ibm logistics pov may 2006
DESCRIPTION
aaaaTRANSCRIPT
deeper
IBM Global Business Services
© Copyright IBM Corporation 2006
Transportation Strategy Workshop
IBM Global Business Services Point of View on the Logistics Provider Industry through to 2015
May 2006
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt2
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Agenda
Logistics Provider Industry Overview
Transport Strategy Considerations
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt3
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Logistics providers need to reinvent their business model in order to meet buyers more demanding requirements
Executive SummaryBuyers 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
More demanding requirements
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
Gap between buyer needs and provider capabilities
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
The model reinvented
Executive summary
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt4
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Contents
Executive summary
Industry Overview
Five Drivers of change
Future industry picture
Implications for industry participants
Appendix
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt5
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Service Offerings Outsourcing
ModelsIncremental Attributes
Relationship Pricing
The provider business model is evolving to offer greater scope and deeper integration
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.
Synchronized Supply Chains
Lead Logistics
Value-Added
Foundation Services
Supply Chain Integrator (SCI) or Lead Logistics Manager (LLM) or
Global Trade Orchestrator
Transport, Warehousing, Customs broking
Lead Logistics Provider (LLP)
Third-Party Logistics Provider (3PL)
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 warehousing
Limited geographical reach
Multi-modal transport management
Focused cost reduction Niche services
Collaborative more than Contractual Partnership
Contractual
Contractual
Contractual and/or Spot
Shared risk and reward
Fixed and variable with some risk sharing
Fixed and Variable
Transactional
Industry Overview
Key Attributes of Freight Logistics Roles
Contractual Transactional
Incr
easi
ng
Sco
pe
and
Inte
gra
tio
n
Freight Forwarders
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt6
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Global Freight Logistics Market: US$ 2.7 trillion (~7% of global GDP)
750
675
125136
531
108139
59
0200
400600800
1000
120014001600
1800200022002400
26002800
Distribution / Warehousing Transportation Inventory Carrying Costs
US
$ (b
illio
ns)
Freight Logistics Segments
In-house Logistics
Freight Forwarding (FF)
Third PartyLogistics (3PL)
Road Freight
Rail FreightOcean-Container Shipping Lines (CSL)
Water-Other, $76BAir Freight, $56B
Parcels
The untapped prize is to reduce the inventory carrying costs – currently over twenty percent of total logistics cost
Industry Overview
Notes: A combination of top-down and bottom up approaches have been used for the overall market size. Inventory Carrying Costs and Distribution/Warehousing are approximately 2% of the global GDP. Total Transportation segment size has been estimated through a bottom-up approach by totaling the market size of each sub-segment. Other sources have estimated the total global freight logistics market size at 3.1 to 3.5 trillion US$ 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)
Total Size ~ US$ 734 billion
Total Size ~ US$ 1.2 trillion
Total Size ~ US$ 750 billion
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt7
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Margins between services vary, but the highest rewards for market share gains lie in activities driven by economies of scale
Complexity
High
Low
Low
Asset freeSupply
Chain Mgr
High
Parcelcarrier
LessThanTruckLoad
Full TruckLoad
SharedUser3PL
DedicatedUser3PL
Warehouse
Cross-dockDC
ConsolidationCenter
FreightForwarding
Asset Supply
Chain Mgr
Potential Scale Economies in Outsourced Logistics
Source: IBM BCS analysis
Industry Overview
Scale Potential
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt8
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Hays
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
0% 5% 10% 15% 20% 25%
Source – IBM BCS analysis, Thomson Financial for financial data, WACC data from Ibbotson & Associates
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
The level of returns in this industry make it relatively hard to attract capital
Return on Invested Capital (ROIC) and Operating Margin comparison
Operating Margin (EBITDA/Total Revenues)
Re
turn
on
In
vest
ed
Ca
pita
l
Industry Average ROIC: 10.7%
Industry Average Operating Margin : 8.1%CH Robinson
Expeditors
