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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


Agenda

Logistics Provider Industry Overview

Transport Strategy Considerations




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




Contents

Executive summary

Industry Overview

Five Drivers of change

Future industry picture

Implications for industry participants

Appendix




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




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




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




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




Contents

Executive Summary

Industry Overview

Five Drivers of Change

Future Industry Picture

Implications for Industry Participants

Appendix




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


Five Drivers of Change More Demanding Buyer Requirements 1

Requirements in Priority Order




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


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




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




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





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


Provider Segments3PL/

CustomizedDistribution

Freight Forwarding

Network- Transport

Express- Parcels LTLs

Containers

Point-to-Point + Charter

Transport




The challenges faced by Providers makes the status quo unsustainable, and makes a compelling case for reinvention


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




Contents

Executive Summary

Industry Overview




Appendix




~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



GlobalLimited

number of global

networks

Segmented around

buyer types

Improved execution excellence




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


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


Incr

easi

ng S

cope

and

Int

egra

tion

of O

ffer

ings




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


Solution Buyers


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




Contents

Executive Summary

Industry Overview




Appendix




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





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




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




Agenda

Logistics Provider Industry Overview

Transport Strategy Considerations




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.

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