Global Logistics and Transportation Carla Reed Principal, New Creed I. Industry Analysis A. Industry Description: Logistics Definition: The process of planning, implementing and controlling the efficient flow and storage of goods, services and related information from point of origin to point of consumption for the purpose of conforming to customer requirements. Source Council of Logistics Management. The logistics market place is one of major opportunity. The globalization that is a by-product of extensive use of the Internet has increased the need for a flexible logistics infrastructure to support a global supply chain, enabling the movement of goods from a growing number of source locations to meet market demand. Supply chain costs are significant. According to a report on the Third Party Logistics market place, (conducted by Piper Jaffray Research, dated January 1999) supply chain logistics costs in 1997 were an estimated $862 billion in the US alone global logistics costs estimated at $3.4 trillion annually. Depending on industry sector, supply chain logistics costs account from 5% to 50% of a product s delivered cost. As such, supply chain management has been elevated in strategic importance, providing an area of potential strategic advantage for global players. A study performed by Pittiglio Rabin Todd & McGrath (PRTM) found that best-practice supply chain management companies had associated costs that were approximately 50% less than the median company within their industry. In addition, it is estimated that world-class supply chains hold up to 50% less inventory in their distribution channels. This is significant not only is it possible to reduce inventory holding costs, a responsive supply chain will facilitate reduced time to market a strategy that has resulted in market growth for organizations like Dell Computers. KEY POINT: Best practice supply chains operate with up to 50% less inventory cost than industry median. (Note: - A detailed overview of the primary constituents of the logistics industry segment is included under Addendum 1) One of the key issues in supply chain management is inventory reduction. Typically 30% of inventory is held in procurement, 30% in operations and transformation, with the final 40% at the physical distribution stage. In addition to the active inventory, there are inventory buffers throughout the supply chain, with resultant cost and lack of velocity. The biggest cause for inventory stockpiling is uncertainty in the system due to both external causes, for example, late deliveries, as well as internal causes, such as production problems and lags in communication. The key to managing this uncertainty is accurate and real-time information. As such, a flow of information, concurrent with the flow of goods and performance of services, provides the mechanism to manage the various links of the supply chain. KEY POINT: Biggest cause of inventory stockpiling is uncertainty, the solution is accurate, timely information to manage variations in the supply process. B. Segment Analysis: The logistics sector comprises two primary segments the shipper community (defined as those organizations who manufacture and sell products) and the service provider community (those organizations who provide transportation, 1
distribution and related services). Although each of these segments has a different perspective, the key enabler for logistics excellence is information. (a detailed analysis of both segments and their primary business drivers is included in Addendum 2) 1. Business models and process flows in these logistics segments During the buy/sell transaction process there are several documents which are exchanged between the parties. Once the goods are ready to be shipped, there are additional transactions that can be exchanged between the seller and the buyer, for example, Advanced Ship Notice. At this point in the shipment lifecycle the carrier becomes part of the dialogue, additional information being exchanged would include Shipment Instructions, that determine the mode of transportation, service level and estimated delivery timeframe. During the transportation lifecycle, additional information exchanged between the carrier, buyer and seller could include shipment status messages as well as delivery information. (illustrated in Figure A). The real-time exchange of this information, to include all parties, is a key enabler to supply chain management. This facilitates supply process visibility, exception notification, advanced receipt of shipment line item details as well as proof of delivery information. Figure A Flow of information during shipment and transportation lifecycle. 2
