Inbound Logistics | July 2007 | Digital Issue

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THE MAGAZINE FOR DEMAND-DRIVEN LOGISTICS•JULY 2007

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3PLs IN THE STRATOSPHERE: Readers’ Choice—Top 10 Editors’ Choice—Top 100 LLPs Enter the 4th Dimension EXCLUSIVE RESEARCH: Exploring the 3PL Sector

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THE MAGAZINE FOR DEMAND DRIVEN LOGISTICS

July 2007 • Vol. 27 • No. 7

INPRACTICE  READER PROFILE Vimal Patel: Taking an Eagle’s-Eye View When merchandise flies off the shelves at American Eagle Outfitters stores, it is up to Vimal Patel, director of material flow, to make sure the distribution center responds accordingly.  SUPPLY CHAIN TECHNOLOGY RFID: A Tale of Two Cities With RFID vendors claiming it the best of times for RFID technology, and users taking a more worst-of-times attitude, who should you believe?

INSIGHT 10 CHECKING IN

What doesn’t kill mid-sized 3PLs makes them stronger.

18 DIALOG

Readers talk back. 22 3PL: TACTICAL RESOURCE OR STRATEGIC PARTNER? KnowledgeBase sponsored by Wheels Group. 24 CONSIGNED INVENTORY MANAGEMENT KnowledgeBase sponsored by NAL Worldwide. 26 3PL MERGERS & ACQUISITIONS KnowledgeBase sponsored by National City Corporation. 28 PAIRING EXPERTISE AND LOCATION KnowledgeBase sponsored by ATC Logistics & Electronics.

 DC SOLUTIONS Bean There, Returned That  LIT TOOLKIT Hassle-Free Electronic Invoicing: Now That’s Hot

L.L. Bean keeps its customer-service-friendly reputation intact with a new materials handling system in its reverse logistics center.

HVACR wholesaler Johnstone Supply heats up efficiency with a cool electronic invoicing system.

INDEPTH  Welcome to the 3PL Zone  “Go Ahead…Pile It On!”

Somewhere between demand and supply, between strategy and tactics, and between the pit of an enterprise’s fears and the summit of its visibility and knowledge lies the 3PL Zone. Enter it with us to explore today’s 3PL market.

Outsourcers today expect the world of their 3PLs, piling on requests for value-added services such as repackaging, freight bill audit/payment, and vendor management. How do 3PLs rise to the challenge?

4 Inbound Logistics • July 2007

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THE MAGAZINE FOR DEMAND DRIVEN LOGISTICS

July 2007 • Vol. 27 • No. 7

PLEASING TO THE PALLET page 124

INDEPTH

 Outsourced Logistics: 4Ward Momentum

INSIGHT 30 KEEP CONTAINERS MOVING KnowledgeBase sponsored by RoadLink 52 IT MATTERS

What is the real role of today’s 4PLs? How do they differ from 3PLs? Inbound

Logistics takes a closer look at this growing segment of outsourced logistics.  READER’S CHOICE Top 10 3PLs Which 3PLs do the best job handling your logistics needs? We asked and you responded, with more than 4,500 votes. See which 3PLs readers single out as market leaders.  EXCLUSIVE RESEARCH 3PL Perspectives

When it comes to supply chain visibility, seeing is believing.

56 CARRIER’S CORNER

Carriers’ call to action: get involved in public policy.

58 ECODEV

As Yogi Berra would say, 90 percent of real estate is half logistics.

60 VIEWPOINT

Unlocking the potential of intermodal freight transportation.

Enter the deepest reaches of the 3PL Zone, where we explore and analyze the $100-billion third-party logistics market. IL ’s exclusive 3PL Market Insight Survey reveals the top trends in the outsourced logistics industry, as seen through the eyes of leading 3PLs.

INFO 172 CALENDAR 211 WEB_CITE CITY 240 CLASSIFIED 242 RESOURCE CENTER

 Top 100 3PL Providers

All the information you need to find the 3PL that best meets your logistics outsourcing challenges. 122 SPECIAL 3PL RESOURCE 3PL RFP  Materials Handling Update: Pleasing to the Pallet Sometimes, back to basics really is the best approach. Before implementing high-tech systems, warehouse operators should reconsider the role of their most underrated asset – the pallet.

