  expansion, as well as necessary technology
  investment.

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E-Logistics The Emergence of a New Threat

• For the e-logistics providers, technology
  overwhelmed the concept.
• Internet was the overriding driver of the
  business.
• First-to-market hits became mantra for these
  businesses.
• 3PLs had substantial headstart (i.e. true
  first-to-market) in terms of technology.
• Movement of freight and SCM drove the business.
• Technology seen as a tool to facilitate the core
  operations.

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The Threat is Quieted

• Two primary issues interrupted the growth
  potential of the e-logistics industry

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The Threat is Quieted

• NASDAQ/Internet Bubble Burst
• Profitability once again became important
• Viability of technology driven business models
  questioned
• Valuations became increasingly inflated scaring
  off would be investors
• VC funding dried up
• Equity markets currently unavailable to many of
  these businesses, further limiting availability
  of much needed funding

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The Threat is Quieted

• Traditional 3PLs responded to the threat
• Saw the Internet as a tool to create
  efficiencies, lower costs, and provide better
  information (real-time)
• Utilized sizable presence in the logistics arena
  to fund technology enhancements
• Took best practices and technologies from the
  e-logistics companies and applied them to their
  own business models.

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The Threat is Quieted

• Quickly became apparent that services offered by
  e-logistics companies were rudimentary, comprised
  of procedures that could be easily automated

• Load-matching
• Rating Systems for shippers carriers
• Tools for Selection Criteria (ex. Price)
• Online Freight Bidding
• Online connection between shippers and carriers
• Online routing and mapping
• Online tracking and tracing
• Data warehousing
• Fleet utilization software
• Purchasing Co-Ops

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The Threat is Quieted

• However, logistics and SCM is more than a
  sequence of automated processes.
• Traditional 3PLs created additional VALUE-ADDED
  services

• Carrier selection
• Rate negotiation
• Transportation
• Warehouse management
• Shipment consolidation
• Freight forwarding
• Inventory management
• Product assembly
• Product returns
• Order processing
• Order fulfillment
• Information services

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The Threat is Quieted

• Companies emerged offering software
  technologies performing same functions as the
  e-logistics companies allowed traditional 3PLs
  to automate certain functions and services as a
  complement to their traditional and value-added
  services.
• i2 Technologies
• Descartes
• Manhattan Associates
• EXE

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The Battle Goes On

• While failure and consolidation has eaten into
  the e-logistics ranks, the stronger players
  remain.
• Examples
• Transplace.com
• Transportation.com
• DAT Services
• Logistics.com
• Viable Business Model
• View technology as a tool and not the end all
  solution
• Many supported by stronger parent company

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The Threat is Quieted

• However, we believe the 3PLs now have the upper
  hand
• used sizable industry presence to capture
  additional market share as outsourcing trend
  continues
• no funding issues, core operations provide
  necessary cash flow
• recent events increase complexity of logistics
  tasks, further necessitating need for experience
  and value creation

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Impact of Recent Events

• Attacks of September 11th resulted in substantial
  supply chain disruptions globally and across
  nearly all industries.
• Examples
• Automotive
• High Tech
• In our opinion, given these disruptions, supply
  chain management is likely to be elevated to a
  new level of importance within all shippers
  organizations.

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Impact of Recent Events

• Complexity of supply chain management increases
• Firms will be forced to examine inventory
  management techniques
• Balance minimizing inventory carrying costs
  versus cost of production disruptions
• Adjust inventory management to Just-in-Case in
  order to smooth any disruption
• Examine need for global sourcing of raw materials

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Impact of Recent Events

• Complexity of supply chain management increases
• Firms will be forced to ensure access to all
  modes of transportation and reduce reliance on
  any one mode
• Domestic
• International

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Impact of Recent Events

• Weak U.S. and Global Economies
• Increases the need for shippers to focus on
  operational and financial improvements
• Rationalize all non-core operations as a means of
  improving financial performance and increasing
  shareholder value
• Will likely drive further growth in the
  outsourcing of transportation and supply chain
  management functions
• Provides further growth opportunities for the
  traditional 3PLs

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• Q A

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