2. Utilization of EC current and future trends Global acceptance of the Internet as a primary communications medium is reflected in a growing trend for transportation and other logistics providers to provide web-based tools to facilitate information diffusion. The positive impact is a growth in the use of electronic commerce in an industry notorious for its extensive use of multiple documents. The negative impact is a move away from EDI transaction sets, based on paper documents. In fact, the trend for logistics service providers to add value-added services to protect their transportation-based services is reflected in the virtual logistics of data transportation and transformation. KEY POINT: Survival strategies include identifying and developing solutions for the logistics market which incorporate web-based technologies. Major channel drivers The key players in the logistics arena are inter-related and are impacted by the same business drivers: Need to provide enhanced customer service capabilities, to include web-based order entry as well as real time order and shipment visibility Increased competition through Internet access, with associated price pressure. Need to provide business to business e-commerce with key supply chain partners Need to integrate all supply chain partners no matter how small Integration of supply chain data into ERP systems to drive business process Market Needs: Problem or Need Solution Benefit of Solution 3
Incompatible data formats Data transformation Supply partner integration Non-EDI capable community partners Web-based data input Supply partner integration Message transmission Network services Secure, etc. Web enablement Internet Extranet Cost effective, Scalable solution Intranet Customer Support for global community Outsourced and hosted solution Scalable solution Technical resource scarcity Consulting services Supplement client intellectual capital Need to connect to multiple business partners and all have different requirements One stop shop Ease of partner integration irrespective of size or capabilities Integration to internal applications Leverage ERP capabilities Ease of integration Partners need to receive fax Media conversion Flexibility and responsive No EC capabilities Enabling tools Productivity Cost, other EC benefits Expert resources with enabling tools to connect all partners Flexible business, process and data integration Key Players in the Logistics Arena Third Party Logistics Providers: An addition to the shipping community, categorized as organizations that consume transportation and distribution 4
services, the logistics market place is dominated by transportation providers, storage providers and Third Party Logistics Providers. A growing trend for organizations focused on managing their supply chains is to outsource part or all of the logistics functions to Third Party Logistics Providers 3PL s. By definition, these are independent companies that design, implement and/or manage a client s supply chain logistics needs. The key differentiating factor between a 3PL and a transportation provider is that a 3PL provider s primary value-add is based on information and knowledge, versus providing an undifferentiated service at the lowest costs. Capitalizing on this strategy, it is appropriate for Sterling to link our marketing strategy, which, in common with the 3PL approach, focussed on value-added services versus nondifferentiated network and data translation services, which are price sensitive. KEY POINT: 3PL companies provide valued-added services based on knowledge and information versus storage and transportation, which are price sensitive commodities. (The 3PL logistics sector is estimated to be about $40 billion in size with a market capitalization of more than $4.5 billion. Its estimated annual growth of 20% is primarily driven by the growing trend to outsource supply chain logistics functions.) Many 3PLs have developed global networks, either by establishing their own operations in key geographies, or by forming alliance partnerships with complimentary service providers. These 3PLs facilitate an extension of the enterprise, providing detailed knowledge of various logistics markets, including transportation, logistics and regulatory issues. Critical information related to storage and distribution, international customs documentation, multi-modal freight rates and preferential trade terms is compiled and processed by these 3PL providers. In addition to providing expertise, a key to managing the complexities of a global supply chain with regulatory and other issues, 3PL providers leverage their infrastructure and freight rate negotiations over a large base, providing cost advantages. Additionally, for companies experiencing seasonal demand for their product, outsourcing the logistics function transforms a fixed cost into a variable. This can have a significant benefit to the bottom line. KEY POINT In a study performed by Ernst & Young and the University of Tennessee, organizations using 3PL companies reduced logistics costs by an average of 7.8%; achieved a reduction in logistics assets of 21.6% and a reduction in order cycle time from 6.3 to 3.5 days. The growing emphasis on information technology, a key enabler in an information intensive global economy, has created challenges as well as opportunities in the area of supply chain logistics. The majority of large corporations have already invested in large enterprise systems (ERP) and are increasingly requiring their supply chain logistics partners to interface with them, facilitating an integrated information flow throughout the supply chain. 