A CEO Perspective: The State of U.S.Logistics Companies in Europe
By Robert C. Lieb and Laura Kopczak -- Supply Chain Management Review, 6/1/1997
Third party logistics—the management practice also known as outsourcing or contract logistics—has evolved into a multimillion dollar industry worldwide. This evolution, which has gained momentum in the 1990s, has been driven by a number of factors. These include not only industrial changes such as a growing supply chain focus in many companies, reengineering activities, and greater emphasis on core competencies, but also the increasing complexities of global sourcing and sales. Collectively, these factors have impacted the number of companies providing third party logistics services as well as their structure, service offerings, and market coverage.
Several recent studies have examined the market for third party logistics services in the United States from both the provider and user perspectives.1 That research documented two interesting dynamics: (1) users of third party logistics services were becoming increasingly interested in expanding their use of such services for their international supply and distribution activities2 and (2) many logistics service providers, whose operations were initially domestic in nature, began feeling strong pressure from large accounts to provide similar services in foreign markets.3 Those companies believed that the pressures to "internationalize" their service offerings not only provided real growth potential, but also threatened their core domestic business if they did not expand globally.
In response to these industry dynamics, a number of the largest third party logistics service providers in the United States have expanded their operations into the international arena. To a large degree, their initial forays have been in Europe. This study examines the experiences of 10 U.S. companies that have expanded into Europe. It evolved from the previously mentioned studies, which have focused on the structure, activities, and prospects of 25 large U.S. third party logistics companies.
The companies included in the European study are shown in the accompanying sidebar. The CEOs of the European operations of each company were contacted by telephone and asked to participate in a mail survey. The key findings presented here tell a story of some solid successes to date in Europe, but with far greater potential still to be realized.
The Extent of Involvement in EuropeTo date, supply chain professionals have had little information about the extent of European involvement of U.S.-based logistics companies. Yet this kind of information is important because the participation of those service providers in the European logistics marketplace may have considerable impact on such issues as service offerings, rate of innovation, pricing policies, and competitive intensity. The questionnaire addressed a number of those issues in an attempt to better gauge that level of involvement.
- Number of Years in Europe and Company Structure. Most of the companies included in this survey are relatively new to the European logistics market. Six of the 10 established their European subsidiary within the past decade, and four of those have been in business only since 1994. The other four companies surveyed had established European operations in the 1960s and 1970s in their basic businesses such as air express or truck leasing. These later evolved into full-service logistics operations.
When the 10 CEOs were asked about their degree of autonomy within their organization, only four categorized their European operations as somewhat dependent upon the U.S. parent. Of the other respondents, two categorized their operations as very autonomous and four as autonomous. Nevertheless, all of the subsidiaries get referral business from their U.S. parents. As shown in Exhibit 1, six of those companies receive more than 40 percent of their logistics business through such referrals. When asked if the European subsidiaries were expected to use the services or products of their corporate parents in servicing accounts, only one of the eight CEOs who answered the question said "no." Clearly, there are strong synergies between the subsidiary and the parent company.
All of the subsidiaries are involved in some form of joint advertising, marketing, or sales efforts with their U.S. parents. Specifically, all of the subsidiaries engage in joint sales calls with the parent companies, while eight are involved in joint marketing programs, and six participate in joint advertising efforts. - Net Asset Value. The majority of the companies surveyed have made only modest investments in their European operations, with all reporting net asset values of less than $10 million. Clearly, from an investment perspective, these companies are moving cautiously into the European marketplace. As noted later in this article, the limited capital supplied by their corporate parents effectively means that alliances with other companies will be necessary to support significant expansion.
- Geographic Coverage and Employees. Asked about the number of countries served by their European operations, the CEOs gave answers ranging from two to 16, with the average being seven. In general, the number of employees involved in the European operations is relatively small. Of those chief executives who were able to separate their logistics service employees in Europe from the rest of the organization, five reported fewer than 500 employees. Two companies, in fact, had fewer than 100 employees.
- Accounts Served and Contract Renewals. Not surprisingly, the number of accounts served by these companies varies substantially. Eight of the companies surveyed were able to segregate their logistics accounts in Europe. Each of these reported 80 or fewer accounts—with the lowest being three. At the same time, the number of new European logistics accounts added within the past year varied widely, with eight of the companies reporting between three and 45 new accounts. The CEOs indicated that their European subsidiaries also have been quite successful in terms of contract renewal. On average, 90 percent of the contracts scheduled for renewal last year were renewed.
The survey also sought to determine the types of clients, by national origin, served by the European subsidiaries. Exhibit 2 shows that, on average, approximately 60 percent of the annual revenues generated have come from U.S. multinational companies, with 42 percent of the total coming from companies that had previously done business with their corporate parent. This not only reflects the referral business discussed earlier, but also suggests a "reward" for the U.S. logistics service providers that have expanded into Europe.