UPS
FedEx
Nippon
Geodis
EGL
Exel
Kuehne & Nagel
Deutsche Post
Christian Salvasen
TNT
Wincanton
Kintetsu Yamato
UTI
Industry Overview
Weighted Average Cost of Capital: 10.9%Toll
Patrick
K&S
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt9
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Contents
Executive Summary
Industry Overview
Five Drivers of Change
Future Industry Picture
Implications for Industry Participants
Appendix
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt10
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Buyers have more demanding requirements
8. Industry Specialization
7. Optimization
6. More Tightly Engineered
Synchronization
1. Greater Reliability
5. Deep Integration with Buyers and
Partners
2. Lower Total Cost
3. Consistent Global Capability
4. Global End-to-End Integration
What Buyers
want
Source: IBM BCS analysis
Five Drivers of Change More Demanding Buyer Requirements 1
Requirements in Priority Order
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt11
IBM Business Consulting Services
© Copyright IBM Corporation 2005
As global sourcing increases, providers must respond by extending their capabilities
Global Sourcing2
3278
3225
2798
2675
1940
1927
1168
1024
383
311
113
43
0 400 800 1200 1600 2000 2400 2800 3200 3600
UK
Germany
USA
Japan
Singapore
France
Taiwan
Poland
Brazil
Mexico
China
India
Source: International Labor Organization LABORSTA Database
Key Drivers Competitive labour
rates Availability of skills Favourable Tax rates Low Duty rates
Constraints Reliable transport and
infrastructure Uncertainty drives up
inventory as safety stock is increased
Global Sourcing Issues
US$ per Month
Five Drivers of Change
Manufacturing Wage Costs
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 – 2001Current 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
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt12
IBM Business Consulting Services
© Copyright IBM Corporation 2005
The boundaries of the opportunity space are slowly widening …. but not as fast as investors have been promised
3 Outsourcing Envelope Slowly Widening Five Drivers of Change
Retained Core - Not for outsourcing
Non-core - Probably already outsourcedSource: IBM BCS analysis
Traditional “core” candidates for outsourcing - Extend scope of outsourcing to transform? Either multi-sourced teams (in & out source) or total outsource
Customer Relationship Linkages
Customer Fulfilment
Distribution SupplyManufacturing
Product Development
Product Management
Retail Marketing Execution
In Store Inventory Management
Customer Account Servicing
Product Directory
Customer Directory
Product Movement
Strategy
Planning and Control
Execution
Data
Supply Chain Strategy
Network and Asset Configuration
Manufacturing Strategy
Strategic Sourcing
Distribution OversightManufacturing
OversightSupplier Relationship
Management
Distribution PlanningManufacturing
PlanningSupplier Planning
Integrated S & OP
Demand Planning and Forecasting
Customer Fulfilment
PrimaryTransport
Line SchedulingPlant Inventory
ManagementInbound
Transport
Distribution Centre Operations
Make Product/Components
Transport ResourcesAssemble/Pack
Products
Manufacturing Procurement
Product Movement Data
Customer Directory
Product Directory
Supplier/MaterialsDirectory
Performance Measurement
MES Data
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt13
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Synchronizing supply and demand
Integrating customer forecasts and demand with their suppliers to plan logistics requirements
Participation in customer’s Sales & Operations Planning process
Monitoring shipment status
• Monitor shipment status throughout pipeline with proactive event notification
• Improved ability to identify short and over shipments
Multiple channels and customer touch points
• Single source dashboard to view overall performance
• Tracking from order to delivery
• Knowledge of total pipeline customer inventory
Integration with manufacturer’s systems
Access to order commitments & delivery schedules
Visibility into order production status
Multi-source orders and fulfillment
Ability to track purchase orders through their entire lifecycle
Knowledge of total pipeline supplier inventory
Distributed informationDozens of planning and execution systemsInaccurate informationSlow moving information
Excess inventoryLong lead timesExcess manpowerDeteriorated customer serviceBusiness performance uncertainty & risk
EQUALSEQUALS
Standardized data definition, Key Performance Indicators & event monitoring for collaborative decision making
Supply ChainSupply ChainSuppliersSuppliers
ManufacturersManufacturersSellSellPlanPlan SourceSource
DeliverDeliverDeliverDeliver MakeMakeMakeMake
CustomerCustomer
ChannelsChannelsStores
Distribution Centers
