3RD PARTY LOGISTICS (3PL) OVERVIEW Dirk Stammnitz / August 2015 | Contents ▪ Transportation industry segments and 3PL overview ▪ Performance, key players and factors critical for success ▪ Several major trends impacting the industry ▪ Technology as an enabler of SCM | 1 3PLs offer more complex and wider value chain coverage than basic service providers ESTIMATES Global logistics market by subsector, 2014 Market share (%) Characteristics Value drivers Supply chain manager– typically asset Free ▪ Broad end-to- Lead Logistics ▪ end supply (LLP / 4PL) 1.5 ▪ Can manage several 3PLs For a shipper ▪ Broad scope; 3+ years contract with chain management/transactional Fees or gain expertise Third Party sharing models OR… Logistics (3PL) 17.5 ▪ Deep ▪ Integrated logistics mgmt. in the Form oF knowledge dedicated contract carriage, warehousing, within a transport management, IT, and VAWD speciFic ▪ 2-7 year contracts, sometimes involving vertical(ie – Freight Forwarder1 6 own assets/executional activities automotive) ▪ Logistics service providers For single/ ▪ Sophisticated multimode transportation, typically in yield mgmt international markets involving air and/or ▪ Scale Integrators economies For (many now also 10 ocean modes ▪ Spot market or shorter, 1 - 2 year contracts purchasing oFFer 3PL serv.) ▪ Extensive Fleet network (ie. truck, aircraFt, ▪ Global reach etc) providing door-to-door solutions ▪ Fleet/network Providers oF Basic through completely “integrated” modes size 65 ▪ IT – mobile Services in ▪ Historically limited to large providers like apps Transport / UPS, DHL, and FedEx, with a strong Focus Complexity of service/value chain coverage ▪ E-commerce Warehousing (2PL) on courier, express, and parcel (CEP) ▪ Operators oF a single transport mode – ▪ Operational truck carriers, railroads, couriers eFFiciency ▪ OFten act as subcontractors to 3PLs ▪ Asset 1 Typically accounted For under 3PL in market sizing utilization SOURCE: Transport Intelligence; Datamonitor | 2 The 3PL space is typically segmented into four major categories Description Value proposition Global Freight ▪ FF’s purchase capacity with air cargo or ▪ International expertise Forwarders ocean shipping carriers, and resell that ▪ Buying power/ logistics, (LSPs) capacity to shippers inventory cost reduction ▪ FF’s see higher proFitability and ROIC ▪ Global customs & trade Asset-light than asset-heavy 3PLs compliance & ▪ Vendor management Non-Asset ▪ DTM’s are non-asset based 3PLs ▪ Flexible capacity/ Domestic Focusing on truck brokerage, intermodal solutions across all Transportation marketing, and transportation/Freight Management modes and lanes (Brokers) under management ▪ Mode agnostic ▪ Similar to Freight Forwarding, this ▪ Seamless integration segment enjoys higher proFitability and of multiple ROIC than its asset-heavy counterparts partners/carriers ▪ Value-added warehousing & distribution Warehouse (VAWD) companies oFten manage ▪ Variable vs Fixed management inventory and provide value-add ▪ Strategically located (contract services such as kitting, pick and pack, ▪ Highly conFigurable logistics) ▪ Local presence and Asset- cross-docking, and reverse logistics relationships intensive ▪ This segment Faces the lowest margins oF the Four 3PL segments Dedicated ▪ DCC’s provide a shipper with equipment, ▪ Guaranteed capacity contract drivers, and/or management staFF to ▪ Fleet management & carriage provide dedicated capacity. maintenance ▪ This segment is experiencing more ▪ Customized equipment growth as capacity becomes more and driver training constrained SOURCE: Armstrong & Associates | 3 Increasing consolidation is helping the big to get bigger Followers Leaders vs. Followers Key Success Factors ▪ Synergies From integrated logistics, incl. solution service oFFering, cross-selling to Global Logistics Kuehne & Nagel customers, high degree oF operational eFFiciency and seamless integration across Service Expeditors International businesses ▪ Strategic positioning (e.g., Global LSP vs. Focused niche provider) Providers Panalpina ▪ Single IT platForm, vendor/order management UTi Worldwide ▪ Capacity planning and contracting (risk management) capabilities ▪ Channel management (agents, representations, own operations) ▪ Pricing discipline ,sales Force incentivizing, key account management ▪ Technology inFrastructure to provide greater automation, client access to key CH Robinson Domestic perFormance indicators and shipment tracking transportation XPO Logistics ▪ Longstanding relationships with a large network oF carriers management ▪ Technical capability in network and route optimization Hub Group ▪ Discipline in project management and customer service Landstar ▪ Innovative and customized service models (e.g., shared dedicated Fleets, co-loading) ▪ Demonstrated expertise within speciFic industry or supply chain capabailities GENCO ▪ "Right" industry sector Focus and business system setup (organization, mind-set, people, Warehouse partnerships) Neovia (CAT Logistics) management ▪ Client mix/diversity For improved EOS and contract risk management CEVA ▪ Real-time integration oF IT systems to achieve Full visibility as basis For optimization ▪ Operational excellence in warehousing and distribution processes ▪ Expansion oF value proposition to include broader range oF the entire value chain (e.g., Dedicated Schneider Dedicated sourcing Function, co-location) contract J.B. Hunt DCS ▪ Fleet management/maintenance expertise as well as a Flexible business model carriage ▪ Surge capacity management Werner Dedicated ▪ Standardized driver training and certiFication programs SOURCE: Annual reports, Global Supply Chain Intelligence (GSCi) | 4 Most successful 3PLs have similar business models Attributes of successful models Description Evidence ▪ Asset-light players are not constrained by ▪ Players such as CH Robinson and Expeditors are Asset-light capacity utilization nor burdened by warehouses known as “best-in-class” in the industry. models that are and vehicles on their balance sheets ▪ Similar successful players can extract high margins, reliable, flexible ▪ Shippers place high value on dependable, on- demonstrating that clients are willing to pay For quality, and scalable time service with lower probability oF damages reliable capacity, and that scale does matter ▪ Small to medium sized customers are less likely ▪ The highest-perForming 3PLs – have large, highly Focus on SMB to disaggregate the supply chain and demand Fragmented customer bases, with no customers typically customers that the lowest price From each service provider contributing >6% oF revenues possess less ▪ Low volume customers lack leverage to ▪ ReFerred oFten as “B” accounts, who demonstrate leverage negotiate pricing greater loyalty, volume consistency and predictability ▪ Customers are demanding visibility into the ▪ Global players can cut costs and oFFer clients better IT solutions that entire supply chain and preFer working with systems capabilities when entire network is running on provide visibility companies that allow them to control their Freight the same platForm into and control from end-to-end ▪ 3PLs with superior technology also generates of supply chains ▪ Supply chain visibility provides large savings increased productivity and eFFiciency, along with industry best practices ▪ 3PL’s that are deeply engrained with client ▪ 3PL customers emphasize that integration with internal Increase systems making separation increasingly costly systems is a key Factor in determining with whom they switching costs For the client will partner For their global supply chain management by expanding ▪ 3PLs integrate with client systems through tools ▪ Cloud-based solutions have generally made integration relationships such as cloud-based SaaS, EDI, inventory easier and thereFore have mitigated some oF the risk management, tracking and bar coding, etc. Talent ▪ 3PLs agree that having the right talent in place ▪ Estimates show that industry is Facing a talent shortage Management in one key success driver For the next Five years – gap oF 20 million hires For 2015 alone ▪ Mix oF both hard and soFt skills combining both ▪ As a result many 3PLs are recruiting From outside their leadership qualities and cross-Functional own industry, thus increasing their talent pool competencies will be critical SOURCE: 2015 3PL Study - CapGemini | 5 The 3PL industry is experiencing several trends for 2015 and beyond 1 Constraints in domestic freight capacity due to lack of equipment availability and driver shortages has lead many 3PLs and shippers to consider new strategies as well as seeking more dedicated capacity At the forefront of logistics IT will be the continuing development and investment in more robust SCM 2 software through improved Supply Chain Planning (SCP), including Customer Relationship Management (CRM) and Transportation Management Systems (TMS) with the ability to handle “big data” while delivering substantial ROI 3 Shift in transportation flows due in part to “Nearshoring” production being on the rise for several years as Mexico increases manufacturing capacity and capabilities as well as logistics infrastructure, continued USWC port strikes and disturbances, as well as the Panama Canal expansion creating additional all-water capacity to the USEC from Asia 4 Continuing industry consolidation through increased merger & acquisition activity helping large global logistics service providers and 3PLs get even bigger while offering an ever-expanding service portfolio 5 Supply chain participants and channel partners