Understanding Logistics — Global market size, segments & value chain analysis

In recent times, with the emergence of cross-border business operations, increased demand for consumer items, and a large area of operations of industries like retail, e-commerce, automobiles as well as fresh agricultural produce & food items, logistics has emerged to be an integral key in the global business supply chain management.

Logistics refers to the overall process of managing how resources are acquired, stored, and transported to their final destination.

Running complete end-to-end logistic operations requires an extensive set-up which includes — warehouses, essential equipment for storage & transport, an established network of different stakeholders for handling the products and this is quite a challenge for any business. This has prompted the companies to look outside their scope of operations and outsource all or parts of their supply chain to logistics specialists when it is not a core business. These outsourced logistics are oftentimes called third-party logistics (3PL). Their value proposition is:

• Optimizing logistics costs for customers
• Shortening the length of the order completion cycle
• Reducing the number of fixed assets

Third-party Logistics or 3PL

Third-party logistics companies provide a variety of services that include transportation, warehousing, pick-up and packing, inventory forecasting, order fulfillment, packaging, and freight forwarding. Let’s take a look at the different segments of 3PL

Segments of Third Party Logistics

Contract Logistics

This includes — warehousing services (pick up, packing, labeling), postponed manufacturing (minor assembly, kitting, manufacturing, and quality control), payment, and customer management.

Freight Forwarding

Commissioned by companies to manage their freight overseas and overland. The service includes transportation, customs brokerage, insurance, and tracking.

Road Transportation

Structured into 3 different segments: Full truckload, part-load or less than truckload, groupage, and express

Contract Logistics

Source- Bain & Company, “Challenges and winning models in logistics”

According to the report by Bain & Company, contract logistics are a very local and fragmented business, where few large companies dominate the market share such as DHL, Kuehne + Nagel, and DB Schenker from Europe, CH Robinson, XPO Logistics, and UPS from US, Nippon Express, Yusen Logistics, and Kerry Logistics from Asia.

The global contract logistics market is at $203.9Bn in 2017 and is expected to grow at a 5% CAGR until 2025.

It was also mentioned in the report, that market competition is revolving tightly around cost position.

The logistics market offers suppliers few opportunities to differentiate themselves.

Source- Maritime fairtrade

Freight Forwarding

Freight forwarding is commonly used for cross-border or inter-island transportation.

Most freight services don’t own ships, planes, or other transportation assets. Instead, they act as intermediaries between customers and cargo carrier companies.

Freight forwarding services can directly be handled by cargo companies.

Airfreight business structure — Freight forwarders (integrators) handle almost all shipments through freight agents

Sea cargo business structure- two-thirds of all volume is handled without a middleman between customers and carriers

Source — Yusen.jp

Road Transportation

Road Transportation simply refers to land transportation and this is usually apparent in the first-mile to mid-mile part of the logistics value chain.

Road Transportation is structured into 4 segments, based on load type and weight.

• Full Truck Load — single customer for a full truck
• Part-Load or Less than Full Truck Load — several customers with loads weighing more than 1 to 2 tons each
• Groupage and express — consolidate several small shipments to create a full load. It also includes same-day deliveries with the point-to-point model.

The difference in the above types of road transportation all differs in the consolidation method that each type will do. In the full trucks load and less than full truckload, products are carried between two points. Since the customer are paying only for the one way transportation, the value-creating strategy will depend on the logistics company’s ability to fill the truck on its return trip.

Market Differentiation Strategy

Almost every major 3PL players are now evolved into operations with diverse activities, such as DHL, where they first started as air freight, and it is currently running every segments of 3PL.

Below figure shows the revenue allocation for each business segments.

Since there are limited ways of differentiation among logistics companies and these are the key differentiation points:

1. Pricing — customers are highly price-sensitive in choosing which 3PL partners they will choose
2. Delivery speed — in modern times, more logistics companies started offering express services or fast delivery in both first-mile and last-mile shipping
3. Delivery performance — number of successful deliveries and its number of attempts. This factor will become more important in the last-mile activities
4. Digital enablement — ability to digitize the logistics process. This also includes the ability of the logistics companies to provide a customer-friendly interface or platform

Establishing different segments is also one of the ways to capture the whole logistics value chain such as DHL, capturing contract logistics, freight forwarding, and road transportation.

About Rocket Equities

Rocket Equities, a corporate finance and M&A advisory firm for fast-growing mid-sized companies in Southeast Asia.

Latest fundraising news from Rocket Equities - Mineski Global raises $10.6m in Series A funding round