November 07, 2012, Bain Consulting, François Rousseau, François Montaville and François Videlaine
1. Third-party logistics: Market structure
Corporate managers traditionally have viewed logistics as a mandatory cost bucket. But top-performing companies now recognize that mastering supply chain and logistics can be more than that: It can be the source of competitive advantage.
This strategic shift opens up significant growth opportunities for logistics providers, with winners using different paths and business models to foster growth. The major challenges for providers are aligning corporate strategy with the right organizational model and matching that strategy to targeted customer segments—by size, footprint, vertical category and market. Leading logistics providers excel at understanding key customers’ needs and purchasing behaviors—and they know that understanding is a key ingredient to building a solid strategy and defining the most efficient commercial approach and offerings. This report will examine both the market and winning models used by providers.
Many companies now outsource all or part of their supply chain to logistics specialists when it’s not a core business. For logistics providers, the value proposition rests on three key pillars: optimizing logistics costs for customers, shortening the length of the order completion cycle and reducing the number of fixed assets.
1.1 Contract logistics
Moving beyond warehousing. Along with warehousing services (picking up, packing and labeling), contract logistics suppliers have extended their traditional core into extra value added services, such as postponed manufacturing (light assembly, kitting, manufacturing and quality control), and even payment and customer management.
Still a regional and fragmented market. A few large global players dominate the contract logistics market. The leader, DHL Supply Chain, with more than €13 billion in relevant revenues in 2011, is nearly four times larger than the supply chain units of its closest competitors, Ceva Logistics and Kuehne & Nagel, the No. 2 and 3 players, respectively.
Even so, contract logistics remains a local and fragmented business. Top suppliers lead the market at a national or regional level, but not globally. In the Asia-Pacific region, Hitachi’s third-party logistics, Sankyu, Mitsubishi Logistics and Yamato are the established key players; in North America, DHL, Penske, UPS and Ryder are the major suppliers; and in Europe, the main players are Wincanton, Ceva and Kuehne & Nagel. Within Europe, the combined local market share of these logistics suppliers does not exceed 30%, with a large number of small local players meeting the remaining demand.
Cost position is triggering market competition. Despite the development of value-added services, the contract logistics market offers suppliers few opportunities to differentiate themselves. Customers often view contract logistics as a commodity, with a provider’s cost position serving as the main purchasing criteria.
This viewpoint has encouraged providers to develop cost-effective solutions, such as shared warehousing. They also replicate winning formulas that make the most of a solid infrastructure, which may include warehouse configuration, IT systems and skilled teams.
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