6 Inbound Logistics • July 2007

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THE MAGAZINE FOR DEMAND DRIVEN LOGISTICS

July 2007 • Vol. 27 • No. 7

DUBAI FLYING HIGH page 148

INDEPTH  Ocean View

Inbound Logistics ’ 2007 Ocean Carrier Guide rounds up some of the industry’s top ocean freight carriers.

 Dubai Flying High

One of the world’s fastest-growing cities, Dubai is emerging as a center of logistics activity in the Middle East, thanks to soaring air cargo growth and a busy port system.  Hospitality Logistics: Supply Chains Made to Order Five-star supply chain management helps the hospitality industry keep customers coming back for more.  2007 Summer Reading Guide Work on your tan while boosting your logistics skills with this line-up of business-friendly summer reads.

INBRIEF 14 10 TIPS

How to negotiate rail contracts.

33 TRENDS

State of logistics report…One to watch: WMS market…The new supply chain mandates

45 GLOBAL LOGISTICS

Will congestion derail the global economy?... NAFTA’s march to the top…The Asian air cargo conundrum

183 TECH UPDATE 191 NEW SERVICES

198 TRADE SHOW EXPRESS 203 WHITEPAPER DIGEST 256 THE LAST MILE: CONTINGENCY PLANNING

8 Inbound Logistics • July 2007

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flow-through distribution and warehousing expertise • Reduce port delays with best-in-class transloading, freight forwarding and customs brokerage services • Get freight out of ports faster using local drayage • Get more peace of mind with increased control and visibility of shipments, and the convenience of a single provider Call us today at 1-800-525-9358, Ext. 8269 , or visit schneiderlogistics.com to see how we can help you make ports a competitive advantage.

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CHECKINGIN

Vol. 27, No. 7 July 2007 THE MAGAZINE FOR DEMAND-DRIVEN LOGISTICS www.inboundlogistics.com

STAFF

Keith G. Biondo publisher@inboundlogistics.com Felecia J. Stratton editor@inboundlogistics.com Amy Roach Partridge apartridge@inboundlogistics.com

PUBLISHER

by Keith Biondo | Publisher

EDITOR

ASSISTANT MANAGING EDITOR

A h, conventional wisdom. Not long ago, observers of the third-party logistics segment predicted the demise of many Tier II and Tier III 3PLs. Smaller players could not keep up with the increasing complex- ity required to serve customer demands, they said. In addition, they predicted merger and acquisition activity would create a pool of large 3PLs dominating the segment and forcing smaller players out of the game. Neither has happened. Contradicting what observers expected, mid-size brokers, warehouses, and even carriers successfully evolved into logistics solutions providers, and have not only survived, but are prospering. Why? Here are five reasons. 1. The economy stays strong. We are experiencing the “greatest global eco- nomic boom in history,” according to a recent Fortune article. That economic expansion creates opportunities for all 3PLs. And, even when economies cool down, companies look to 3PLs to help them slash inventory. 2. Smaller players have capacity. As big as the national players are, they repre- sent only a small portion of distribution center capacity in the United States. 3. Companies spend more money on 3PL services. In the United States, 3PL users currently direct 48 percent of total logistics expenditures to outsourc- ing, which is lower than the overall global average of 55 percent, according to a Georgia Institute of Technology study. If the United States follows the global trend, the market will continue to grow domestically. In fact, IL’s lat- est research shows continuing growth in the size of the 3PL market ( see page 99 for details ). 4. The outsourcing concept enjoys growing acceptance, for at least some of today’s transportation and logistics challenges. 5. Inbound logistics creates opportunity. Domestic 3PLs are benefiting from the growth in what ProLogis calls “import-driven warehousing” and we call inbound logistics. Following an inbound logistics philosophy creates over- all savings, scalability, and growth opportunities. But along with that created value comes greater logistics complexity, which 3PLs can – and do – help disentangle. Tier II and smaller 3PLs also spur growth by creating market sub-segments that the larger logistics players do not or cannot excel at. One example is in the financial niche, where some 3PLs act as banks for their customers for lon- ger periods than the more financially sophisticated players. By paying carriers quickly when shippers pay slowly, they are able to command capacity when it is scarce. Customers appreciate the float, and that makes them loyal. Bottom line: if the demand is there, 3PLs–large, mid-size, or small–will continue to grow. For details, check out our expanded 3PL coverage starting on page 63. ■ Mid-Size 3PLs: What Does Not Kill You Makes You Stronger

Joseph O’Reilly

EUROPEAN EDITOR

Mark Rowan

EDITORIAL ASSISTANT

Merrill Douglas John Edwards Lisa Harrington Amanda Loudin Deborah Ruriani Lisa Terry

