IBM Global Business Services
Transportation Strategy Workshop
IBM Global Business Services
Point of View on the Logistics Provider Industry through to 2015
May 2006
deeper
© Copyright IBM Corporation 2006
IBM Business Consulting Services
Agenda
Logistics Provider Industry Overview
Transport Strategy Considerations
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Executive summary
Logistics providers need to reinvent their business model in order
to meet buyers more demanding requirements
Executive Summary
More
demanding
requirements
Buyers are seeking consistent global capability to provide greater reliability at lower
total cost. This requires managing trade-offs between cost of inventory, transport,
and storage. This calls for end-to-end integration, more tightly engineered
synchronization, industry specialization, and optimization. This implies deep
integration with buyers and partners across people, processes, information, and
cash flow
Gap between
buyer needs
and provider
capabilities
Most providers over promise and under deliver. The business model of most
providers trap them by failing to generate returns which will allow them to meet
buyer demands
The model
reinvented
Market shapers will develop shared user offerings which will be difficult for buyers
to substitute. They will develop componentized solutions to increase returns, and
will move away from country-centric to global line of business profit & loss
management as portfolio managers. Tighter integration delivers greater value and
increased lock-in across the network. Success will be measured by how well they
increase reliability and reduce total cost
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Contents
Executive summary
Industry Overview
Five Drivers of change
Future industry picture
Implications for industry participants
Appendix
4
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© Copyright IBM Corporation 2005
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Industry Overview
The provider business model is evolving to offer greater
scope and deeper integration
Key Attributes of Freight Logistics Roles
Service Offerings
Synchronized
Supply
Chains
Outsourcing
Models
Supply Chain
Integrator (SCI) or
Lead Logistics
Manager (LLM) or
Global Trade
Orchestrator
Lead Logistics
Provider (LLP)
Lead Logistics
Incremental
Attributes






