Third-party logistics: Competitor or Partner?; Are distributors moving toward the logistics business?

Electronic News, Nov 19, 2001 by Rob Spiegel

Distributors have spent the past year searching for new service opportunities.

Since part of their business model includes the work of managing materials across the globe, is the logistics business a potential opportunity for distributors seeking to extend their reach into new services? And likewise, have third-party logistics (3PL) companies encroached on the business territory of distributors? The answer turns out to be a strong maybe.

"Distributors clearly are starting to offer logistics," said Matt Sheerin, VP of research at San Francisco-based Thomas Weisel Partners. "Avnet and Arrow are stepping in and saying, 'We can do that, too.' So they're going after business they normally wouldn't get. These would be fee-for-services programs where they would help with logistics."

Sheerin noted that the ability of distributors to compete with 3PL providers will depend on their ability to enhance those logistic services. "They will be successful at logistics if they can add value that 3PL companies can't. They're expertise at handling products helps them a lot," Sheerin said.

The fee-for-services model is becoming more and more important to leading distributors such as Avnet Inc. of Phoenix and Arrow Electronics Inc. of Melville, N.Y., so they may be enticed to try the 3PL market.

"Most electronic distributors have not had much business as a 3PL provider," said Rob Damron, senior VP and equity analyst at SWS Securities in Milwaukee. "But now, some of the top distributors in this industry are focused on fee-for-services opportunities. It does appear that being a 3PL provider would provide this opportunity."

Damron also suggested that 3PL services could offer distributors entree into new industries. "The opportunities could be in the electronic industry, but they could also be outside the electronics industry," Damron said. "I believe it would be a slow evolution, but if they want to reduce the cyclicality of their earnings as a result of being in the electronics industry, pursuing 3PL opportunities outside the industry could mitigate the cyclicality."

At Avnet, John Hovis, senior VP and director of investor services, said he doesn't believe the company will soon compete directly against logistics providers. "We wouldn't compete with a FedEx or UPS. It's not in our interest to own trains, planes or automobiles." Yet Hovis did indicate that Avnet is keeping an eye on the possibility. "We do compete somewhat with third-party logistics. It's definitely on the radar, and we'll continue to monitor it."

The lines between distributors and 3PL providers are not necessarily clear. "I think some of the 3PL services overlap with distribution," said Clarke Walser, principal at Arlington Heights, Ill.-based Walser and Associates. "There are not big black lines drawn here. That means the distinction between various elements in the channel is a gradual transition rather than a sharp distinction. That doesn't make life easy."

The territory of current competition between distributors and 3PL companies is limited. "The process of getting the parts around the world at the right time -- that process is being outsourced by electronics companies, and we compete with 3PL providers for some of it," Hovis said. "But the typical 3PL just moving a box. That's not what we do." Hovis explained that distributors always attach services to the movement of components. Distributors are continually involved in forecasting, and they also take ownership of the parts, which results in the delivery of financial services to both suppliers and customers. "The material flow is part of the information flow and the financial flow," Hovis said.

Though distributors may consider moving into the 3PL market, they are not particularly concerned about 3PL providers moving into distribution. "The way Avnet looks at third-party logistics is that the providers would have to complete with distribution on inside-the-box logistics," Hovis said. By inside-the-box logistics, Hovis referred to the value-added services distributors provide from the time they receive a component through the time they ship the altered component to a customer. "We receive material and the first thing we do is break that box down. We take the parts out, and we do something to them. We add value and then the product goes out."

Hovis described an electronic distributor's role as delivering a more complex service than the typical 3PL company. "They deliver one plus one plus one equals three, while we deliver one plus one plus one equals five. We include the materials flow, the value flow and the information flow, and we provide it in one seamless transaction within one company."

Walser said he doesn't expect distributors to enter the 3LP territory simply because the lines between the two are fuzzy. Nor does he expect distributors to enter 3PL for the potential opportunities. "Are distributors going to get into 3PL per se? I'm skeptical," Walser said. "After all, distributors, with the exception of a small handful, don't do logistics." Walser insisted that the market will continue to give its business to the companies best equipped to deliver the services. "Who's best equipped to hold the materials? Distributors. Who's best equipped to move materials? Clearly it's folks like FedEx and UPS."