CONTRIBUTING EDITORS

Michael Murphy mmurphy@inboundlogistics.com

CREATIVE DIRECTOR

Shawn Kelloway production@inboundlogistics.com Sonia Casiano scasiano@inboundlogistics.com

PRODUCTION/DESIGN ASSISTANT

PUBLICATION MANAGER

Carolyn Smolin

CIRCULATION DIRECTOR

SALES OFFICES NORTHEAST: Keith Biondo

(212) 629-1560 • FAX: (212) 629-1565 publisher@inboundlogistics.com WEST/MIDWEST/SOUTHWEST: Harold L. Leddy (847) 446-8764 • FAX: (847) 446-7985 haroldleddy@inboundlogistics.com Marshall Leddy (763) 416-1980 • FAX: (763) 201-4010 marshall@inboundlogistics.com MIDWEST/ECONOMIC DEVELOPMENT: Jim Armstrong (815) 334-9945 • FAX: (815) 334-1920 jim@inboundlogistics.com SOUTHEAST: Gordon H. Harper (404) 350-0057 • FAX: (404) 355-2036 south@inboundlogistics.com MOBILE, AL: Peter Muller

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Inbound Logistics welcomes comments and submissions. Contact us at 5 Penn Plaza, NY, NY 10001, (212) 629-1560, Fax (212) 629-1565, e-mail: editorial@inboundlogistics.com. For advertising, reprint, or subscription information, call (212) 629-1560, or e-mail publisher@inboundlogistics.com. Inbound Logistics is distributed without cost to those qualified in North America. Interested readers must complete and return the qualification card published in this issue, or may subscribe online at www.inboundlogistics.com/free. Subscription price to others: in North America: $95 per year. Foreign subscriptions: $129. Single copy price: No. Amer. $10, foreign $12, back issues $15. Periodicals postage paid at New York, NY, and additional mailing offices.

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10TIPS

STEP-BY-STEP SOLUTIONS

by Deborah Catalano Ruriani

Negotiating Rail Contracts

N egotiating with rail carriers has moved beyond difficult. Demand for rail services is high, and capacity constraints have caused carriers to pursue yield over volume. As a result, some shippers are experienc- ing sticker shock, with transportation rates increasing between 20 and 30 percent. If your rail freight moves on mostly “closed” lanes (no rail com- petition at origin or destination), you will be negotiating with a monopoly unless you can create the appearance of competition. Here is some advice from Kathy Langan and Gordon Heisler of trans- portation consulting firm Professional Logistics Group Inc., Oak Park, Ill. 1 Be prepared. Before you schedule carrier negotiations, gather all con- tract-related materials so you have everything at hand to start your anal- ysis. Accumulate all contracts, tariffs, rate benchmarks, and information from carriers in all modes regarding their fuel surcharge programs and

driver shortages. Also compile magazine and newspaper articles that discuss cur- rent rail events – derailments, hazmat shipments, rate increases, new rail con- struction, and service impacts. When developing larger contracts – $10 mil- lion and more – begin preparation and strategy development six to nine months in advance of negotiation meetings. 2 Know your industry and how it impacts the carriers you negotiate with. Compile industry facts and statistics that demonstrate to rail carri- ers that your business is desirable. Show them how your industry is growing, for example, and what new technol- ogy is available. Describe how imports will affect domestic movements. Also determine what value railroads place on moving your commodities versus other commodities and traffic types. 3 Understand the rail carriers’ key drivers. During the negotiations, try to draw out the carriers’ moti-

vations. What are their key drivers and pricing strategies? What are the railroads’ marketing and operating goals, and how can your business fit in? Knowing cur- rent market conditions, and how they may influence the carriers’ volume cycles, will impact their willingness to negotiate. 4 Leverage everything you have. Present your business as attrac- tive for the carriers to handle, and emphasize your competitive lanes and growth opportunities. Prepare data on potential truck conversions, plant expansions, transloading opportunities, recent or pending acquisitions, and process improvements in your own rail management operations. 5 Consider operations, not just freight rates. Are you a “problem” shipper with excessive demurrage, poor fleet management, or difficult plant switching environments? Do your plants offer the opportunity for priva- tized switching? Is adequate car storage

14 Inbound Logistics • July 2007

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10TIPS ‹ CONTINUED FROM PAGE 14

7 Anticipate carrier positions and develop a sound negotiation plan. Using the intelligence gathered, for- mulate a picture of your business for the carriers. Have a plan to account for all possible objections, and response. Yes, you are developing a strategy for engagement, but you don’t need to be contentious because that will not work to your advantage. Determine what you want to achieve from the negotiations. Be specific. Be realistic. Be organized. Be concise. Above all, be prepared. 8 Prepare a written bid package to present to the rail carriers. Make sure to present your written bid package in a clear format that does not overwhelm carriers with more informa- tion than necessary. Make it simple and easy for carriers to work with, so they can respond in a timely manner.