Flows: Product, Process, Information, Cash + Capital Management
Flows: Product, Process, Information, Cash + Capital Management
The extent of incorporating technology advances into logistics services may ultimately separate the winners from losers
4 IntegrationDrivers of Change
Source: IBM BCS analysis
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt14
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Speed of convergence may be limited by learning how to performance manage businesses with widely differing core competencies
Relative Asset Profile
Core Competency
High
Customer Intimacy
Low
Buying
High
Yield Management
Medium
Capacity Management
Consolidation & Convergence 5Five Drivers of Change
Source: IBM BCS analysis
Provider Segments3PL/
CustomizedDistribution
Freight Forwarding
Network- Transport
Express- Parcels LTLs
Containers
Point-to-Point + Charter
Transport
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt15
IBM Business Consulting Services
© Copyright IBM Corporation 2005
The challenges faced by Providers makes the status quo unsustainable, and makes a compelling case for reinvention
Five Drivers of Change
Model reinvented
Challenges Drivers
Profitably increasing scope and integration
Realizing the inventory reduction prize
Achieving scale economies
Raising returns on capital
More demanding buyer requirements
Global sourcing
Outsourcing envelope slowly widening
End-to-End integration
Consolidation and convergence
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt16
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Contents
Executive Summary
Industry Overview
Five Drivers of Change
Future Industry Picture
Implications for Industry Participants
Appendix
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt17
IBM Business Consulting Services
© Copyright IBM Corporation 2005
~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
We expect the industry in 2015 to be more global, concentrated and segmented, and better at execution
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%
Business processes are standardized and systems are integrated
Better visibility of end-to-end supply chain information and integration with partners and customers
Effective & shared metrics to continuously measure performance
Exception management through event monitoring
Single view of customer
2015
Future Industry Picture
Source: IBM BCS analysis
GlobalLimited
number of global
networks
Segmented around
buyer types
Improved execution excellence
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt18
IBM Business Consulting Services
© Copyright IBM Corporation 2005
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
Source: IBM BCS analysis
The industry faces three distinct buyer segments: the battle will be for the middle ground
Logistics Buyer Segments
Bu
yin
g t
yp
e
Extent of Geographical Reach
National Continental Global
Solution Buyers
Commodity Buyers
Bundled Services 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
FoundationServices
Diversified Portfolio of Services,
Specialized Segments
Outsourced global, supply chain services
Future Industry Picture
Incr
easi
ng S
cope
and
Int
egra
tion
of O
ffer
ings
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt19
IBM Business Consulting Services
© Copyright IBM Corporation 2005
The Provider industry will eventually shake out to form three provider segments, each serving a buyer segment
Logistics Provider Segments 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
Source: IBM BCS analysis
Solution Buyers
Future Industry Picture
Pro
vid
er T
ypes
Commodity Buyers Bundled Services Buyers
Buyer Types
Incr
easi
ng S
cope
and
Int
egra
tion
of O
ffer
ings
Synchronized Supply Chain Services
Lead Logistics Providers
Foundation & Value AddedServices
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt20
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Contents
Executive Summary
Industry Overview
Five Drivers of Change
Future Industry Picture
Implications for Industry Participants
Appendix
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt21
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Processes, Systems, Organization, and Metrics for Different Segments
Additionally, processes, systems, organization, and metrics must align with chosen segment strategy
Organization
Process
Systems
High standardization – relatively limited customization options
Standardized, but high integration is local
Country based P&L Outsourcing of non-core
processes Able to value customer
knowledge
Culture of high process standardization and componentized activities; customized products are turned into replicable ones for other buyers
Culture of high process standardization with activities componentized by buyer supply chain. Customization limited to maintain scale economies.
