Third-party logistics firms (3PLs) are essentially travel agents for freight. They generally do not own transportation equipment, but instead buy capacity from the carriers who do –the truckers, railroads, steamship lines, or cargo airlines, and then mark it up and resell it to the shippers. The cost of purchased transportation is highly variable for 3PLs because they primarily buy capacity in the spot market. As a result, in periods of macroeconomic weakness when capacity loosens and carrier pricing falls, 3PLs can pass those declines to shippers on a lag, thereby expanding their gross margins.
Despite how robust the 3PL business model has always been, increasing cost pressures on shippers and continuing economic uncertainty has combined over the last few years to lower margins for 3PLs worldwide, thus raising the specter of further industry consolidation.
So what are they doing about it? Many have entered new industry verticals and yes, you guessed it, healthcare is at the top of most everyone's list. Healthcare is ripe for 3PLs (and visa versa) because it's an industry full of businesses trying to gain better control over their costs. In fact, a recent survey of leading 3PL CEOs didn't just reflect their confidence in the growth of the healthcare transportation services markets, but their enthusiasm was characterized as "wildly optimistic." And while medical devices have never had the volumes –in terms of dollars– that pharmaceuticals have enjoyed, more than 50% of the CEOs surveyed expressed their thought that the medical device industry is going to take-off over the next three years –both in physical volume (an important metric to the 3PLs) and dollars.
- Tom Finn