3PL providers have responded to this challenge, forming alliances with independent software companies or developing information technology internally. This has in turn created a market for software vendors, who have responded with suites of Supply Chain Execution (SCE) applications. This includes order management systems (OMS), warehouse management systems (WMS) and transportation management systems (TMS). KEY POINT: Providers of services in the area of information technology, a key enabler in an information intensive industry, have responded to market needs by developing suites of supply chain execution software. These applications are data driven and are potential users of EC and web enabling technologies. These applications allow organizations (or their 3PL providers) to optimize storage, distribution and transportation networks, track shipments across multiple transportation modes and execute transactions electronically. The use of electronic data interchange (EDI) has been extensively applied, providing opportunities for value added solutions providers in this area. Traditionally this exchange of data has been based on traditional trade and transportation documentation, with standardized transaction sets being exchanged by business partners. (Carrier EDI has comprised a large portion of the traditional data exchange in the past). Costs associated with this exchange in many cases precluded the participation of smaller organizations, necessitating the manual input of data into logistics systems. The utilization of the Internet, or electronic highway, in universal 5
fashion has changed everything. It is now possible to link all logistics partners, no matter how small, providing real time information flows on a global scale. And even for those organizations that have not chosen to outsource their logistics function, there is a growing need to integrate supply chain logistics data into their internal systems. In fact, a global supply chain, normally comprised of many business partners suppliers, customers and service providers cannot survive without the lifeblood of real time information exchange. Inter-modal Market Sector Intermodal is defined as being or involving transportation by more than one form of carrier during a single journey. A more complete definition is The concept of transporting passengers and freight on two or more different modes in such a way that all parts of the transportation process, including the exchange of information, are efficiently connected and coordinated (source Intermodal Freight Transportation 4 th Edition) This sector (or sub-set) of the transportation industry is experiencing considerable growth. The key to successfully executing a coordinated, seamless, flexible and continuous movement of goods on two or modes of transportation is the timely and accurate exchange of information between all parties. The use of EDI, as well as other enabling technologies, facilitates this, providing new opportunities in the area of logistics information management. There many entities involved in the intermodal movement of goods carriers, forwarders, container terminals, regulatory authorities etc. Successful execution requires the capability to link all the players in this community. Transportation Providers: The transportation industry includes the following service providers: Railroads Motor Freight Water transportation Air transportation Transportation as a vertical industry sector is an important part of the US economy the industry has remained constant at 16.3% with an average 5.5% increase in transportation outlays slightly less than the 5.6% rise in GNP. Productivity initiatives in the transportation industry have been successful the transport Bill only increased 63.4% while the GNP increased 72.4% over the same period. (source: Transportation in America 1998, Eno Foundation). Over $504 billion was spent for freight transport in the US in 1997, a significant increase of $153 billion since 1990. Expenditures for truck freight dominated the freight transportation market at $402 billion in 1997. This has increased from 73% of the national total in 1980 to over 79% in 1997. Airfreight expenditures continue to increase, from $4 billion in 1980 to over $22 billion in 1997 an increase in market share from 1.9% to 4.5%. Other transportation modes have experienced moderate revenue increases in the 90 s but all declined in their percentage share of the overall market. Railroads, reflecting the trend for reduced transportation cycle time, reported the sharpest decline in market share, falling from 13% to 7% during this period. This has resulted in a trend to consolidate operations, creating more efficient and productive railroad networks. Strong competitive pressure pushed average freight rate levels down for the slower transportation modes in 1997. During the past decade average freight rates have declined for rail, oil pipelines and barge traffic, while, reflecting increased demand in these sectors, rates have increased for both truck (motor) and air. Additionally, there is rapid growth in traffic and rate levels for air carriers, when both Federal Express and UPS small package business is included. This segment has risen from 109.8 cents per ton mile in 1987 to 116.6 in 1997. 6
