According to the most recent market results and trends report from Armstrong & Associates, Inc., 2016 domestic transportation management increased 5.3% in gross and 7.0% in net revenues over 2015 and if the first half of 2017 is any indication, 2017 will be much better than 2016.
The beneficiaries of the growth has not been equal among all providers, as the mega logistics providers are making their impact. M&A activity that occurred over the past two years and the continued inflow of capital, along with the technology advances is making it more and more difficult for the "little guys" to survive.
While not all market verticals are growing in there needs for 3PL services, the overall reasons for growth do fall into four buckets:
- Better economy
- Managed transportation services market growth
- Planning for future capacity concerns
- Mega logistics providers leading the conversations.
A summary of each of the four areas of growth are outlined below:
1. The most obvious reason for growth is the economy is performing better in 2017 versus 2016. As a result, truck tonnage shipped (chart below) and railroad traffic data are above 2016. These trends are expected to continue, with the Industrial Production Index (IP) showing more life in 2017 than 2016. (chart below)
There has been some margin pressure over 2017 because capacity has been fairly loose and relatively balanced through the first six months. Contract rates were under pressure in the 1st quarter, but with the rise in the spot rate market our expectation is to see increases in the contract rate when the 2018 RFP season kicks into full gear in the latter part of 2017. (see the latest intermodal spot rate index analysis)
To further back the strength being exhibited in the freight market, a recent article by FTR Associates reported "the first quarter of 2017 registered the second strongest freight growth of the current recovery" and went on to say "the balance of 2017 is expected to grow more modestly, but continue to be positive through 2018".
2. Technology is making its impact and transforming the logistics market at breakneck speeds, which is putting a megaphone on the sales pitch of logistics service providers on their managed transportation services offering.
The largest of shippers were on the front end of taking advantage of technology to drive a competitive advantage, but the message is now being heard and accepted by shippers of all sizes.
It has been interesting to watch technology and logistics service providers market blend to an extent, as LSP's have taken their TMS used in their brokerage business and wrapping it into a full outsourced managed transportation services model for the benefit of all shippers. The blending of the market is validated in the latest Gartner Magic Quadrant ranks that includes the largest TMS software providers: MercuryGate, Oracle, etc., but also have LSP's: CH Robinson's TMC division, TransPlace and LeanLogistics within their evaluation of the TMS market. The LSP's listed feel they are better positioned with a home grown system. Our position has always been that proprietary systems are less robust than those coming from the TMS software companies that have 100% of their focus on building the best software package in the market. The proprietary systems also lock their shippers in and provide less flexibility for strategic changes.
No matter your perspective, today's technology and the market knowledge top 3PL's offer make managed transportation a compelling service that offers a quick return on investment and high ROI by: saving shippers capital that would have otherwise been needed to bring today's powerful TMS cloud technology online; bringing immediate freight savings; offering operational efficiencies; and delivering on improved performance. The data captured within the TMS also allows for big data analysis to further improve a shipper's supply chain cost structure and performance.
3. Logistics professionals are preparing their business for what appears to be a tighter capacity market and bringing in brokers and intermodal providers for additional capacity. Freight is a cyclical market and shippers have had a long run of having the upper hand in negotiations. Various market reports indicate the carrier market will have its turn shortly and the more seasoned shippers are making preparations now.
4. The mega logistics providers are driving the narrative and market share, as they spread further into the market with a compelling offer for shippers. At the same time, mega logistics providers are outflanking the small to medium logistics providers.
The outflanking is summarized in the following points:
- Leverage on the buy side is making a stronger price play for shippers.
- The investment in technology for high end functionality is tough for the smaller LSP's to keep pace.
- The combination of speed needed to service today's sophisticated market requirements and technology within the pricing landscape has given complete transparency to available capacity. The combination puts the the small to medium players at a disadvantage because they cannot act fast enough and cannot put the higher margins they have previously enjoyed. The result is the logistics buy-sell transaction has moved to a whole other level, which puts pressure on the smaller LSP's working on lower margins and higher volumes.
- More sophisticated logistics buyers.
- Ability to offer a more robust compliment of services for a one-stop-shop.
- The mega providers offer additional protection for shippers. Examples include: a more robust bond, plus $1.0 million shipper interest liability policies versus a contingent cargo policy.
InTek knows a bit about the mega logistics providers having competed against them since 2003. Now as an agent of SunteckTTS, a top ten logistics provider, gives InTek a unique perspective. The services and backing InTek now can offer shippers is light years ahead of where we were as a medium sized broker, which is demonstrated in our 40% increase over prior year.
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