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Traditional 3PL versus e-Logistics CompaniesTraditional 3PL versus e-Logistics CompaniesThe Wall Street ViewThe Wall Street View

November, 2002November, 2002

Laurie Hahn, Laurie Hahn, CFA CFA Deutsche Bank Securities, Inc.Airfreight & Surface Transportation Team

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

• During the late 1990’s, the e-logistics industry was born During the late 1990’s, the e-logistics industry was born and roared onto the competitive landscape.and roared onto the competitive landscape.

• In little less than 12 months, over 100 e-logistics companies In little less than 12 months, over 100 e-logistics companies appeared.appeared.

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But which?But which?

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

• New participants were well-funded:New participants were well-funded:

• Venture capitalists were constantly looking for new Venture capitalists were constantly looking for new technology driven investment opportunities.technology driven investment opportunities.

• Provided start-up/seed funding enabling first-to-market.Provided start-up/seed funding enabling first-to-market.

• IPO/Investment banking provided access to capital IPO/Investment banking provided access to capital markets and an even larger pool of funding.markets and an even larger pool of funding.

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

• Transportation/Logistics industry was a logical choice for Transportation/Logistics industry was a logical choice for investment.investment.

• Information was becoming increasingly important, Information was becoming increasingly important, necessitating the need for improved technology.necessitating the need for improved technology.

• For many shippers, transportation function was last For many shippers, transportation function was last frontier of rationalization, technology appeared to be the frontier of rationalization, technology appeared to be the answer to lower costs and improved productivity and answer to lower costs and improved productivity and efficiency.efficiency.

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

• E-logistics firms had goals:E-logistics firms had goals:

– creation of value by eliminating the middleman (i.e. the 3PL)creation of value by eliminating the middleman (i.e. the 3PL)

– creation of value by commoditizing the services of traditional creation of value by commoditizing the services of traditional transportation providerstransportation providers

• Truckload CarriersTruckload Carriers• Less-than-Truckload CarriersLess-than-Truckload Carriers• Airfreight ProvidersAirfreight Providers• Ocean Freight ProvidersOcean Freight Providers

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

In our opinion:In our opinion:

More HYPE than Reality!!!More HYPE than Reality!!!

We viewed the e-Logistics participants as little more than a We viewed the e-Logistics participants as little more than a minor annoyance for the traditional 3PLs. minor annoyance for the traditional 3PLs.

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

• Market size was ample for new entrants without disrupting the Market size was ample for new entrants without disrupting the growth prospects of the traditional 3PL.growth prospects of the traditional 3PL.

• Only 15% penetration into shipper’s transportation Only 15% penetration into shipper’s transportation operations.operations.

• Only 7% penetration into shipper’s distribution operations.Only 7% penetration into shipper’s distribution operations.

• Growth of transportation/logistics/SCM outsourcing fueled Growth of transportation/logistics/SCM outsourcing fueled 20% annual industry growth for better than 10 years.20% annual industry growth for better than 10 years.

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

Shippers facing increased pressure toShippers facing increased pressure to

OUTSOURCEOUTSOURCE

non-core corporate functions.non-core corporate functions.

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

• Increasing complexity of supply chain due to:Increasing complexity of supply chain due to:

– globalization globalization

– inventory practicesinventory practices• Just-In-TimeJust-In-Time• Just-In-CaseJust-In-Case

– search for productivity and efficiencysearch for productivity and efficiency

– increasing need for continual information flowincreasing need for continual information flow• Glass Pipeline - the Holy Grail of SCMGlass Pipeline - the Holy Grail of SCM

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

• More appropriate uses of managerial, intellectual and financial More appropriate uses of managerial, intellectual and financial resources: resources:

– Research & Development on core product offeringResearch & Development on core product offering

– Organic GrowthOrganic Growth

– External expansion via market share gains or External expansion via market share gains or acquisition/mergeracquisition/merger

– Improved financial performance via earnings growth and Improved financial performance via earnings growth and increased returns on invested capitalincreased returns on invested capital• Creating additional shareholder value.Creating additional shareholder value.