Average rail revenue per ton-mile returned to 1995 levels in 1997 however rail rates have declined almost 12 percent over the past decade. Barge lines are almost level with those a decade ago. Less than truckload (LTL) motor carriers have enjoyed a rise in rates from 22.48 cents per ton mile in 1987 to 26.12 in 1997 a 16.2% increase. However, truckload motor carriers have seen a decline of 7.3% on average rates during the same period. A response to these factors there is an increasing trend to reduce costs and increase productivity. This is an opportunity for EC and webenabled technologies. As is apparent, the most promising transportation sector in the US is the small package and LTL shipment area. In view of industry trends towards more frequent, small shipments, it is anticipated that this trend will continue. The impact of web-based storefronts has not been measured, however one thing is certain, there will be a major increase in small shipment transportation in the foreseeable future. Small shipment freight consists of two types of carriers: Those handling small packages that weight less than several hundred per shipment Those handling separate but heavier shipments weighing no more than 10,000 pounds In both cases the shipments are combined for collective movements for the inter-city hauls. In domestic for hire trucking, the small package sector is completely dominated by United Parcel Service (UPS). This company continues to grow rapidly from $8 billion in 1987 to $15.7 billion in 1997. The LTL sector, with many, smaller players, has experienced revenue growth of 20.7% over the past decade from $16.5 billion in 1987 to $19.8 billion in 1997. The domestic air freight market is dominated by four carriers Federal Express, UPS, DHL and Airborne Express. They dominate not only from a revenue standpoint in the small-package sector, but also in the entire domestic airfreight arena. Revenues for specialized air carriers rose from $4.3 billion in 1987 to $12.8 billion in 1997. Transportation trends Exceptional customer service is now a key differentiator in transportation services. Other trends include mergers, the growth of just-in-time (JIT) inventory management and a sharp increase in intermodal shipping methods. (164%) In an effort to enhance customer service, transportation providers are upgrading from telephone/fax to information technology. In many cases a combination of web-enabling technologies are used to receive shipment instructions, track and trace shipments and compile/post statistical information. Despite efforts to decrease costs associated with implementing these systems, connectivity to customers, suppliers and supply chain partners is still the #1 information technology issue. Electronic commerce, the Internet and the World Wide Web are key enablers for IT strategies. Storage Providers (warehousing) In addition to the networks of storage facilities operated by the shipping and 3PL community, there are commercial warehouse operators who provide storage facilities for both dry goods and temperature controlled product. These can be either contract warehouses, or public warehousing facilities. Contract Warehousing These organizations provide storage facilities to a single client, normally under a long-term contract. Services provided could include additional value added services such as kitting, configuration etc. This is a growth area, due in large part to the requirements of web-based storefronts. Public Warehousing Public warehouses provide storage for a variety of clients, either on a short term, or seasonal basis, or on a longer term. In addition to storage and transportation management these facilities also provide value-added services as 7
required. Temperature Controlled Warehousing/Frozen Storage These facilities are similar to both public and contract warehouses, the primary difference being that they are temperature controlled, based on product requirements refrigerated, frozen etc. This type of storage is extensively used in the food industry and in response to market demand is increasing their value-added service offerings. Other Storage providers In addition to the traditional warehouse facilities, there are specialized facilities that offer national parts distribution, or storage and distribution for products with low velocity or those of a hazardous nature. KEY POINT: All storage providers are responding to market demand and providing value-added services, which include configuration, final assembly or other functions normally performed as part of final finishing in the manufacturing area. This will increasingly require integration to their customers ERP and other key systems. Other Service Providers The International logistics industry includes other providers of specialized services. For example: Drayage contractors (short haul movements of containers from ship-side to container terminals and customer locations) Terminal operators (operate container and trailer terminals) Port operators (operate internal and ocean ports/airports) Free trade zones (bonded locations where duty is not incurred unless goods are sold or transferred) International Freight Forwarders/Customs Brokers When moving freight across international borders it is necessary to complete necessary documentation to comply with customs and other regulatory bodies. Licensed customs brokers provide services in the area of import and export. Additionally, freight is consolidated and transported globally by multi-modal freight forwarders, who do not own or operate equipment, acting a agents and providing additional services. Supply Chain Management Systems (SCM) Supply Chain Execution Systems (SCE) One of the key drivers for