9 Utilize expert legal counsel for the final transportation contract review. Several highly reputa- ble firms specialize in transportation law. They can work independently or alongside your in-house legal counsel to identify potential pitfalls or sug- gest additional language in the final document that will help protect your company. 10 Establish a long-term rail t ra n s p o r ta t i o n st ra te g y. Strategically located origin or destination points enable the best transportation rates and terms. Avoid siting new plants that depend heavily on rail at locations that don’t provide competitive access to at least two Class I railroads. Also, consider build-out/ build-in, short-line, and transloading strategies wherever possible. ■

available? Meanwhile, understand how railroad network design, local opera- tions, and capital improvements affect your traffic. Operational factors can be either distractions or opportuni- ties for leverage in the negotiations; account for them in your strategy and approach. 6 Develop relationships. You should not meet your railroad counter- parts for the first time at a contract negotiation. Although rail carrier behavior and performance frustrates shippers at times, getting involved in transportation industry trade groups and cooperative joint initiatives will ultimately prove more useful than tak- ing a hostile or combative approach. In addition, networking can help you better understand the personalities of the people you negotiate with.

16 Inbound Logistics • July 2007

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DIALOG

LETTERS TO THE EDITOR

ments within Romania leading up to and following its accession into the European Union this past January. The CIA’s World Factbook reports that Romania’s economy grew 6.4 percent in 2006, the strongest growth in the past decade. Perfect Flaws While I enjoyed Lisa Harrington’s article, Designing the Perfect Warehouse (May 2007), I found that it bypassed key issues related to: size, flow, and parking of motor carriers in the exte- rior yard; carrier driver and customer waiting areas with safe access to phone, water, and restrooms; and EPA anti- idling laws that suggest monetary penalties against warehouse operators and carriers when a carrier idles lon- ger than the guidelines. I know articles can’t cover all the issues, but I was sur- prised that this feature did not mention these factors at all. John A. Gentle, John A. Gentle & Associates LLC Lisa Harrington replies: In an attempt to narrow the focus and investigate certain warehouse areas in depth, we concen- trated the article primarily on design aspects affecting the flow of goods and material inside the warehouse. Driver accommodations and ample yard area are critical issues; we no doubt will include a discussion of those issues in a follow-up article.

global supply chain technology needs to catch up a bit, but also, many compa- nies are still reluctant to increase their IT budgets—and when they do, logistics solu- tions aren’t always at the top of the list. TMS providers, however, are improving their capabilities for addressing global transportation. A Story With Legs I just finished reading Lisa Terry’s article, Furniture Logistics Finds its Legs (March 2007). I found the section on managing inbound movement of Asian sourced products particularly interest- ing. Good article! Don Granholm, Nashua Corporation Reading IL in Romania While reading Joseph O’Reilly’s March 2007 article, CEE Change: Central & Eastern Europe Makes Waves, I was intrigued by the figures for Romania shown in the two charts highlighting Europe’s average GDP per capita and economic growth. I’m wondering what the source is for the respective figures, and what year the figures refer to?

Kudos for Blogs Thank you for the great article about logistics industry blogs (Logistics in the Blogosphere, February 2007 ) . Blogging is a great medium for digging deeper into current supply chain issues and an excellence resource for staying up to speed on current news and happen- ings. Keep up the good work. Nathaniel A. Riggs, BestTransport.com Desperately Seeking Global I just read Amy Roach Partridge’s col- umn Global Technology Gets Hyperactive (March 2007). The topic fits in with a research paper I am a writing on the challenges of global transportation optimization. I’d like to know if Ms. Partridge has any comments concern- ing the development and availability of global TMS solutions? I assume that a gap exists between the effectiveness of domestic TMS and systems that can build loads and optimize routing internationally. Andy Street, CSCP Amy Roach Partridge replies: You are correct; many shippers tell us it is diffi- cult to manage the nuances of global transportation with their current TMS. They often purchase separate, niche solutions for components such as global trade management and import/export compliance. The problem is two-fold:

Jackie Bojor, Factor Regional Development Center Romania

Joseph O’Reilly replies: The two charts featured in this article are from PMR Consulting’s 2006 research. Bear in mind that this data does not reflect invest-

18 Inbound Logistics • July 2007

Another perfect fit!