Broad supply chain expertise
Knowledge and information-based
Inventory minimization
End to end network optimization
Advanced integrated technology
Adaptive, flexible and collaborative
 Total transport planning
 Operate and buy logistics services
 Project manage network
improvements
 Single point of contact: total wallet
 Limited technology integration with
client
 Integration limited to transport with
Third-Party
warehousing
Logistics Provider
 Limited geographical reach
(3PL)
Relationship
Pricing
Collaborative
more than
Contractual
Partnership
Shared risk
and reward
Contractual
Fixed and
variable
with some
risk
sharing
Contractual
Fixed and
Variable
Contractual
Transactional
Contractual
and/or Spot
Transactional
Value-Added
Freight Forwarders  Multi-modal transport management
Foundation Services
Transport,
Warehousing,
Customs
broking
 Focused cost reduction
 Niche services
Source: Adapted from “Third-Party Logistics Results and Findings of the 2004 Ninth Annual Study”. Authors are C. J. Langley, Georgia Institute of Technology, G. R. Allen,
Capgemini, and T. A. Dale, FedEx Supply Chain Services, Inc.
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Industry Overview
US$ (billions)
The untapped prize is to reduce the inventory carrying costs –
currently over twenty percent of total logistics cost
2800
2600
2400
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
0
Global Freight Logistics Market: US$ 2.7 trillion
(~7% of global GDP)
Total Size ~
US$ 1.2 trillion
Total Size ~
US$ 750 billion
750
139
108
Total Size ~
US$ 734 billion
531
Air Freight, $56B
Water-Other, $76B
Ocean-Container Shipping Lines (CSL)
Rail Freight
Road Freight
136
125
59
Third Party
Logistics (3PL)
675
Distribution / Warehousing
Freight Forwarding (FF)
Parcels
In-house Logistics
Transportation
Inventory Carrying Costs
Freight Logistics Segments
Notes: A combination of top-down and bottom up approaches have been used for the overall market size. Inventory Carrying Costs and Distribution/Warehousing are approximately 2% of
the global GDP. Total Transportation segment size has been estimated through a bottom-up approach by totaling the market size of each sub-segment. Other sources have estimated the
total global freight logistics market size at 3.1 to 3.5 trillion US$ which is in the approximate range of 7-9% of global GDP. “CSL” denotes container shipping lines and “other Water” includes
bulk shipping, tankers and other means of water transport
Source: IBM Estimates for 3PL, FF, and Parcels market sizes , IBM BCS analyses, Baird Report Oct 2004 for Air Freight market size, DPWN fact book Nov 2004 for In-house and
Outsourced Logistics market sizes, Datamonitor “Global Trucking,” and “Global Railroad” for Road and Rail Freight market sizes, Baird Report and Goldman Sachs report on Shipping Nov
2004 for CSL and other Water market sizes; X-rates.com for Euro Dollar exchange rate of 1.26 (2004 average)
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Industry Overview
Margins between services vary, but the highest rewards for
market share gains lie in activities driven by economies of scale
Potential Scale Economies in Outsourced Logistics
Asset free
Supply
Chain Mgr
High
Freight
Forwarding
Asset
Supply
Chain Mgr
Shared
User
3PL
Dedicated
User
3PL
Complexity
Parcel
carrier
Less
Than
Truck
Load
Consolidation
Center
Full
Truck
Load
Cross-dock
DC
Warehouse
Low
Low
Scale Potential
High
Source: IBM BCS analysis
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Industry Overview
The level of returns in this industry make it relatively hard to attract
capital
Return on Invested Capital (ROIC) and Operating Margin comparison
Industry Average Operating Margin : 8.1%
30%
CH Robinson
Wincanton
Return on Invested Capital
25%
Expeditors
UPS
20%
Kuehne & Nagel
15%
10%
Exel
Kintetsu
5%
Geodis
EGL
0%
0%
-5%
Nippon
5%
TNT
Toll
K&S
FedEx UTI Weighted Average Cost of Capital: 10.9%
Yamato Deutsche Post
Industry Average ROIC: 10.7%
Patrick
Christian
Salvasen
10%
15%
20%
25%
Hays
-10%
Operating Margin (EBITDA/Total Revenues)
Notes: ROIC and Operating Margins are average values calculated for the latest five years. ROIC is defined as Net Income/Total Capital. Industry Averages are the simple averages of all
players plotted on the graph. Weighted Average Cost of Capital is based on US Industry Average
Source – IBM BCS analysis, Thomson Financial for financial data, WACC data from Ibbotson & Associates
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Contents
Executive Summary
Industry Overview
Five Drivers of Change
Future Industry Picture
Implications for Industry Participants
Appendix
9
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Five Drivers of Change
1
More Demanding Buyer Requirements
Buyers have more demanding requirements
Requirements in Priority Order
1. Greater Reliability
8. Industry
Specialization
7. Optimization
6. More Tightly
Engineered
Synchronization
2. Lower Total Cost
What
Buyers
want
3. Consistent Global
Capability
4. Global End-to-End
Integration
5. Deep Integration
with Buyers and
Partners
Source: IBM BCS analysis
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Five Drivers of Change
2
Global Sourcing
As global sourcing increases, providers must respond by
extending their capabilities
Global Sourcing Issues
Manufacturing Wage Costs
Key Drivers

India
43



113
China
Mexico
311
Brazil
383
Poland
Competitive labour
rates
Availability of skills
Favourable Tax rates
Low Duty rates
1024
1168
Taiwan
France
1927
Singapore
1940
Constraints

Japan
2675

2798
USA
Germany
3225
UK
3278
0
400
800
1200
1600
2000
2400
2800
3200
Reliable transport and
infrastructure
Uncertainty drives up
inventory as safety
stock is increased
3600
US$ per Month
Notes: Graph incorporates latest available yearly data: UK and USA – 2004; Germany, Japan, Mexico, Poland, and Singapore – 2003; Brazil, China, France and Taiwan – 2002; India – 2001
Current currency conversion factors have been used. Hourly data was converted to monthly data by multiplying hourly rate by 40 hrs per week times 52 weeks per year and dividing by 12
Source: International Labor Organization LABORSTA Database
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Five Drivers of Change
3
Outsourcing Envelope Slowly Widening
The boundaries of the opportunity space are slowly widening
…. but not as fast as investors have been promised
Customer Relationship
Linkages
Product Development
Customer
Fulfilment
Distribution
Manufacturing
Supply Chain
Strategy
Network and Asset
Configuration
Manufacturing
Strategy
Strategic Sourcing
Manufacturing
Oversight
Supplier Relationship
Management
Distribution Oversight
Product Management
Supply
Strategy
Integrated S & OP
Retail Marketing
Execution
Demand
Planning and
Forecasting
Manufacturing
Planning
Supplier Planning
Line Scheduling
Plant Inventory
Management
Make
Product/Components
Assemble/Pack
Products
Manufacturing
Procurement
Distribution Planning
Planning and
Control
In Store Inventory
Management
Customer Account
Servicing
Customer
Fulfilment
Transport Resources
Product Directory
Customer Directory
Product
Movement Data
Product Movement
Retained Core - Not for outsourcing
Source: IBM BCS analysis
12
Primary
Inbound
Transport
Transport
Distribution Centre
Operations
Customer
Directory
Product
Directory
MES Data
Execution
Supplier/Materials
Directory
Data
Performance Measurement
Traditional “core” candidates for outsourcing - Extend scope of outsourcing to transform?
Either multi-sourced teams (in & out source) or total outsource
Non-core - Probably already outsourced
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4
Drivers of Change
Integration
The extent of incorporating technology advances into logistics
services may ultimately separate the winners from losers
Supply Chain
Suppliers
Customer
Channels
Flows: Product, Process, Information,
Cash + Capital Management
Stores
Distribution Centers
Manufacturers
Plan
Synchronizing supply and
demand
Multi-source orders
and fulfillment