managing the integrated supply chain is the cost of inventory - in place in duplicate nodes, based on uncertainty and unpredictability of supply chain processes. Elimination of duplicate data entry will result in a reduction of errors as well as enhancing productivity across the whole supply chain., resulting in cost reduction in each of the supply nodes. There are two components of mission critical software: Enterprise Resource Planning (ERP) systems - these manage the functions that take place within the corporation (interenterprise) Supply Chain Execution systems (SCE) - focussed on managing the functions that take place outside of the corporation (i.e. extra-enterprise, or supply chain) KEY POINT: As organizations extend their global reach through collaboration with supply chain and other business partners, it is important to ensure integration of key business data into both ERP and SCE systems. 8
Supply Chain Execution (SCE) systems comprise: Order management systems (OMS) Warehouse management systems (WMS) Transportation Management systems (TMS) KEY POINT: The combination of OMS, WMS and TMS applications enables information sharing across all logistics partners in the supply chain. This eliminates uncertainty and facilitates inventory reduction The systems will enable users to monitor supply chain performance, identifying changes in demand (and how this relates to source of supply) and will enable an optimal supply chain. In addition to the execution capabilities of these supply chain execution applications there are software tools that provide planning and dynamic response capabilities - these include advanced planning and scheduling (APS) components to provide what if analysis and decision support. The primary benefits of these systems are achieved when logistics best practices are included in the system implementation, focussing on ensuring value-added processes, versus perpetuating current business processes. Implementation should include defining data needs, timing issues and exception notification mechanisms, in the case of discrepancies. Data exchange between these applications, as well as legacy and external systems, can be achieved through multiple technologies - message based EDI, Internet applets, middleware or other messaging software layers. Data should be exchanged real-time versus the more common practice of store and forward or batch processing. KEY POINT: EC is the enabling technology which ties supply chain execution systems together, integrating dynamic data into advanced planning and ERP systems. (This provides the Digital Nervous System (DNS) referred to by Bill Gates in his book Business at the speed of thought as the key to corporate survival.) Analysis of the Issues facing the constituents in Global Logistics This question was addressed by evaluating issues from the perspective of the two primary constituents trade (shipper) community and carrier/service provider community. Shipper Community Issues: How to manage variability of Supply and Demand in a 24 x 7 digital economy How to acquire the data needed to monitor the supply chain How to gain total supply chain visibility How to facilitate Velocity How to reduce time to market How to reduce cash to cash cycle time How to reduce concept to cash cycle time How to respond to changes in demand through postponement and mass customization How to create a supply chain of chains with enough flexibility to enable an agile enterprise capable of responding to change in virtual time Service Provider Community Issues: Requirement for global networks to meet demands of shippers 9
Demand for real-time accurate information, integrated into shipper systems It is no longer just an issue of price and good service technology is an issue Requirement to manage more than transportation mass customization has extended the manufacturing environment and requires additional services to meet customer needs Need to manage whole supply chain at information level versus node optimization Balance between managing client expectations, maximizing asset utilization and human resources KEY POINT: Both constituencies are faced with issues related to speed, timing and information, aggravated by the need to manage an evolving community of logistics partners across a global supply chain. These issues are compounded by the complexity of Globalization the Internet has changed the marketplace forever. It is no longer possible to segregate markets and remain US-centric. The customers and competition are all playing a global game new rules of play include: International Supply Chain (chains of chains a key to achieving global reach is collaboration) Logistics/Transportation Payments/currency Government/Regulatory Customs Insurance The scope and scale of these changes requires a knowledge of and ability to manage the complexity of related elements in this new business environment: Language Internet Business collaboration Supply Chain globalization Time zones Local economy Available technology Stability of the local government Availability of talent (HR availability) Local customs and laws KEY POINT: Globalization requires expertise, sharing of knowledge and information and integrated business processes, irrespective of geographiclocation or language issues 10
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