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If you’ve ever worked with Jacobson Companies— national 3PL and warehousing leaders—you know about our “can do” service. We do it all . . . warehousing, transportation, logistics, packaging, contract manufacturing, industrial staffing and more. And we do it better—helping you streamline your supply chain management and improve your ROI with our single-source, seamless solutions, worldwide. Now, we’ve grown our service capabilities and warehouse network again, thanks to our merger with Pennsylvania-based Arnold Logistics, a premier group of

warehousing, reverse logistics and contract manufacturing companies serving the food, CPG and high-growth industrial sectors. The result is, we can offer more value-added services across your supply chain from end to end. Innovative thinking, state-of-the-art facilities, worldwide footprint and our unmatched service commitment. Learn how Jacobson can be the perfect fit for your supply chain solutions. Talk to John Rolf or Stan Schrader at 1-800-636-6171 . Or email john.rolf@jacobsonco.com or sschrader@arnoldlogistics.com.

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R E A D E R PROFILE

by Merrill Douglas

Taking an Eagle’s-Eye View

hen Vimal Patel speaks, every- one listens. As manager of merchandise flow at American

clothing chain based in New Jersey. Like other purveyors of youthful apparel, AE manages giant spikes in its

Eagle (AE) Outfitters’ Warrendale, Pa., distribution center, his job is to make sure all departments–receiving, replen- ishment, packing, and shipping–pull together to achieve the facility’s goals. “Every department wants to do well individually, but they don’t always look at the holistic picture of company- wide goals,” says Patel. That’s where he comes in, advocating a broad, all- encompassing view. At 6:30 each morning, Patel meets with DC supervisors and group lead- ers to outline the day’s objectives and assign workers to departments to han- dle current volume. Throughout the morning shift, he monitors progress and productivity, making changes to accommodate priority orders. Patel is also responsible for workplace safety. The Warrendale DC is one of three that serve AE’s 840 U.S. and 73 Canadian stores –which sell clothing for the 15- to 25-year-old set –plus its new MARTIN+OSA sportswear stores and online direct sales channel. When Patel joined AE as manager of industrial engineering in 1999, he was no stranger to the needs of a retail busi- ness. His parents owned convenience stores in Scranton, Pa., and his first post-college job was managing a CVS pharmacy store. His first supply chain management position was distribution manager for Petrie Retail, a women’s

The Big Questions

What do you do when you’re not at work? From September to January, Sundays are consumed watching NFL football. I’m a converted Pittsburgh Steelers fan, having moved from New Jersey to southwestern Pennsylvania. I also volunteer for the AE Events Committee and AE Foundation, and exercise when time permits. I’m the single parent of a 15-year-old daughter and a 13-year-old son; our family activities include movies, amusement parks, and recreational facilities. Ideal dinner companion? Mohandas Gandhi or Nelson Mandela. What’s in your briefcase? PDA, iPod, business cards, note pad, and paperwork. Business motto? Always be flexible to accommodate business changes and dynamics, and never stop learning. If you didn’t work in supply chain management, what would be your dream job? I would start a specialty retail business in India. Many untapped opportunities exist there, in areas such as specialty foods, or cosmetics and fragrances, from around the world.

VIMAL’S VITAE

NAME: Vimal Patel TITLE: Manager of merchandise flow, Warrendale, Pa., distribution center, since 2005

COMPANY: American Eagle Outfitters PREVIOUS EXPERIENCE:

Manager, CVS pharmacy store; distribution manager, Petrie Retail; industrial engineer positions with NYP Corp., Boston Scientific, and Hills Department