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

As the complexity associated with the outsourced tasks As the complexity associated with the outsourced tasks increased, the need forincreased, the need for

Experience and Value-Added IdeasExperience and Value-Added Ideas

increased in importance. increased in importance.

Created growth opportunities for the mature participants.Created growth opportunities for the mature participants.

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

• Funding for new entrants was at the whim of outside parties:Funding for new entrants was at the whim of outside parties:

– so many ideas floating around, investors had options.so many ideas floating around, investors had options.

• Technology diminished the importance of the 3PLs transactional business:Technology diminished the importance of the 3PLs transactional business:

– However, transactional business generated predictable stream of revenue/cash However, transactional business generated predictable stream of revenue/cash flow from core operations.flow from core operations.

– Cash flow was more than adequate to fund growth & expansion, as well as Cash flow was more than adequate to fund growth & expansion, as well as necessary technology investment.necessary technology investment.

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E-Logistics: The Emergence of a New ThreatE-Logistics: The Emergence of a New Threat

• For the e-logistics providers, technology overwhelmed the For the e-logistics providers, technology overwhelmed the concept. concept.

• Internet was the overriding driver of the business.Internet was the overriding driver of the business.• First-to-market & “hits” became mantra for these First-to-market & “hits” became mantra for these

businesses.businesses.

• 3PLs had substantial headstart (i.e. true first-to-market) in 3PLs had substantial headstart (i.e. true first-to-market) in terms of technology. terms of technology.

• Movement of freight and SCM drove the business.Movement of freight and SCM drove the business.• Technology seen as a tool to facilitate the core Technology seen as a tool to facilitate the core

operations.operations.

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The Threat is QuietedThe Threat is Quieted

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

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The Threat is QuietedThe Threat is Quieted

• NASDAQ/Internet Bubble BurstNASDAQ/Internet Bubble Burst

• Profitability once again became importantProfitability once again became important

• Viability of technology driven business models Viability of technology driven business models questionedquestioned

• Valuations became increasingly inflated scaring off Valuations became increasingly inflated scaring off would be investorswould be investors

• VC funding dried upVC funding dried up

• Equity markets currently unavailable to many of these Equity markets currently unavailable to many of these businesses, further limiting availability of much needed businesses, further limiting availability of much needed fundingfunding

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The Threat is QuietedThe Threat is Quieted

Traditional 3PLs responded to the threatTraditional 3PLs responded to the threat

• Saw the Internet as a tool to create efficiencies, lower Saw the Internet as a tool to create efficiencies, lower costs, and provide better information (real-time)costs, and provide better information (real-time)

• Utilized sizable presence in the logistics arena to fund Utilized sizable presence in the logistics arena to fund technology enhancementstechnology enhancements

• Took best practices and technologies from the e-Took best practices and technologies from the e-logistics companies and applied them to their own logistics companies and applied them to their own business models.business models.

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The Threat is QuietedThe Threat is Quieted

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

• Load-matchingLoad-matching

• Rating Systems for shippers & Rating Systems for shippers & carrierscarriers

• Tools for Selection Criteria (ex. Tools for Selection Criteria (ex. Price)Price)

• Online Freight BiddingOnline Freight Bidding

• Online connection between Online connection between shippers and carriersshippers and carriers

• Online routing and mappingOnline routing and mapping

• Online tracking and tracingOnline tracking and tracing

• Data warehousingData warehousing

• Fleet utilization softwareFleet utilization software

• Purchasing Co-OpsPurchasing Co-Ops

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The Threat is QuietedThe Threat is Quieted

• However, logistics and SCM is more However, logistics and SCM is more than a sequence of automated than a sequence of automated processes.processes.