Integrating customer
forecasts and demand with
their suppliers to plan
logistics requirements
Participation in customer’s
Sales & Operations Planning
process

Make
Source
Ability to track
purchase orders
through their entire
lifecycle
Knowledge of total
pipeline supplier
inventory
Integration with
manufacturer’s
systems


Access to order
commitments &
delivery schedules
Visibility into order
production status
Deliver
Sell
Monitoring shipment
status
Multiple channels and
customer touch points
•
•
•
Monitor shipment status
throughout pipeline with
proactive event notification
Improved ability to identify
short and over shipments
•
•
Single source dashboard to
view overall performance
Tracking from order to
delivery
Knowledge of total pipeline
customer inventory
Standardized data definition, Key Performance Indicators & event monitoring for collaborative decision making
Distributed information
Dozens of planning and execution systems
Inaccurate information
Slow moving information
EQUALS
Source: IBM BCS analysis
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Excess inventory
Long lead times
Excess manpower
Deteriorated customer service
Business performance uncertainty
& risk
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Five Drivers of Change
5
Consolidation & Convergence
Speed of convergence may be limited by learning how to performance
manage businesses with widely differing core competencies
Freight
Forwarding
NetworkTransport
Express- Parcels
LTLs
Containers
Point-to-Point +
Charter
Transport
High
Low
High
Medium
Customer
Intimacy
Buying
Yield
Management
Capacity
Management
Provider Segments
3PL/
Customized
Distribution
Relative Asset Profile
Core Competency
Source: IBM BCS analysis
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Five Drivers of Change
The challenges faced by Providers makes the status quo
unsustainable, and makes a compelling case for reinvention
Challenges
Drivers
Profitably increasing scope and integration
More demanding buyer requirements
Realizing the inventory reduction prize
Achieving scale economies
Global sourcing
Outsourcing envelope slowly widening
Raising returns on capital
End-to-End integration
Consolidation and convergence
Model reinvented
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Contents
Executive Summary
Industry Overview
Five Drivers of Change
Future Industry Picture
Implications for Industry Participants
Appendix
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Future Industry Picture
We expect the industry in 2015 to be more global, concentrated
and segmented, and better at execution
2015
Limited
number of
global
networks
Global
 Fortune 500 companies
become more global
businesses
 Logistics Providers “follow
the flag”
 Top 10 providers control
more than 50% of the
market
 The top provider controls
around15%
Segmented
around
buyer types
Improved
execution
excellence
 ~20% of buyers have large
volumes (top 25 in the
AMR list), are most
demanding for specialized
services, and global
 ~50% of buyers have
medium volumes and are
mostly continental in
geographic reach
 ~30% of buyers are low
volume and mostly national
in geographic reach
 Business processes are
standardized and systems
are integrated
 Better visibility of end-toend supply chain
information and integration
with partners and
customers
Source: IBM BCS analysis
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 Effective & shared metrics
to continuously measure
performance
 Exception management
through event monitoring
 Single view of customer
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Future Industry Picture
The industry faces three distinct buyer segments: the battle
will be for the middle ground
Outsourced
global, supply
chain services
Buying type
Increasing Scope and Integration of Offerings
Logistics Buyer Segments
Solution Buyers
Diversified
Portfolio of
Services,
Specialized
Segments
Foundation
Services
Bundled Services Buyers
Commodity Buyers