Operationally, the companies surveyed rely heavily upon subcontract relationships to provide their service offerings in Europe. On average, they report that slightly more than half of their revenues are paid to subcontractors, with slightly more than one-quarter of that being paid to other operating units of their parent organizations. - Competitive Environment. Competition for third party logistics services abounds in Europe, as evidenced by the CEOs' responses when asked to identify their main competitors. While many companies were mentioned, the most frequently cited competitors were: NFC (Exel), Nedlloyd Districenters, TNT, Danzas, United Parcel Service, Ryder, DHL, AEI, Christian Salvesen, Expeditors International, Panalpina, and Federal Express. Interestingly, several of the CEOs indicated that potential U.S. multinational customers were more likely to include companies with U.S. links in their "short lists" than European providers.
In the interest of establishing an immediate presence in Europe while limiting the capital investment required to be a market player, European subsidiaries of U.S. third party logistics providers have relied quite heavily upon strategic alliances. Seven of the companies surveyed have pursued this strategy, averaging slightly more than three alliances each. The most popular alliance partners have been involved in warehousing, fleet management, trucking, ocean shipping, freight forwarding, and express services.
Asked what makes these alliances work, the CEOs most often cited such factors as similar corporate cultures, a "win-win" proposition for both parties, a shared commitment to quality, shared goals and information, and a clear understanding of the relationship and relative roles of both partners in the relationship.
Broad Range of Service OfferingsThe companies surveyed offer a broad range of logistics services in Europe, either directly or in conjunction with their alliance partners. Their service offerings are summarized in Exhibit 3. All 10 of the companies offer carrier selection, rate negotiation, warehouse management, inventory management, and logistics information services. Nine do order processing, order fulfillment, product returns/reverse logistics, shipment consolidation, and customs clearance.
The services provided by nine of the 10 companies included in the survey extend beyond Europe. More than half the customers served by these companies require intercontinental transportation services into Europe, while about a third require such services out of Europe.
Despite the broad range of services, most of the revenues generated tend to come from a handful of offerings. In particular, the CEOs ranked transportation services, warehouse management, inventory management, and value-added services as the top revenue-producing activities.
Selling Third Party ServicesHow are U.S. third party logistics companies marketing and selling their services in Europe? The survey addressed this question from a number of perspectives, exploring such issues as the nature of the selling process used by these companies, CEO perceptions of the buying process, profiles of companies that buy the services, and the length of service contracts.
- The Most Effective Ways of Finding New Clients. The survey asked the CEOs to identify the five most effective ways of finding new clients. It found that (on a weighted scale) references from the U.S. parent company or partner were the single most important method of finding new clients. This reinforces the point about the importance of those relationships made earlier. Ranking second on a weighted basis was references from an existing customer. Logistics audits for prospective clients and sales calls by company representatives ranked third and fourth, respectively. (Exhibit 4 shows the percentage of respondents listing these methods among the top five ways of finding new clients.)
- Distinguishing Factors and Market Niches. When asked what factors distinguished their companies from their European competitors, most respondents gave similar answers. They tended to emphasize their strong global networks as well as their ability to implement integrated, customized solutions for customers. The CEOs also mentioned several other characteristics such as past performance records, willingness to invest, and a strong relationship with the U.S. parent company.
The European subsidiaries have targeted particular industries in their sales efforts. Asked to name the key industries being targeted, the top executives most often pointed to high technology/electronics and automotive. Interestingly, these also were among the most important "targets" of the CEOs who respond to the annual industry surveys conducted in the United States.4 - Who Decides to Explore and Buy Logistics Services? The most commonly targeted position within a prospective European customer is the corporate logistics manager. Chief executive officers and chief financial officers also are primary targets of the third parties' sales efforts, the CEOs say.
This emphasis on the corporate level appears justified, given that the CEOs included in the survey uniformly believe that the decisions to explore and buy third party logistics services are made at the corporate or divisional level. Not one of the CEOs said that the decision either to explore or buy was made below the divisional level. - Length of Contracts and Size of Customers. When asked about the length of contracts signed with their European customers, six CEOs reported that the average ranged from one to three years. The others said that their average contract was longer than three years.
As Exhibit 5 clearly shows, the size of clients served also varies considerably. On average, only seven percent of the revenues generated by the six companies that provided this data comes from customers with annual sales of less than $101 million. By contrast, 44 percent of their revenues, on average, are realized from customers with annual sales of more than $500 million. This clearly reflects the extent to which these logistics service providers currently rely upon U.S. multinationals for their customer base.
The survey addressed several operational issues as well. Specifically, the CEOs were asked to identify the main impediments encountered in bringing new clients "on-line." The obstacles cited most often were overcoming resistance to change, convincing potential customers of the value of third party logistics services, and integrating provider and customer information systems.
