By Clifford F. Lynch
Logistics Management, May 2002
Given the slowdown in the U.S. economy and the recent bankruptcies of several
large providers, some companies that are considering outsourcing are becoming
concerned about the health of third-party logistics service providers
(3PLs). Although its woes have not been as widely publicized as those of
some other industries, the third-party logistics industry has had its share of
financial difficulties. Companies are finding out - sometimes the hard way
- that some providers simply do not have adequate financial resources.
In 2000, for example, Burnham, a major logistics service provider owned by a
large venture capital firm, filed for bankruptcy. The provider had touted
its ownership by the venture capital firm as irrefutable evidence of its
financial stability. Yet we all know that such firms don't enhance their
returns by continuing to back a losing horse. The provider in question
went from an acquisition mode directly into Chapter 7, giving several large
clients a serious case of heartburn.
Another example is the recent bankruptcy of Computrex, a large freight bill
audit and payment firm, which left its clients liable for as much as $25 million
in unpaid freight bills. Shippers had already paid many of those bills,
but they may have to pay them again because freight payment companies are agents
of the shipper and the payment obligation is not met until the carriers receive
Despite these conspicuous exceptions, I believe that the industry is for the
most part financially stable. Such isolated failures should not taint the
industry any more than the problems of Kmart should spell doom for all
retailers. Most logistics service providers are fiscally sound,
On the other hand, these occurrences do demonstrate the importance of
conducting thorough financial due diligence when selecting a third-party
provider. This can be a relatively straightforward matter if you need to
investigate a provider that is publicly held. Readily available financial
statements will reveal any cause for concern. Some providers, moreover,
will furnish serious prospects with audited financial statements before they
sign the final agreement and every year thereafter.
Most third-party providers, though, are privately held and there is
reluctance, if not absolute refusal, on the part of many owners to reveal
detailed financial information. They might, for example, provide banking
information, which sometimes can be helpful but is not always an absolute
indicator of financial health.
Their reluctance is understandable, but because of the startup cost of an
outsourcing agreement and the value of the products involved being quite high,
it is critical that the potential client be able to satisfy itself regarding the
provider's financial stability before a contract is signed. If a provider
is financially healthy, responsible and capable of handling the business, it
will find a satisfactory method of demonstrating this to its clients.
There are a couple other precautionary steps companies can take. In
addition to conducting due diligence, some users of third-party services require
their providers to maintain minimum levels of financial assets. Others
award contracts only if the total value of the contract falls below a certain
percentage of the provider's total revenue.
Whatever the case, thorough financial due diligence must be at the top of a
company's list when qualifying potential providers. Today's supply chain
initiatives are complex and expensive and should be considered with the same
care as any other large financial transaction.