• Traditional 3PLs created additional Traditional 3PLs created additional VALUE-ADDED services:VALUE-ADDED services:

• Carrier selectionCarrier selection

• Rate negotiationRate negotiation

• TransportationTransportation

• Warehouse managementWarehouse management

• Shipment consolidationShipment consolidation

• Freight forwardingFreight forwarding

• Inventory managementInventory management

• Product assemblyProduct assembly

• Product returnsProduct returns

• Order processingOrder processing

• Order fulfillmentOrder fulfillment

• Information servicesInformation services

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The Threat is QuietedThe Threat is Quieted

• Companies emerged offering software & technologies performing same Companies emerged offering software & technologies performing same functions as the e-logistics companies; allowed traditional 3PLs to functions as the e-logistics companies; allowed traditional 3PLs to automate certain functions and services as a complement to their automate certain functions and services as a complement to their traditional and value-added services.traditional and value-added services.

• i2 Technologiesi2 Technologies

• DescartesDescartes

• Manhattan AssociatesManhattan Associates

• EXEEXE

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The Battle Goes OnThe Battle Goes On

• While failure and consolidation has eaten into the e-logistics ranks, the While failure and consolidation has eaten into the e-logistics ranks, the stronger players remain.stronger players remain.

• Examples:Examples:• Transplace.comTransplace.com• Transportation.comTransportation.com• DAT ServicesDAT Services• Logistics.comLogistics.com

– Viable Business ModelViable Business Model• View technology as a tool and not the end all solutionView technology as a tool and not the end all solution

– Many supported by stronger parent companyMany supported by stronger parent company

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The Threat is QuietedThe Threat is Quieted

• However, we believe the 3PLs now have the upper hand:However, we believe the 3PLs now have the upper hand:

– used sizable industry presence to capture additional market used sizable industry presence to capture additional market share as outsourcing trend continuesshare as outsourcing trend continues

– no funding issues, core operations provide necessary cash no funding issues, core operations provide necessary cash flowflow

– recent events increase complexity of logistics tasks, further recent events increase complexity of logistics tasks, further necessitating need for experience and value creationnecessitating need for experience and value creation

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Impact of Recent EventsImpact of Recent Events

• Attacks of September 11th resulted in substantial supply chain disruptions Attacks of September 11th resulted in substantial supply chain disruptions globally and across nearly all industries.globally and across nearly all industries.

• Examples:Examples:• AutomotiveAutomotive• High TechHigh Tech

• In our opinion, given these disruptions, supply chain management is likely In our opinion, given these disruptions, supply chain management is likely to be elevated to a new level of importance within all shippers’ to be elevated to a new level of importance within all shippers’ organizations.organizations.

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Impact of Recent EventsImpact of Recent Events

• Complexity of supply chain management increases:Complexity of supply chain management increases:

• Firms will be forced to examine inventory management Firms will be forced to examine inventory management techniquestechniques

• Balance minimizing inventory carrying costs versus cost Balance minimizing inventory carrying costs versus cost of production disruptionsof production disruptions

• Adjust inventory management to Just-in-Case in order to Adjust inventory management to Just-in-Case in order to smooth any disruptionsmooth any disruption

• Examine need for global sourcing of raw materialsExamine need for global sourcing of raw materials

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Impact of Recent EventsImpact of Recent Events

• Complexity of supply chain management increases:Complexity of supply chain management increases:

• Firms will be forced to ensure access to all modes of Firms will be forced to ensure access to all modes of transportation and reduce reliance on any one modetransportation and reduce reliance on any one mode

• DomesticDomestic

• InternationalInternational

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Impact of Recent EventsImpact of Recent Events

• Weak U.S. and Global EconomiesWeak U.S. and Global Economies

• Increases the need for shippers to focus on operational Increases the need for shippers to focus on operational and financial improvementsand financial improvements

• Rationalize all non-core operations as a means of improving Rationalize all non-core operations as a means of improving financial performance and increasing shareholder valuefinancial performance and increasing shareholder value

• Will likely drive further growth in the outsourcing of Will likely drive further growth in the outsourcing of transportation and supply chain management functionstransportation and supply chain management functions

• Provides further growth opportunities for the traditional 3PLsProvides further growth opportunities for the traditional 3PLs

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Q & AQ & A