Notes from Armstrong & Associates - Chicago Summit 2016
- General thoughts are that the 3PL market will see modest growth for the rest of 2016.
- Many services that were value-adds a few years ago are now part of the expected base 3PL service.
- Three-year 3PL contracts are the norm. Integration costs are driving some five-year terms. The time from contact to contract is running about eight months.
- Major 3PLs are stressing targeted customer acquisitions. The focus is on targeting vertical industries and playing to a 3PL’s strengths to deliver value for customers.
- People are key to creating value for customers and driving 3PL growth and profitability. Having solid programs for talent acquisition and training are critical.
Mergers & Acquisitions
- This year has been a good seller’s market.
- Big M&A deals are done for 2016 and it’s expected that most transactions will be under $100 million through 2017. An EBIT of $10 million is pretty realistic for a transaction. Right now there is a size premium. The majority of the deals have EBITDA multiples of 8-12x and can be in the 11-12x range with the right strategic buyer.
- Capital is plentiful for private equity investments and strategic acquisitions.
- Red flags for 3PL acquisitions are homegrown IT systems, financial books that are not clear and straightforward, manager feuding, and investor/management cultures that do not match.
- Amazon is building its operating infrastructure to support its fulfillment business and is encroaching on 3PLs.
- The distribution infrastructure requirement to handle smaller parcel quantity outbound orders versus buying goods from a brick-and-mortar store is much higher.
- Consumers have adapted a return from anywhere mentality and want to be able to return goods no matter where they were originally sourced.
- On-time fulfillment and delivery performance expectations continue to increase. Amazon PrimeNow is providing free two-hour delivery in select markets which will only continue to ratchet performance expectations up.
- IT capability and scale are critical for the 3PL market going forward.
- 3D Printing is impacting the way service parts logistics is handled in key industries. UPS is making significant investments in 3D printing. It has a network of 60 3D printer locations in the US, and those of parts manufacturer Fast Radius, with its logistics operation using an online IT platform.
- Healthcare has three minor trends impacting business and technology. 1. Patients are becoming consumers. 2. Numerous Fortune 50 companies do something with Healthcare. For example, Novartis and Google created “smart contact lenses” which monitor bodily functions. 3. Life expectancy has increased.
- Material handling robots such as Kiva Systems (Amazon Robotics) are becoming more commonplace in high wage markets.
- The Uberization of Transportation may happen, but based upon current transportation networks and realistically available empty miles, it will have limited impact. We prefer the term Digital Freight Matching, since in a recent report which analyzed 27 apps, none had the same functionality as ride-hailing service Uber.
- Drones are finding some application within logistics. PINC Solutions utilizes drones to read RFID tags in its Yard Management System and perform cycle counting in warehouses.
- Autonomous trucks through Uber’s Otto have started hitting the road. Use should excel over the next 5-10 years. GM/Lyft is testing self-driving taxis. Regulatory questions abound.
- “Big Data” is real and describes the process of quickly aggregating data from multiple sources into individual systems and applications.
- There has been a proliferation of cloud-based systems and applications with specific functions. The focus of 3PLs is to integrate/interface all of these systems in developing value-creating solutions for internal operations and customers.
- Technology risk is shifting from shippers to 3PL providers.
International Transportation Management (ITM)
- ITM is expected to maintain slow growth. Overall ITM net revenue growth is anticipated to be 4-5%.
- Overcapacity on the carrier side still continues.
- Integrated solutions such as air-ground, air-sea, and other combinations are seen as ways to create more value for customers and increase 3PL margins.
Domestic Warehousing and Transportation Management
- U.S. Department of Transportation driver hours of service and restart provisions may be disruptive and can be expected to add a few percentage points to the costs.
- eCommerce is driving growth.
- Omni-channel fulfillment strategies are still in vogue.
- Warehousing growth is flat to double digit depending on the region.
- Labor management is 60-65% of warehousing cost. Wages have increased for temporary workers.
- 60% of customers use more than one service from a 3PL.
- Domestic transportation management to support manufacturing and eCommerce (last mile) has above average growth.
- Domestic transportation management is the strongest of the four major 3PL segments.