Buy/manage end to end solutions: physical and technology
Desire supply chain flexibility in terms of plug and play
Shift to on demand business structures
Desire greater visibility and reliability




Gain lower costs, through scale of fewer providers
Desire less complexity
Focus on simplicity and standardization
Some information integration and more value added
services

Keep in play specialized providers but switch frequently to
lower prices
Brands don’t matter
High level of operational efficiency provided by suppliers –
within the silos within which they service
Sufficient understanding of visibility of pipeline and provider
capabilities allows disintermediation of 3PLs and more use
of foundation services



National
Continental
Global
Extent of Geographical Reach
Source: IBM BCS analysis
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Future Industry Picture
The Provider industry will eventually shake out to form three
provider segments, each serving a buyer segment
Able to deliver end-to-end supply chain integration and
synchronization repeatedly for many global customers
Drives standards that add value to buyers: data, visibility, ease
of doing business, trade finance benefits etc.
Able to support supply chain flexibility in terms of physical and
IT application plug and play, which drives confidence in
delivery capability
Undertakes supplier management for buyers
Likely to emerge as a consortium including a Lead Logistics
Provider and other parties





Good at acquiring scale and scope in new emerging parts of
the world – drives consolidation
Acquire a broad range of capabilities; also drives consolidation
Globally integrated offering seamless physical and information
services
Better at mass customization – “Deliver what they advertise”



Foundation service providers are more sought after than 3PL’s
Transport providers grow in scale and become more
concentrated
Very little product differentiation
May be a highly specialized niche provider
Geographic reach is mostly national
May start by partnering with Lead Logistics Provider but end by
being acquired by them






Synchronized Supply Chain Services
Provider Types

Increasing Scope and Integration of Offerings
Logistics Provider Segments
Lead Logistics
Providers
Foundation
& Value Added
Services
Commodity Buyers
Solution Buyers
Buyer Types
Source: IBM BCS analysis
19
Bundled Services
Buyers
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Contents
Executive Summary
Industry Overview
Five Drivers of Change
Future Industry Picture
Implications for Industry Participants
Appendix
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Implications for Industry Participants > Strategic Clarity
Additionally, processes, systems, organization, and metrics
must align with chosen segment strategy
Processes, Systems, Organization, and Metrics for Different Segments
Foundation & Value Added
Services Providers
Process

High standardization –
relatively limited
customization options

Culture of high process standardization
and componentized activities;
customized products are turned into
replicable ones for other buyers
Systems

Standardized, but high
integration is local

Tightly coupled with buyer systems


Country based P&L

Outsourcing of non-core
processes
Organization

Top 6 Metrics
(illustrative)
21
Able to value customer
knowledge
Synchronized Supply
Chain Services Providers
Lead Logistics Providers

Culture of high process standardization
with activities componentized by buyer
supply chain. Customization limited to
maintain scale economies.

Automated forms of optimization
(network, schedule, etc.)
Real time, end-to-end integration; deeply
integrated into the customer’s business

Plug & play – component based n-tier
architecture (Service Oriented
Architecture)

Sales and development teams able
to sell benefits of standardization

Sector based global P&L to improve
conformance on global customer contracts

Able to reduce labor outlays by
leveraging recruitment and onboarding skills

Superior partnering skills

Excellent skills around analysis,
synchronization, optimization under
uncertainty, change and project management

Non core processes completely outsourced

Non core processes mostly
outsourced
1.
Profitability
1.
Cost/Sales
1.
On-time delivery
2.
On-time delivery
2.
On-time delivery
2.
Fill rate
Error rate
3.
Fill rate
3.
Profitability
3.
4.
Error rate
4.
Fill rate
4.
Damage rate
5.
Damage rate
5.
Error rate
5.
Cost/Sales
6.
Cost/Sales
6.
Damage rate
6.
Profitability
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt
Source: IBM BCS analysis
© Copyright IBM Corporation 2005
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Industry Overview
Although there is geographic variation, the retail industry is the largest
user of in-house and outsourced logistics by value across all regions
Breakdown of Freight Logistics Industries Served by Geography (~14% excluded)
United States
Retail
Europe
Retail and Consumer Products
Source: Datamonitor
Retail
Automotive
Automotive Hi-Tech Pharmaceutical Consumer
Electronics
Consumer
Automotive
Hi-Tech
Business

