“The last few years have caused global third-party logistics providers to reconsider the structure of their businesses within a shifting industry. Many of the CEOs [participating in the survey] reported adopting new strategies that are more conservative in nature with respect to both market expansion and new service offerings.” –Joe Gallick, senior vice president of sales, Penske Logistics, commenting on the 17th Annual Survey of Third-Party Logistics Providers
Make no mistake: while things are slowly getting better, especially in the freight world, things are still mighty tough out there.
“The recession, by any measure, is worse than anything we’ve experienced in the last three or four decades,” noted Noel Perry, senior consultant with FTR Associates and principal of research firm Transport Fundamentals, at McLeod Software’s recent user conference (an event covered by my editorial comrade Brian Straight with his usual aplomb.)
“What we can say with some certainty is that we are in an era where the economy recovers slowly,” Perry added – and that applies to the freight market as well.
William Strauss, senior economist and economic advisor to the Federal Reserve Bank of Chicago, noted at FTR’s 2010 Transportation Conference a few weeks back that the current economic downturn resulted in a 4% drop in the gross domestic product (GDP) U.S. economy. That’s a far deeper drop than what occurred in the recessions of the 1970s and 1980s (3%) but not as bad as the Great Depression (a 26% drop), he explained.
Strauss added that we’ve not seen a “normal” bounce-back yet from the so-called “Great Recession” of 2008/2009. In the 1980s, for instance, the “bounce back” resulted in 6% economic growth. Instead, we’re seeing smaller growth numbers, he noted – starting in the first quarter at around 3% and now down to 1.6%; trending out to 2.4% GDP in 2010 and 2.9% GDP in 2011.
It’s numbers like those that are making all the firms servicing the freight world – truckers, railroads, and third party logistics firms (3PLs) alike – very cautious in their future planning. Yet there are good signs out there, too – and that’s something the freight industry needs to take note of as well.
The real good news for the trucking industry, FTR’s Perry said, is that growth in trucking is outpacing GDP by some 4% to 2.5%, respectively, for the year.
Another positive sign is the trade deficit, which has started falling again – something Perry calls “the best news I’ve heard in the last four or five months.” Historically, when the trade deficit falls, that corresponds to a growth in domestic freight, he noted. So when the deficit grows – as it has for much of the past decade – it translates to a drop in domestic freight of about 1% per year, Perry pointed out.
A possible reason for this “renewal” within the U.S. domestic freight market can be gleaned from the 17th Annual Survey of Third-Party Logistics Providers, a project sponsored by Penske Logistics and presented at the Council of Supply Chain Management Professionals annual global conference this past week by its author Dr. Robert Lieb, Professor of Supply Chain Management at Northeastern University.
The survey’s findings are winkled out from responses by 31 CEOs heading up 3PLs across North America, Europe and Asia-Pacific (APAC) – companies responsible for generating approximately $37 billion in revenue last year.
One of the report’s key findings is that 87% of those 3PL CEOs noted that some of their manufacturing customers have begun to move toward “near-shoring” options in the past year – a trend that is expected to trickle down to 3PLs in the years to come.
The 3PL CEOs in all three regions are also considerably more bullish about future revenue growth prospects of not only their companies but also for the 3PL industry as a whole than they were last year, Lieb found:
• One-year company revenue growth projections were 10.4% for North America (6.9% in 2009), 7.2% for Europe (-3.3% in 2009), and 22.5% of APAC (12.9% in 2009). The average three-year company growth projections were 10.6% for North America (11.8% in 2009), 8.3% for Europe (8.7% in 2009), and 19.5% for APAC (16.7% in 2009).
• One-year regional 3PL industry revenue growth projections averaged 7.3% for North America (3.5% in 2009), 4.8% for Europe (-1.4% in 2009), and 15.4% for APAC (10.7% in 2009). The average three-year regional 3PL industry growth projections were 7.8% for North America (7.9% in 2009), 5.4% for Europe (4.9% in 2009), and 12.9% for APAC (11.7% in 2009).
It’s also worthy to note that despite a more positive outlook on the market, 3PL executives – much like their counterparts in trucking – are taking a far more conservative approach in terms of expansion plans.
“The CEOs involved in this year’s surveys are more optimistic about growth prospects than they were last year, but appear to be more cautious about how growth will be achieved,” said Lieb.
“They are likely to spend more time ‘qualifying’ new accounts, while devoting less attention to accounts in industries that are more cyclical in nature,” he added.
Here’s how that “conservatism” is playing out, Lieb (at left) noted:
• The global economy continued to pose a challenge in 2009, with 48% of companies surveyed failing to meet revenue growth projections, while 80% of them still managed to be profitable.
• Some 25 of the 31 CEOs surveyed reported their companies were profitable during 2010, with three reporting they broke even, and three reporting their companies were unprofitable
• Pressure on 3PLs to share risk with their clients increased in 2009, with 28 of the 31 CEOs reporting that their companies now have performance-based contracts with many of their clients. Only five of the companies were involved in significant merger or acquisition activity in the year.
• Eighteen of the CEOs reported that their companies had put new risk management programs in place during the past year, with increased pressure to share risks with customers now a major factor in the industry.
• Among the other important problems mentioned were price compression and procurement’s growing role in the North American survey, the slow economic recovery and decreasing margins in Europe, and managing increased costs and dealing with “unrealistic competition” were highlighted by the APAC CEOs.
The survey also determined that while labor numbers imply an upturn for 3PLs, with 87% of the companies beginning to rebuild their workforces in 2009, many of the CEOs said they will focus more on developing part-time rather than full-time positions, to keep their operations more flexible in the face of future swings in the freight market.
So while the freight picture sure isn’t rosy by any stretch of the imagination, there are some bright spots out there – especially longer-term trends that may see more manufacturing, and thus jobs and freight, moving back to our shores. Let’s hope that trend, at least, continues to gain strength.