Stores; manager, industrial engineering, American Eagle Outfitters EDUCATION: B.S., industrial engineering, Pennsylvania State University, 1988; M.S., industrial

engineering, New Jersey Science and Technology University, 1992

20 Inbound Logistics • July 2007

business during the back-to-school and holiday seasons. “Weekly receipt projections can range from 300,000 to 3.7 million units, combined with weekly replen- ishment projections that may expand from 100,000 to 1.2 million units,” Patel says. One challenge these num- bers pose is that no matter how high the volume climbs, the DC’s convey- ors and sorters can only handle a fixed amount of product per hour. To move the record-breaking volume that passed through Warrendale dur- ing the most recent holiday and early spring seasons, Patel looked at the receipt and replenishment plans and

sharpened his figurative pencil. “I backtracked from the plan, then crunched the numbers,” he explains. “I had to determine how much we could pick, pack, and receive, respectively, per hour.” Then, given the maximum materials handling capacity, Patel looked for cre- ative ways to reach AE’s targets. ROCKING AROUND THE CLOCK “To meet the demand, I had to buy more capacity; more time to ship products out,” Patel says. That meant extending the first shift by two hours and 45 minutes. His counterpart on the second shift used a similar tactic,

so together they kept the DC work- ing practically around the clock. They also called in a cavalry of temporary workers. “The trick is to use as many resources as possible to meet volume goals,” Patel says. In the two years since AE created his current position, Patel has seen the DC’s departments learn to share resources for the common good as they never had in the past. “Before, it was challenging to get all the supervisors to work as one team,” he says. Now, they are starting to embrace Patel’s philosophy of taking an eagle’s-eye view of business. ■

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BY PETER JAMIESON Chief Operating Officer, Wheels Group 5090 Orbitor Drive, Unit 1 • Mississauga,ON L4W 5B5, Canada 800-663-6331 • info@wheelsgroup.com

3PL: Tactical Resource or Strategic Partner?

W hen it comes to choosing a 3PL provider, what do you look for? Beyond competitive pricing, is it breadth of service? Specialty transportation capabilities? Global reach? Whatever your selection criteria, price is a critical factor once the must-have capabili- ties have been confirmed - but is price really the issue, or is it cost? When it comes to logistics, price is only one of the variables that contribute to cost. Sure, it’s vital to procure 3PL services at com- petitive rates, but it is equally important that the relationship is structured so that your company can maintain or improve customer service while reducing the cost of doing business. A 3PL user/pro- vider relationship often begins with the goals of reducing transac- tion costs and improving efficiency. This is accomplished through outsourcing of transportation, warehousing, customs clearance and brokerage, freight forwarding, cross-docking/shipment consolida- tion, order fulfillment and distribution, etc. This tactical approach, when executed well, delivers excellent results. But, could those results be multiplied to reduce internal resource costs, enable greater agility in decision making and improve your business’ abil- ity to adjust to changes in customer demands or the business environment? The answer is often yes, but it means making a strategic decision about how you use a 3PL to move the relationship to another level: one of strategic partnership. That takes mutual commitment, focus on clear objectives, flexibility and, above all, trust. Choosing a Partner There’s a natural apprehension about inviting a vendor to sit at the table when business decisions are being made. However, in our experience a shared understanding of our customers’ business models, short and long term objectives, competitive pressures, cost issues and customer demands enables them, and us, to be more successful. Transparency is essential; a willingness to share infor- mation confirms that goals are aligned. That enables us to be pro- active so we can anticipate and identify opportunities to improve, suggest innovative ways to increase logistics effectiveness and pro-

vide business intelligence that helps 3PL users make more effective decisions and improve profitability. Choosing the right partner is key to a successful strategic 3PL relationship, and getting to know each other to build the necessary trust is vital. You need to confirm shared values and that your cor- porate cultures are compatible. You need to understand capabilities and expertise and determine how to leverage those of both orga- nizations. You need to be clear about your expectations and agree upon goals, key performance indicators and measurement intervals. You need to talk about the opportunities, but also consider “What if?” scenarios and take the necessary steps to mitigate risks. Strategic Goals In our view, the objective should not be to create a partnership, but to achieve specific goals through partnership by working to the same performance standards. There should be consequences for both organizations should they not meet the standards, and rewards when they meet or exceed them. The potential for the part- nership to be win-win, or lose-lose, encourages partners to work together to achieve the desired results. Sustainable value creation should be the overriding goal of a strategic 3PL partnership. Since “value” is defined differently by every business, when we work with a customer we learn what con- stitutes value for their business, first. Then, together, we validate proposed goals, activities, innovations, processes and performance indicators against those criteria before moving ahead. While a transactional relationship is more appropriate and effec- tive for some organizations, strategic 3PL relationships represent an exceptional business opportunity for others. As the supply chain lengthens and its complexity increases, logistics and supply chain planning, measurement, and evaluation processes become increas- ingly important - and the potential for Wheels Group to help 3PL users build strategic competitive advantage has never been greater. Wheels Group is one of the top 100 North American providers of 3PL/4PL services and innovative supply chain solutions.