Grocery
Drinks
White goods
Brown goods
Textiles
DIY/Furniture
Books/music/video
•
•
•
•
•
•
Automotive
Hi Tech
Pharma/health
Aerospace
Construction
Agriculture
Pharmaceutical
Consumer Electronics
RetailElectronics
Automotive
Consumer
Asset
Hi-Tech
Pharmaceutical
•
•
•
•
Energy
Utilities
Defence
Aviation
Consumer Electronics
Service
Asset Driven
End User Demand Driven
•
•
•
•
•
•
•
Hi-Tech
Pharmaceutical
Japan + China
•
•
•
•
•
Financial
Education
Government
Entertainment
Business
Services
Of course, each
industry buying
segment also
has its own
unique freight
logistics needs
Notes: Europe consists of UK, Germany, France, Italy, Spain, the Netherlands, Belgium, Denmark, Sweden, Finland and Norway
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Drivers of Change
Consolidation and convergence among providers is likely to
continue as they try to improve capabilities and extend reach
Convergence Between 3PL and FF
 Ocean Group which was a top FF with a presence in 3PL merged with Exel, a much bigger 3PL skewed
towards the UK and US to form the combined Exel - 2000
 Exel acquires Tibbett & Britten, the #3 3PL - 2003




Deutsche Post starts offering parcel and express services and acquires a 25% stake in DHL Express - 1998
Acquires leading FF and 3PL Danzas, also acquires airfreight provider AEI – 1999
Acquires majority share in DHL Express – 2002
Acquires Airborne Express - 2003
 TNT Group, originally operating a mail and parcels business builds 3PL business with major acquisitions in
USA and Italy enabling them to become highly innovative in automotive inbound supply chain. Introduced
more IT in inbound supply chain and common collaborative layers - 1999 -2001
 Broadens portfolio by acquiring FF Wilson Logistics - 2004




UPS Logistics Group to provide supply chain solutions is formed in 1995
Acquiring FF Fritz – 2001
Acquires FF Menlo - 2004
Broadens portfolio with acquisition of LTL Overnite Express in 2005
 RPS subdivision of Caliber Systems (acquired in 1998) re-branded as FedEx Ground in 2000
 Acquires leading LTL American Freightways (AF) in 2001 and re-brands services offered by AF and prior
acquisition Viking as FedEx Freight in 2002
 Kuehne & Nagel establishes KN Lead Logistics to take on Lead Logistics Provider role - 2002
Source: Company Websites
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Agenda
Logistics Provider Industry Overview
Transport Strategy Considerations
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Transportation Maturity Matrix Model
Most companies evaluate their processes against a Maturity Matrix Model.
Stage II
Stage III
Freight
Procurement
 Contracted rates
 Many carriers
 Decentralized
purchasing
 Inbound freight
controlled by
vendors
Stage I
 Core carriers
 Central purchasing
with decentralized
execution
 No compliance
tracking
 Limited inbound
freight controlled
Shipment
Planning
 Paper orders
 Decentralized
 Manual without
planning tools
 Electronic orders
 Manual with limited
planning tools
 Decentralized
 Outbound only
Carrier
Assignment &
Dispatch
 Manual Via Phone
 Based on carrier
availability
 Vendors control
inbound
assignments
 Dispatch only
 Exception
notification by
customers
 Post Audit only
 Manual routing
guide for outbound
and inbound
 Limited use of
automation
 Core carriers with
volume
commitments
 Central support
and execution
 Compliance
tracking
 Inbound freight fully
integrated
 Automated load
planning at the
Entity level
 Centralized
 Inbound and
outbound
 Automated carrier
assignment
 No use of inbound
carrier assignments
in outbound
planning
 Dispatch and
Delivery notification
 Limited use and
reliance on EDI
 External Match and
Pay
 Dispatch, shipment
status, and delivery
notification
 Integrated EDI
 Internal Match and
Pay
 Many Carriers,
Many Rates
 No Performance
monitoring
 Core Carriers
 Limited
Performance
monitoring
 Core Carriers w/
vol, commitments
 Performance
Tracking
 Timely Reviews
Shipment
Monitoring and
Control
Post Shipment
Activities
Carrier
Management
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Emerging
 Carrier
partnerships
 Use of electronic
brokering
 Automated load
planning at the
Enterprise level
 Automated carrier
assignment using
inbound carriers
 Continuous moves
 Integration of spot
buy capabilities
 Proactive tracking
and exception
management
 Use of Internet
 Self Invoicing
 Working with
Carrier community
to reduce “cost to
serve”
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