One of the most important issues that enters into a company's decision-making process is considering the potential impact of third party logistics on the company's employees. In most instances, the use of such services will lead to a reduction, often substantial, in the number of full-time logistics employees within the company. To lessen this concern, while at the same time addressing staffing needs related to the new account, some logistics companies have hired employees who would otherwise be displaced. Asked if they ever adopted this practice, the CEOs surveyed gave mixed responses. Some often do so, others do so infrequently, and the remainder never hire customer employees. In characterizing their experience with this practice, the chief executives of the logistics companies that have hired such employees gave responses ranging from very positive to acceptable.
Current Status and Future Prospects of the IndustryThe CEOs also were asked to give their perceptions of the status and future prospects of the third party logistics industry in Europe. Their responses are detailed below:
- Sources of Revenue Growth. The CEOs were asked how much of the revenue growth of the past year had come from new accounts versus expansion of existing accounts. Though the responses varied widely, new business development clearly was a high priority during the past year. Revenue growth attributed to new accounts ranged from 30 to 100 percent, with the average being 61 percent. As for growth attributed to existing accounts, the range was from 0 to 70 percent; the average was 39 percent. However, the source of revenue growth is expected to shift somewhat over the next three to five years, with more emphasis being placed on expanding existing accounts. On average, the CEOs expect 43 percent of their revenue growth to come from new accounts and 57 percent to come from their existing account base.
- Estimated Growth Rates. As shown in Exhibit 6, the CEOs forecast strong revenue growth rates for their own companies both for the next year and the next three years. Eight out of 10 CEOs predicted one-year company growth rates in excess of 20 percent. Two, in fact, forecast that their revenues would more than double next year. Projections are similarly optimistic for the three-year period. Interestingly, the one- and three-year growth projections for the industry as a whole are considerably more conservative. Eight of the chief executives projected industry growth of less than 20 percent next year; nine saw similar industry growth rates for the three-year period.
- Industry Dynamics. To respond effectively to market opportunities, management must understand the dynamics of the marketplace in which they operate. The CEOs were asked to identify and rank the three most important industry dynamics currently impacting third party logistics services in Europe. By far, the two most important dynamics identified were a heightened customer desire for one-stop shopping on a worldwide basis and a restructuring of customer supply chains. Among the other important dynamics identified were increased desire for sophisticated IT services, increased CEO and CFO participation in the third party decision-making process, and continued downward pressure on pricing.
The findings on restructuring were particularly revealing. The CEOs indicated that more than 40 percent of their customers were involved in some form of supply chain restructuring. They noted, too, that a similar percentage was moving toward centralized European warehousing. - Opportunities and Problems. When asked to identify the most significant opportunities for their companies, the CEOs gave a broad range of answers. They strongly believe that continued international expansion, both within Western Europe and beyond, is justified. At the same time, they see opportunities in providing integrated supply chain management services, inventory management, process design and management, and information services.
While considering those opportunities, the CEOs also must address a number of important problems. Some of these lie within their own companies, others in the marketplace. Among the problems most frequently cited were the human resource limitations of their companies, the resistance to change and unrealistic expectations of customers, price pressures and low returns in the marketplace, inadequate information systems to effectively link providers and users, and the lack of a truly global focus in both the provider and user communities. - Most Significant Developments of the Last Year. The chief executives gave varied responses when asked to identify the most significant developments affecting the European market for logistics services over the past year. The most frequently cited development, however, was continued entry of new providers into the European marketplace. That appears to be an important consideration, particularly in view of the widespread perception that the market for such services in Europe is already "mature."5
The respondents believe that the capacity brought into the marketplace by such new entrants will likely continue to exert downward pressure on prices and margins. Among the other developments cited were the expansion of information technology capabilities, the broadening of the service areas covered by individual service providers, and increasing market awareness of the services offered by third party logistics companies.
In response to both perceived market opportunities and pressure from existing customers to internationalize their service offerings, a number of large U.S. third party logistics companies have established subsidiaries in the European marketplace. This study determined that this is a relatively new development, with many of the subsidiaries being established during the past several years. The majority of the subsidiaries operate in a largely autonomous manner, but all receive considerable referral business from their U.S. parents. In addition, they all participate in some form of joint sales and marketing efforts with those companies.
The investment base of the European subsidiaries is quite limited. They have relied heavily upon alliances with European companies to broaden their service offerings and market coverage. On average, nearly half of their revenues come from large customers with annual gross revenues in excess of $500 million. A significant portion of their business comes from U.S. multinational companies, and this likely represents a "reward" in part provided for expanding into Europe.