22 Inbound Logistics • July 2007

NO TWO SUPPLY CHAINS ARE ALIKE . THAT’S WHY WE APPROACH THEM ALL THE SAME WAY. First, we get busy analyzing the way your goods and information flow from here to there. Then we determine what, if anything, can be improved. Then, we improve it. Whatever the challenge, if it involves transporting goods across town, cross-country, or overseas, we’ll partner with you and together we’ll create solutions for your supply chain that are uniquely yours.

When pre-packaged solutions just won’t do, think red instead.

1-800 AVERITT www.averittexpress.com > For case studies and more, visit www.averittexpress.com/flexible/ib

THINK RED INSTEAD

1200 Greenbriar Drive • Addison, IL 60101 800-316-6860 • info@nalworldwide.com

Consigned Inventory Management: The Rx for Ailing Medical Profits

I n matters of life and death, the last thing one should worry about is a supply chain. But when it comes to medical devices and healthcare services, supply chain headaches can change the abbreviation for Out-Of-Stock to RIP in a heartbeat. Like many other manufacturing industries, medical device makers face the need to streamline an increasingly complex supply chain. Of the approximate 6,000 medical device component and equipment manufacturers selling goods today, between 50% and 80% of the industry’s $75 billion in revenues come from products introduced during the last 3 to 5 years. That’s high turnover in a market already facing the tightest regulatory, liability, and product- tracking requirements in history. At the other end of the medical supply chain, hospitals and ser- vice providers are facing similar economic pressures. In recent years, rising insurance costs and rising numbers of uninsured have sent hospital margins to the lowest levels in the past decade, according to the Healthcare Financial Management Association. In both cases, moving beyond in-house supply chain manage- ment to a consignment inventory management solution (CIMS) can add vital points to a medical organization’s bottom line. Medical device manufacturers trying to go ‘lean’ by reducing inventories face the challenges of how to continue to provide order fulfillment, warehousing, distribution, and customer service while reducing the inventory and maintaining (or reducing) product lead times. The first step in relieving the medical supply chain headache is realizing that while a supply chain is critical to the manufactur- ing operation, it may not be a core strength of the organization or its people. Companies around the world are outsourcing non-core operations to benefit from best in class solutions that reduce sup- ply chain costs while improving overall customer service, such as NAL Worldwide’s Centralized Supply and Logistics Center (CSLC). Consider the additional costs of traditional in-house inventory management processes. High sales projections lead to overstocked inventory, which reduces the efficiency of the manufacturing sched- ule. Orders are filled on a per requisition basis rather than a con- solidated shipment to a particular customer. Extra shipments mean additional transportation and labor costs and increase the chances for discrepancies and billing delays. When is the last time you saw receiving operations at a hospital? The last thing they need is more inbound shipping activity. Finally, hospitals – operating under their own economic con-

straints – resist carrying high inventory levels, leading manufactur- ers to move towards a vendor managed inventory (VMI) system to get their high-value products as close to the hospital as possible. Unfortunately, VMI requires monthly audits from field sales when they should be identifying and servicing new orders rather than rec- onciling inventory and billing documents. An alternative to traditional VMI practices is for manufacturers to outsource inventory management to an independent Centralized Supply and Logistics Center (CSLC) that is designed specifically to serve the unique needs of the healthcare industry. If this is done, many of the inventory, warehousing, distribution, and billing prob- lems facing manufacturers go away. One call to a CSLC delivers all the materials needed for exist- ing orders. A CSLC can consolidate deliveries, while improving receiving, restocking, and service to the hospital. Space previously used for inventory becomes flexible space for growth and revenue generation, while visibility across the manufacturing enterprise is greatly improved through a centralized inventory/warehouse/logis- tics provider. At the other end of the medical supply chain, hospitals also financially benefit from a centralized inventory center. Supply chain management, inventory, and procurement can account for up to 35% of a hospital’s operating budget, according to Healthcare Purchasing News. Unofficial VMI can account for up to 50% of total inventories, creating distribution, billing, and product lifecycle headaches for both manufacturers and hospitals. Hospital supply chains spend approximately $8 billion each year on inventory management and order management out of an esti- mated $11.5 billion in total supply chain costs. In this context, even small percentage improvements to supply chain efficiencies quickly add up! Recent studies show that – just in the past 2 years – hospi- tals that move to a Consigned Inventory Management System can expect to reduce supply costs by up to 3.5% within the first 4 years of operation, which equates to more than 1% of total hospital operating expenses. To learn more about how consigned inventory management can streamline your operation, contact Kristy Mouser, VP, Supply Chain Solutions–Healthcare at NAL Worldwide at 817-297-3550 or by email at kristy.mouser@nalworldwide.com. NAL Worldwide delivers specialty logistics solutions for Healthcare, Communications, Retail and Technology.

