Miss Hilary

343

The changing supply of logistics services – a UK

perspective

Colin Bamford, University of Huddersfield

In the four years since the publication of the 4th edition of this book, there has been substantial change to the supply of logistics services in the UK. This change has in part been internal to the business through a significant consoli- dation of provision amongst the largest companies. This has included Exel’s acquisition of the Tibbett and Britten Group (2004), closely followed by Deutsche Post’s takeover of the greatly expanded Exel (2005) and further consolidation with Wincanton’s takeover of P and O Trans European (2003). At the same time all companies have experienced difficult trading conditions as a result of:

� uncertainties over the price of fuel and the climbdown on lorry road user charging;

� lower operating profits in many cases despite an increase in turnover; � driver shortages and concerns over the short- and longer-term effects of

the EU’s Working Time Directive on logistics providers.

External change and challenges have come about through the further global- ization of supply chains and the demands for a high level of customer performance from the retail and manufacturing customers of logistics

21

C o p y r i g h t 2 0 0 7 . K o g a n P a g e .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 6/19/2020 2:08 PM via AMERICAN PUBLIC UNIV SYSTEM AN: 189238 ; Waters, C. D. J., Chartered Institute of Logistics and Transport in the UK.; Global Logistics : New Directions in Supply Chain Management Account: s7348467.main.ehost

344 � Global logistics

providers, as well as through the long-awaited geographical expansion of the EU in May 2004 to include eight new members in Central and Eastern Europe plus Cyprus and Malta.

In short, much has happened to change the way in which logistics services are supplied to customers in the UK.

UK market trends

Table 21.1 shows general trends in the overall market since 1994 (ONS, 2005). As this indicates, in terms of goods moved, the market has been relatively static since 1998. This is slightly surprising given the unprecedented and consistent growth in real GDP over the period. It is also in contrast to the period before 1998 when the total goods moved was broadly in line with the state of the economy.

The causes of this changing pattern are not easy to explain. An obvious one is the continued de-industrialization of the British economy. The manufac- turing sector has experienced continued decline over the period shown in Table 21.1. Given the derived demand for freight transport, it is clear that there is now less demand from customers in those sectors of manufacturing that have experienced structural changes due to increased competition from the rest of the world. By 2004, the manufacturing sector was responsible for less than one-fifth of GDP.

Table 21.1 Freight transport by road – goods moved by goods vehicles over 3.5 tonnes, 1994–2004 (billion tonne-kilometres)

Year Mainly Mainly own Total Percentage public account2 mainly public haulage1 haulage

1994 100.8 37.0 137.8 73.0 1995 106.5 37.2 143.7 74.1 1996 109.1 37.7 146.8 74.3 1997 112.2 37.4 149.6 75.0 1998 114.3 37.6 151.9 75.2 1999 110.9 38.3 149.2 74.3 2000 113.0 37.5 150.5 75.1 2001 114.7 34.7 149.4 76.8 2002 110.6 39.2 149.8 73.8 2003 114.3 37.4 151.7 75.3 20043 110.8 41.4 152.2 72.8

Notes: 1 Relates to carriage of goods owned by people other than the operator. 2 Relates to goods carried by operators in the course of their own business. 3 A minor reclassification means that data for 2004 are not strictly comparable with earlier years.

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A second reason for change though is the improvement in logistical efficiency as a result of better road vehicle utilization. This has been evidenced in a recent study by the Department for Transport that indicated that, since 1998, the intensity of road freight activity had increased by just 2 per cent whilst the economy had grown by almost 17 per cent (DfT, 2005). The increase since 2002 reflects the increased use of 44-tonne vehicles; the average length of haul in contrast has fallen slightly. Transport efficiency has also improved through a steady fall in empty running. This decreased from around 29 per cent in 1998 to 26.5 per cent in 2004. In part this can be explained through more supplier collections and factory gate pricing contracts from major retailers especially. In contrast, lading factors (the ratio of goods carried in relation to the maximum carrying capacity of the vehicle) have fallen. This is best explained by the increased use of less dense unitized loads through the greater use of roll-cages, tote boxes and so on, again mainly by the major retailers.