Tightly coupled with buyer systems 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
Able to reduce labor outlays by leveraging recruitment and on-boarding skills
Non core processes mostly outsourced
Sector based global P&L to improve conformance on global customer contracts
Superior partnering skills Excellent skills around analysis,
synchronization, optimization under uncertainty, change and project management
Non core processes completely outsourced
Foundation & Value Added Services Providers
Lead Logistics Providers Synchronized Supply Chain Services Providers
Top 6 Metrics(illustrative)
1. Profitability
2. On-time delivery
3. Fill rate
4. Error rate
5. Damage rate
6. Cost/Sales
1. Cost/Sales
2. On-time delivery
3. Profitability
4. Fill rate
5. Error rate
6. Damage rate
1. On-time delivery
2. Fill rate
3. Error rate
4. Damage rate
5. Cost/Sales
6. Profitability
Implications for Industry Participants > Strategic Clarity
Source: IBM BCS analysis
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt22
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Although there is geographic variation, the retail industry is the largest user of in-house and outsourced logistics by value across all regions
United States Europe Japan + China
Breakdown of Freight Logistics Industries Served by Geography (~14% excluded)
• Grocery• Drinks• White goods• Brown goods• Textiles• DIY/Furniture• Books/music/video
• Automotive• Hi Tech• Pharma/health• Aerospace• Construction• Agriculture
• Energy• Utilities• Defence• Aviation
• Financial• Education• Government• Entertainment• Business
Services
Consumer Business ServiceAsset
Asset DrivenEnd User Demand Driven 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
Source: Datamonitor Retail and Consumer Products Automotive Hi-Tech Pharmaceutical Consumer Electronics
Industry Overview
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt23
IBM Business Consulting Services
© Copyright IBM Corporation 2005
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
Convergence Between 3PL and FF
Consolidation and convergence among providers is likely to continue as they try to improve capabilities and extend reach
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
Drivers of Change
Source: Company Websites
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt24
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Agenda
Logistics Provider Industry Overview
Transport Strategy Considerations
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt25
IBM Business Consulting Services
© Copyright IBM Corporation 2005
Stage I Stage II Stage III Emerging
FreightProcurement
Contracted rates Many carriers Decentralized
purchasing Inbound freight
controlled byvendors
Core carriers Central purchasing
with decentralizedexecution
No compliancetracking
Limited inboundfreight controlled
Core carriers withvolumecommitments
Central supportand execution
Compliancetracking
Inbound freight fullyintegrated
Carrierpartnerships
Use of electronicbrokering
ShipmentPlanning
Paper orders Decentralized Manual without
planning tools
Electronic orders Manual with limited
planning tools Decentralized Outbound only
Automated loadplanning at theEntity level
Centralized Inbound and
outbound
Automated loadplanning at theEnterprise level
CarrierAssignment &
Dispatch
Manual Via Phone Based on carrier
availability Vendors control
inboundassignments
Manual routingguide for outboundand inbound
Limited use ofautomation
Automated carrierassignment
No use of inboundcarrier assignmentsin outboundplanning
Automated carrierassignment usinginbound carriers
Continuous moves Integration of spot
buy capabilities
ShipmentMonitoring and
Control
Dispatch only Exception
notification bycustomers
Dispatch andDelivery notification
Limited use andreliance on EDI
Dispatch, shipmentstatus, and deliverynotification
Integrated EDI
Proactive trackingand exceptionmanagement
Use of Internet
Post ShipmentActivities
Post Audit only External Match andPay
Internal Match andPay
Self Invoicing
CarrierManagement
Many Carriers,Many Rates
No Performancemonitoring
Core Carriers Limited
Performancemonitoring
Core Carriers w/vol, commitments
PerformanceTracking
Timely Reviews
Working withCarrier communityto reduce “cost toserve”
Transportation Maturity Matrix ModelMost companies evaluate their processes against a Maturity Matrix Model.