24 Inbound Logistics • July 2007

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BY JONATHAN L. IVES, CFA Director and Head of Transportation and Logistics Group Investment Banking Group, National City Corporation (216) 222-2825 • jonathan.ives@nationalcity.com www.nationalcity.com/investmentbanking

Third Party Logistics Mergers and Acquisitions

W ith almost 600 reported deals representing more than $79 billion in aggregate transac- tion value since 2005, the transportation industry has seen significant mergers and acquisitions transaction activity. Third party logistics is one of the most active sectors within the transportation industry for private equity investment and strategic buyer acquisitions. Consolidation Although the third party logistics industry is currently highly fragmented, it is expected to become increasingly concentrated. Shippers are continuing to consolidate their business with a smaller number of providers that offer a breadth of services in order to meet both domestic and international logistics and warehousing needs. Private equity firms have played a part in consolidation thus far by focusing on aggregating smaller players and building scale through numerous acquisitions. Other factors driving industry consolidation include the ability to penetrate new customers and end markets as well as diversify cus- tomer concentration. Expansion of service offerings and acquisition of proprietary know-how and technology are also driving increased volumes of transactions. Private Equity Investment Despite the pace of investment by private equity firms in the last several years, we still observe, by various estimates, as much as $400 billion of equity capital waiting on the sidelines and looking for attractive situations in which to invest. Private equity funds are investment firms that aggregate capital and seek to acquire private and publicly traded companies. Third party logistics businesses have attracted substantial inter- est from private equity buyers due to high industry growth rates and limited capital investment requirements. Private equity interest is particularly strong for asset light and non-asset based business models. Asset light models are defined as transportation providers that utilize owner-operators and avoid the large capital expenditures typically required to maintain company owned fleets. Non-asset based models involve the use of technology or intellectual property to act as an intermediary for transportation arrangement, warehous- ing, and supply chain management. These firms are characterized by very limited ownership of transportation equipment and real estate. Private equity firms have been successful with transportation and logistics companies in various sub-segments. Areas of focus for

private equity firms have included expedited transportation services, freight forwarding, intermodal transportation, warehousing, reverse logistics, and transportation management. In terms of criteria, a capable management team is one of the most critical elements that private equity firms use to evaluate new opportunities. In certain instances, private equity firms part- ner with an industry executive that has a track record of value cre- ation, particularly in a situation where an entrepreneur is looking to exit. An established customer base with limited reliance on any one customer or group of customers is another key consideration for private equity logistics acquisitions. Logistics companies with a defensible market position and a differentiated service offering are also attractive. Valuation of Logistics Acquisitions Many factors specific to the buyer and the target affect the cash flow multiple that will be paid in a given sale process. In the logis- tics industry, non-asset or asset light operating models drive the highest transaction multiples. Historical and prospective growth represents an important consideration for valuation of logistics transactions. Broader industry conditions and volatility, not only within the economy but also the third party logistics industry, are also a factor in valuation of logistics acquisitions. Finally, scale and size have an effect on valuation with higher cash flow multiples being paid for larger situations. About National City Capital Markets Investment Banking and its Transportation and Logistics Group National City Bank is the 11th largest bank in the U.S. with over $140 billion in assets. National City Capital Markets’ Transportation and Logistics Group is a team of highly experienced professionals dedi- cated to providing financial and strategic advisory services to middle market transportation and logistics companies. Our investment bank- ing services include sell-side and buy-side acquisition advisory, capi- tal raising, going private transactions, restructurings, and corporate divestitures. For sell-side advisory services, we have met or exceeded valuation expectations for selling shareholders for over 90% of our engagements. The Transportation and Logistics Group hosted a web seminar on third party logistics trends and mergers and acquisitions, which is available at www.nationalcity.com/seminars . Both the replay and copies of the presentation and transcripts can be found under the Archived Webcasts section. Jonathan Ives can be reached at jonathan.ives@nationalcity.com .

26 Inbound Logistics • July 2007

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