Table 21.1 also shows that, although there are minor annual variations, the ‘mainly public haulage’ sector, which includes third-party logistics providers (3PLs), has remained more or less static at around three-quarters of the total market. A tentative conclusion could be that this sector has more or less reached saturation level relative to the ‘mainly own account’ sector. If this is the case, it supports the view that the supply of logistics services through 3PLs has become even more competitive.

The arguments in favour of businesses using a 3PL are well documented (see Chapter 17, for example). This sector in the past has seen most of the growth of activity in goods moved. Although the data are not strictly compa- rable, in total terms, the own account sector would appear to be holding its own. This should not in any way undermine the importance of 3PLs (and in some cases advice from a fourth-party logistics provider, or 4PL) in offering a full range of supply chain management services to clients. As well as offering the usual transport and warehouse management services, 3PLs can provide for the assembly and management of inventory and the integration of business IT systems.

With a relatively static market, there are clear signs of increasing segmen- tation, particularly on the part of middle-sized operators, which are increas- ingly vulnerable to competition from the top tier of providers in the market. Typical segments are automatic parts, food services and home deliveries, to add to the more traditional ones of fuel oils and chemicals. The top-tier oper- ators tend to have interests in most segments: primary and secondary distri- bution, temperature-controlled as well as ambient.

The annual round of contracts awarded attracts considerable attention in the trade press (see, for example, Motor Transport magazine). As market growth has slowed, the market has become even more competitive. The uncertainty over fuel prices, given their importance in contract terms, and the need to be price- competitive have meant that most providers have had a difficult time in main- taining margins. In 2005, for example, Analytica reported that around half of

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the main European providers in 2004 had experienced a small decline in oper- ating margins (Analytica, 2005). This list included Exel, Wincanton, Christian Salvesen, TDG and GIST.

A crucial issue in any contract renegotiations is whether service levels are being met. It has been clear for some time that businesses invariably compete on the efficiency of their supply chains – getting it right is vital for business success, in the retail sector more than ever.

In a difficult marketplace, the challenge for the top logistics providers has been to meet the needs of supply chain globalization, whilst integrating the services that they are able to provide. As the Analytica study stated, ‘This enables logistics providers to benefit from scale, creating competitive advantage and a greater breadth of expertise, both of which results in benefits to their customers… customer service must come first. This is the only true base upon which a fully integrated service can be built.’

A further insight into outsourcing and globalization has questioned whether the former really is a magical solution in cases where businesses have sought to benefit from lower unit labour costs in Eastern Europe and Asia (Sweeney, 2005). It is argued that this has resulted in a shift away from controlling the supply chain through ownership to one based on management and control through effective supply chain relationship management. In some cases, the outcome has been a disaster. In other cases, particularly in clothing, textiles and hi-tech manufacturing, many companies have gained significant benefits from outsourcing various supply chain services. The key to success is to see outsourcing as part of an integrated approach to managing the supply chain, a task that increasingly is best carried out by one of the top tier of global logistics providers.

The need for customers to have strategies to exploit the global market is one that is increasingly being carried out by 3PLs. In some cases, this might be a 4PL, an outside organization that has the task of assembling and integrating supply chain capabilities for clients. Our largest 3PLs now see themselves as 4PLs, usually ensuring that much of the supply chain management function for clients produces an appropriate amount of business for themselves.

Market structure – continuing consolidation and globalization

The term ‘market structure’ is one that is used by economists to describe the way in which a market is organized. In distinguishing market structures, there are two key variables, namely the number of firms and the extent of barriers to entry for new firms seeking to join the market. The significance of these is that they determine the degree of competition in a market. The smaller the number of firms and the higher the barriers to entry, then in theory the less competitive the market will be.