These European subsidiaries have tended to focus their marketing efforts in certain industries, with particular emphasis being given to the high-technology/electronics and automotive industries. The number of accounts served by these providers varies broadly, with several of the newest entrants having few accounts. Most of the contracts signed with these accounts are for less than three years in duration. To date, these logistics service companies have been quite successful in terms of contract renewals.
The CEOs surveyed are optimistic about the growth prospects of their operations in Europe in both the near (one year) and longer (three year) time frames. They also see their own companies outperforming the industry average. For them, the European logistics marketplace is an arena of rapid change, driven by market dynamics such as increased customer desire for worldwide one-stop shopping and the continued restructuring of customer supply chains. Those dynamics also translate into what the CEOs see as the most important market opportunities in Europe. At the same time, however, they perceive problems in the marketplace. The most significant of these relate to the human resource limitations of their companies, the flow of new entrants into the field, and the already depressed industry pricing structure.
It is likely that these European subsidiaries are but the first wave of U.S. third party logistics providers to enter Europe. The low-capital entry strategy used so far appears both intelligent, given the market uncertainties, and necessary due to the reluctance of their parent company boards to risk substantial sums of capital in such ventures. At this stage, the U.S. multinational customers provide a necessary base from which to build. But to be successful in the longer term, these U.S. subsidiaries must attract substantially more "pure" European business. That will be challenging because many view the European logistics service market as already being "mature" and the incumbent providers are likely to respond to this new competition with even lower prices.
A key to the success of the companies surveyed appears to be their ability to align themselves with competent partners that provide complementary services. The alliances, which will undoubtedly be difficult to manage due to cross-cultural considerations, may provide access to the "pure" European accounts, which will be vital to European success. For these U.S.-based companies, Europe may be the laboratory that allows them to determine if the concept of a global service network is viable ... and if further expansion into such markets as Asia and South America is justified.
| % of Business | Number of Respondents |
| 5–20% | 4 |
| 40% | 1 |
| 50% | 3 |
| 70% | 1 |
| 100% | 1 |
| Customer Category | Average % of 1995 Revenues | Range |
| U.S. Multinationals That Have Been Clients of the U.S. Parent | 42% | 10–80% |
| U.S. Multinationals That Have Not Been Clients of the U.S. Parent | 18% | 0–80% |
| European Companies Headquartered in the Same Country as Providers' European Headquarters | 13 | 0–40% |
| Other European Companies | 24% | 5–73% |
| Japanese Multinationals | 3% | 0–40% |
| Service Provided | % of Companies Offering This Service |
| Carrier Selection | 100% |
| Rate Negotiation | 100% |
| Warehouse Management | 100% |
| Inventory Management | 100% |
| Logistics Information Services | 100% |
| Order Processing | 90% |
| Order Fulfillment | 90% |
| Product Returns/Reverse Logistics | 90% |
| Shipment Consolidation | 90% |
| Customs Clearance | 90% |
| Product Assembly/Installation | 70% |
| Spare-Parts Fulfillment | 70% |
| Vendor Selection | 40% |
| Fleet Management | 30% |
| Purchasing | 30% |
| Other | 40% |
| Projected Growth Rate | Company Next Year | Company Next 3 Years (Annual Rate) | Industry Next Year | Industry Next 3 Years (Annual Rate) |
| 0–20% | 2 | 3 | 8 | 9 |
| 21–40% | 2 | 3 | - | - |
| 41–60% | 2 | - | 1 | 1 |
| 61–80% | - | 1 | 1 | - |
| 81–100% | 2 | - | - | - |
| >100% | 2 | 3 | - | - |
| Author Information |
| Robert C. Lieb is the Walsh Research Professor in the College of Business Administration at Northeastern University. Laura Kopczak is visiting assistant professor of industrial engineering and engineering management at Stanford University. |
| Footnotes |
| 1 See Robert Lieb and Hugh Randall, "1996 Perspectives on the Current Status and Future Prospects of the Third-Party Logistics Industry in the United States," 1996 Annual Conference Proceedings, Council of Logistics Management (1997), pp. 399–430; also, see Robert Lieb and Hugh Randall, "A Comparison of the Use of Third-Party Logistics Services by Large American Manufacturers, 1991, 1994, 1995, and 1996," 1996 Annual Conference Proceedings, Council of Logistics Management (1997), pp. 431–452. |
| 2 Lieb and Randall, "1996 CEO Perspectives on the Current Status and Future Prospects of the Third-Party Logistics Industry in the United States," p. 408. |
| 3 Ibid. |
| 4 Ibid., p. 424. This finding also is consistent with the significant volume of referral business that the European subsidiaries receive from their U.S. parent companies. |
| 5 See Melvyn Peters, James Cooper, Robert Lieb, and Hugh Randall, "The Use of Third-Party Logistics Services by U.K. and European Industry," forthcoming in The Journal of Transport Logistics (1997). |
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