Noted logistics educator Dr. Thomas J. Goldsby is the Harry T. Mangurian, Jr. Foundation Professor in Business, Professor of Logistics, and Chair of the Department of Marketing & Logistics at the Fisher College of Business, The Ohio State University. He is an academic advisory board member to the National Center for the Middle Market located at Ohio State. We recently talked to Dr. Goldsby about some of the challenges and opportunities associated with logistics for middle market companies.
Q: What does the National Center for the Middle Market do?
A: The National Center for the Middle Market (NCMM) exists to ensure that the vitality and robustness of middle market companies are recognized as fundamental to our nation’s economic outlook. The Center generates a quarterly economic index on the health of mid-market firms.
Q: What constitutes a middle market company?
A: It depends on who you ask. At NCMM, we define it broadly as companies with revenues from $10 million to $1 billion. But within this range, companies will form their own definition of mid-market based on their specific business. To some, a $10 million company could be an attractive customer, whereas, for some larger suppliers, that size company might be too small and would fall outside their mid-market target.
Q: How significant a force are mid-market companies on the U.S. economy?
A: It’s huge. While companies that fall within our $10 million to $1 billion range represent just 3% of all U.S. companies, they account for 33% of private sector GMP and one-third of all U.S. jobs.
Q: Is it harder or easier these days to thrive as a middle market company?
A: Our Middle Market Indicator (MMI) shows robust growth for the sector. Historically, performance has been strong in good and bad economic times. While mid-market firms may lack the resources of larger competitors, they tend to be nimble and well plugged in to the markets in which they operate. This agility helps them adjust more quickly to business changes than large cap companies.
Q: What overall business challenges do they have?
A: They can lack a sophisticated professional management approach across key business functions. These management capabilities become more important the larger a company becomes. Fast-growth, mid-market companies can be more dependent on outsourced experts until they can recruit people into these roles or develop that talent internally. Beyond talent management, a lack of global capabilities can be a limiting factor. Once companies grow beyond $500 million, sustained growth means branching out beyond North America. That requires a step change in investment and expertise. Middle market companies are more likely to be backed by private equity, and global expansion is one area where expertise from a PE firm can make a difference.
Q: How about logistics for middle market companies? What specific supply chain challenges do they have?
A: When it comes to competing with much larger competitors, obviously they will lack some scale-related benefits, such as transportation buying leverage. Also, they may still be developing the technology to drive efficiencies across warehousing and transportation functions. One other area of concern that surfaced in recent research done by the NCMM was supply chain risk. While middle market companies were quite prepared to manage operational and strategic risk, they felt completely unprepared for the threat of cyber attacks. A somewhat infamous 2017 cyber attack against the Danish shipping company A.P. Moller-Maersk locked access to systems that Maersk uses to operate shipping terminals all over the world. The problem disrupted operations for two weeks and cost the company upwards of $300 million. For a similar kind of attack, the scale of impact might not be as large for a mid-market company, but the outcome could be far more devastating.
Q: What strategies are mid-market companies employing to play with the big boys when it comes to logistics?
A: Well, outsourcing is one such strategy. The majority of mid-market companies use 3PLs, with companies over $100 million in revenue about 20% more likely to outsource logistics than those below $100 million. They seek transportation buying leverage and overall expertise. They want partners that can provide the strategic and operational capabilities to support their growth. Most are not interested in making the internal investments in systems and people necessary to make logistics a core company focus. They prefer to direct available resources toward their manufacturing or retailing core competency. To be clear, mid-market companies are still less likely to outsource than very large enterprises. That’s because many remain family-run companies that tend to want a greater degree of direct control. But the majority are leveraging 3PLs and the trend is for outsourced logistics to grow in the mid-market space.
Q: Is there a difference in the way mid-market companies choose and manage 3PLs?
A: Without a doubt. Mid-market companies are quite selective about the logistics partners they choose to work with. That’s because the relationships tend to be more strategic. Most wouldn’t choose to work with 8 different truck brokerage firms and 4 different freight forwarders. They prefer to concentrate their spend with strategic partners. This approach applies mainly to the lower and middle levels of the mid-market range. Those whose revenue is closer to $1 billion tend to act more like large cap companies.
Q: Act like how, exactly?
A: Large cap firms are more likely to involve multiple partners and have them compete against each other. Purchasing and Supplier Management teams are more likely to be involved in RFPs, with the goal of driving down the price for purchased logistics. Mid-market firms will be cost-conscious, for sure, but outsourcing for them is less of a price play and more of a strategic play. They want to grow, and they realize they need reliable and capable partners to make that happen.
Q: Are there good opportunities for 3PLs like KANE, who are focused primarily on helping mid-market companies?
A: I think so, yes. Mid-market firms have demonstrated excellent growth, even during post-recession periods, so that’s a good sign. Also, if you are a supplier to this sector, one of the rewards is that mid-market firms are more likely to foster longer-term, integrated partnerships. They prefer to work with companies that, like them, have a strong, customer-centric culture and a long-term approach to business success, as opposed to an approach that is driven by quarterly performance. That said, outsourced logistics partnerships are about much more than relationships. Mid-market firms want to scale and need partners with advanced capabilities that can help them achieve next-level success. 3PLs that can combine big company logistics capabilities with agility and an easy working style are the best match for growth-oriented middle market companies.