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In some markets such as grocery retailing, vehicle production and certain branches of food processing, the level of industrial concentration has been high. In others, such as road freight and distribution, the existence of thou- sands of small firms has meant that historically this has been a very compet- itive, low-concentration market. The continuing consolidation amongst the big players, particularly since 2000, has resulted in this market showing increasing signs of being an oligopoly (see Sloman, 2003).

What has happened over the past six years or so is that the 3PL market espe- cially has become increasingly concentrated in the hands of a small number of very powerful providers. The experience of Exel and to a lesser extent Wincanton is typical of the behaviour of firms in an oligopolistic market. Exel, for example, merged with MSAS Global Logistics in 2000, took over the Tibbett and Britten Group in 2004 and was itself acquired by Deutsche Post World Net (DPWN) in 2005. In theory, an oligopolistic market has some or all of the following characteristics:

� a market leader that often takes the lead in pricing decisions; � interdependence in so far as the actions of one firm can often determine

the reactions of others; � a strong brand image; � although illegal, the possibility of collusion, for example to squeeze out

would-be competition.

So, to what extent is the 3PL an oligopolistic market? Table 21.2 shows the top 10 providers in the UK market in 2003–04 (Motor Transport, 2004). As indicated, Table 21.2 incorporates Exel’s acquisition of Tibbett and Britten; it also includes Wincanton’s purchase of P and O Trans European. Exel had an esti- mated turnover of over four times that of its leading rival and was substan- tially greater than any of the remaining 3PLs shown in the table. This former state-owned business has more than maintained its pole position following its privatization in 1981.

Tibbett and Britten was perceived as the rising star of the 1990s. Prior to the Exel takeover, its turnover had increased tenfold since 1990. It had also led the way amongst 3PLs in establishing a strong foothold in intermodal distri- bution, both for international and for domestic movements, and in the way it had tackled the challenge of providing 3PL services to clients in the emerging Central and Eastern European markets.

Wincanton, unlike Exel and Tibbett and Britten, has traditionally concen- trated its growth in the domestic market. Its acquisition of P and O Trans European was its first successful venture into the wider European market. Equally, there have been casualties. TDG, for example, has lost market share as the market has grown and, in late 2005, TNT announced that its logistics business was to be sold in order to allow it to concentrate its business activities on its mail and courier/express services. Although the reasons behind these

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changes must be complex, a simple conclusion is that both companies have been victims of the increasingly competitive market.

At a European level, as Table 21.3 indicates, in 2004 Exel became the largest single provider of logistics services (Analytica, 2005). As with all of the major players, its business is truly global. The acquisition of Tibbett and Britten gave Exel additional business in 13 countries, including Austria, Poland, Romania and Slovakia, where it had previously no involvement. The growth in its contracts logistics business has been particularly strong in Europe, the Middle East, Africa and the Americas. In the Asia Pacific region, the provision of air and sea freight services accounted for 75 per cent of its turnover. Growth prospects for contract logistics in this region remain healthy. As in Europe, though, operating margins remain subject to external pressures such as the rising price of fuel (Exel, 2005).

The consolidation and integration of the logistics sector has brought substantial business benefits to global European players. These benefits include:

� Economies of sale. As a business increases in scale, it can put pressure on its supply partners to reduce longer-term average costs when purchasing fuel, vehicles, shipping capacity and so on. There are also financial and risk-bearing economies.

� Gaining competitive advantage through not only offering a wider range of services but also concentrating activities in key market segments such as clothing and textiles, automotive, retail, electronics and so on.

348 � Global logistics

Table 21.2 The UK’s leading 3PLs, 2003–04

Company Financial Turnover1 Percentage Employees year end (£m) change on

previous year

Exel2 Dec 03 6,749 +44.2 104,200 Wincanton Mar 04 1,681 +68.4 25,000 Hays Logistics3 Dec 03 ,854 ,–3.0 n/a4 Christian Salvesen Apr 03 ,846 ,–3.6 n/a4 Autologic Holdings Dec 03 ,701 +4.8 4,380 TDG Dec 03 ,541 ,–4.5 7,990 TNT Logistics UK5 Dec 03 ,500 +32.5 8,000 GIST Sept 03 ,292 +10.2 5,750 Kuehne & Nagel Dec 03 ,276 +32.8 , 832 Securicor Omega Logistics Sept 03 ,215 n/a 1,700

Notes: 1 Total turnover from UK market and elsewhere for UK companies only. 2 Includes recently acquired Tibbett and Britten Group. 3 Now ARC Logistics. 4 Data not available for the logistics side of these companies. 5 Estimates.

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� Providing a fully integrated supply chain management service for global clients.

Analytica’s recent research, though, adds a clear warning with respect to the last point in stating that ‘Integration is not a licence to win new customers… a “one size fits all” solution may not be acceptable to all global manufacturers. This sends out a clear message that customer service must come first.’

Finally, in September 2005, it was announced that Exel’s shareholders had agreed a massive £3.6 billion takeover bid from DPWN. The logistics arm of Exel would be DHL, with Exel as a sub-brand (Daily Telegraph, 2005). At the time it was estimated that the combined Deutsche Post and Exel group would have between 6 and 7 per cent of the European logistics market.

The only concern about the takeover was whether it would be blocked by the European Commission on the grounds that it would impede effective competition in the European logistics market. Although total market share is small compared to other sectors of business, a dominant firm like DPWN/Exel could be against the interests of customers of logistics services. After only a brief period of investigation, the Commission approved the merger.

On the face of it, this deal is about logistics. Underneath, though, there would seem to be a very serious threat to the UK’s Royal Mail, which in January 2006 saw its traditional postal business opened up to full competition. Deutsche Post is already a competitor to the Royal Mail in the bulk mail market. Its marriage with Exel’s logistics expertise must surely enhance its opportunities to make further inroads into the UK postal market.

A UK perspective � 349

Table 21.3 Europe’s leading logistics providers, 2004

Company Turnover in Change in turnover 2004 (£m) in 2003 %

Exel 8,961 25.2 Schenker 8,042 17.3 NYK 7,976 7.1 Kuehne & Nagel 7,432 21.2 Deutsche Post World Net 6,786 15.4 Logista 4,406 8.0 TNT Logistics 4,082 9.3 Panalpina 3,965 14.1 Ryder 3,776 7.2 Geodis 3,371 4.8 Wincanton 2,438 2.7

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The EU25 – new market opportunities and threats

Given the nature of the degree of change analysed in the last section, one might conclude that UK 3PLs have a strong hold over the domestic market and that they have little to fear from operators based elsewhere in the EU. This conclusion might also naively be made from the conclusions of research by the Institute of Grocery Distribution (IGD), which once again recognized that UK 3PL operators are the most efficient within the whole of the EU (IGD, 2005). This may well be the case, in particular for the retail grocery market, but in other sectors 3PLs from the rest of the EU and elsewhere are having an increasing share of the UK market.

Table 21.4 shows some such operators (Motor Transport, 2004). Most have particular strengths in the automotive and clothing sectors. In addition, the strength of companies such as DHL and UPS, both of which are major players in the express parcels and document sectors, should be recognized.

The geographical enlargement of the EU in May 2004 has presented increased market opportunities for 3PL operators, including those based in the UK. Prior to the formal accession of the eight countries in Central and Eastern Europe (CEE) plus Cyprus and Malta, various UK operators such as Exel (including in particular Tibbett and Britten) and P and O Trans European (now part of Wincanton) had penetrated the market in Central and Eastern Europe. All have recognized the considerable market opportunities in Poland, the Czech Republic and Hungary.

In these countries there are two main types of opportunity for UK 3PLs. These are

1. Non-food. Unit labour costs in the joining countries are substantially lower than elsewhere in the EU. Consequently, automotive manufacturers such as VW Audi and Suzuki have established assembly plants in these countries

350 � Global logistics

Table 21.4 Non-UK-owned hauliers in the UK market

Company Turnover 2003–04 Change from previous year (£m) %

Autologic Holdings1 701.7 +4.8 Kuehne & Nagel 275.7 +32.8 DFDS Transport 157.0 +12.1

UK subsidiaries: TNT Logistics (UK) 500 +32.5 NYK Logistics (UK) MIR 135 +23.5 Gefco UK 110 +0.5

Note: 1 Includes Walon, Ansa and Acumen.

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and ship finished vehicles into the rest of the EU. Other typical manufac- turers are those involved in chemicals, electronics and textiles. As well as producing for export, the domestic market in these countries is growing as local consumers become more affluent.

2. Retail distribution. This has been an obvious area of development. EU retailers such as Tesco, Metro, Carrefour and so on now have a strong presence in Poland, Hungary and the Czech Republic. It seems logical for them to follow the same logistics practices as in their domestic markets. In some cases, their 3PLs have moved into the market with them.

Getting a foothold in the CEE market is a risky and uncertain business. Some 3PLs have bought transport and warehousing companies in these countries, Tibbett and Britten being a particularly good example. An alternative means of entry is to go it alone and set up a brand new operation. This outcome, of course, is much less certain to succeed.

Realistically, UK companies may have the logistical expertise to make substantial inroads into the expanding CEE market. Geographically, though, German operators are far better placed to know the market and the opportu- nities that may be available. This is a major threat to UK operators.

Transport policy issues

Businesses supplying logistics services are required to operate within a policy and regulatory framework that is increasingly laid down by the EU. It is beyond the scope of this chapter to look at recent issues in depth. It is, though, useful to indicate those that have been and remain of particular concern to UK 3PLs, for example:

� The Working Time Directive. From April 2005, all operators governed by drivers’ hours regulations (excluding self-employed) must comply with these new rules (European Commission, 2002). Driver working time is now limited to an average 48-hour week over a reference period. No more than 60 hours can be spent working in any single week. Complying has raised fundamental problems of driver shortages, although last-minute concessions on ‘periods of availability ’ have helped some operators.

� Drivers from new EU countries. The accession of eight new CEE member states to the EU has opened up the opportunity for drivers and warehouse operatives from these countries to work in the UK. This may help companies in places where there is a labour shortage, although there are concerns over the rates of pay that are being offered. Whether the current wave of activity by recruitment consultants becomes a flood remains to be seen.

� The comparative price of diesel fuel between the UK and the rest of the EU remains a major concern to all UK operators, not only those involved in

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international work. Given the importance of fuel costs in relation to total operating costs, any marked variation in fuel prices between the UK and the rest of the EU must damage the competitiveness of UK operators.

Conclusions

It should be clear from this chapter that the market for 3PL logistics services is subject to ongoing change. Demand-side influences – a highly competitive domestic market and opportunities in the CEE – require UK companies to become increasingly efficient to maintain pole position in the European market.

Simultaneously, supply-side factors have seen major changes in ownership, with increasing concentration in the top tier of operators. This has coincided with concerns over the impact of EU regulations on UK operators, although in context these are unlikely to halt the process of market consolidation and globalization.

References

Analytica (2005) Profitability in European Logistics, Analytica, London Daily Telegraph (2005) Exel snapped up in £3.6bn takeover, 19 September Department for Transport (DfT) (2005) Continuing Survey of Road Goods Transport,

DfT, London European Commission (2002) Working Time Directive, 2002/15/EC Exel (2005) Delivering value across the supply chain, Annual Report, Exel Institute of Grocery Distribution (2005) Retail Logistics, IGD, Watford. Motor Transport (2004), 30 September Office for National Statistics (ONS) (2005) Transport Statistics, Great Britain,

ONS, London Sloman, J (2003), Economics, Prentice Hall, New York Sweeney, E (2005) Outsourcing – a managerial solution?, Logistics Solutions,

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