International Logistics and Supply Chain Outsourcing: From Local to Global

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INTERNATIONAL LOGISTICS AND SUPPLY CHAIN OUTSOURCING

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INTERNATIONAL LOGISTICS AND SUPPLY CHAIN OUTSOURCING From Local to Global Alan Rushton and Steve Walker

London and Philadelphia

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Publisher’s note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or the authors. First published in Great Britain and the United States in 2007 by Kogan Page Limited Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road London N1 9JN United Kingdom www.kogan-page.co.uk

525 South 4th street #241 Philadelphia PA 19147 USA

© Alan Rushton and Steve Walker, 2007 The right of Alan Rushton and Steve Walker to be identified as the authors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. ISBN-10 0 7494 4814 8 ISBN-13 978 0 7494 4814 1

British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Rushton, Alan. International logistics and supply chain outsourcing : from local to global / Alan Rushton and Steve Walker. p. cm. Includes bibliographical references and index ISBN-13: 978-0-7494-4814-1 ISBN-10: 0-7494-4814-8 1. Business logistics. 2. Contracting out. I. Walker, Steve, 1959– II. Title. HD38.5.R867 2007 658.7--dc22 2007002315 Typeset by Saxon Graphics Ltd, Derby Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

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Contents

Preface Introduction and background

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The outsourcing market Introduction 16; The global market 16; Global market drivers 19 Summary 44

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Regional logistics markets Introduction 46; Europe, the Middle East and Africa (EMEA) 46; The Americas 71; Asia Pacific (APAC) 81; Summary 103

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Outsourcing operations and services Introduction 104; Outsourcing operations 105; Breakdown of broad service types 120; Value-added services 130; Summary 134

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Major providers Introduction 136; The overall 3PL market 136; Growth of the 3PL market 137; Global providers 142; European providers 149; US providers 175; Asia Pacific providers 192; Summary 198

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Key drivers Introduction 201; Outsourcing context 202; Business drivers 211; Logistics drivers and drawbacks 222; The critical factors of choice 228; Summary 233

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Current issues and influences Introduction 235; External issues influencing logistics outsourcing 236; Internal outsourcing issues 252; Summary 266

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The selection process Introduction 268; General approach 268; Detailed steps 269; The contract 293; Summary 296

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Outsourcing management Introduction 297; Need for management 298; Managing the relationship 306; Implementation planning 313; Why monitor outsourced logistics operations? 318; Different approaches to cost and performance monitoring 319; What to measure against? 325; An operational planning and control system 329; An approach to monitoring a 3PL 330; Detailed metrics and KPIs 335; Influencing factors 344; Did we get it right? 345; Summary 350

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4PLs and beyond Introduction 352; Understanding 4PL 352; Choosing a 4PL provider 359; The 4PL perspective 362; The reality and development of 4PL 366; The future for outsourcing and 3PLs 369; Summary 376

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Abbreviations References Index

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Preface

This book has been written to address a number of needs, but perhaps the most important is to provide a comprehensive description of the use of, and opportunities for, outsourcing logistics and supply-chain operations. As such we hope that the major benefit from the book will be that it provides a single source for the description and application of all aspects of logistics and supply-chain outsourcing. A key objective has been to take the subject area beyond local or national issues and to cover aspects of global outsourcing – a phenomenon that is becoming an essential requirement for many companies, as sources of supply and locations of demand become worldwide. In this respect, the book addresses all the major markets of the world across Europe, the United States, and other parts of the Americas, together with the various regions in the Asia Pacific. The book is designed to be used as a quick reference guide as well as one that provides comprehensive explanations. Although we have designed the structure of the book to have a natural flow, we have tried to ensure that each chapter is self-contained, to allow for selective use when only particular topics are required. Finally, the book aims to cover both strategic and operational aspects with plenty of practical advice and observations. The content covers several important aspects related to outsourcing, including a review of the market, an assessment of the major providers, a description of the main services that are offered, and a consideration of the key drivers for outsourcing logistics and supply-chain operations. In addition, a detailed framework for the selection of a suitable service provider is examined, together with a comprehensive evaluation of the change management and subsequent contract management requirements. The book concludes with a look into the future at the development of fourth-party logistics and outsourcing in general. Logistics and supply-chain outsourcing is currently an area of fast change and constant growth. Although correct at the time of writing, it is to be expected that some of the company and country-specific data and information will become outdated. We can only apologize for this. Nevertheless, the bulk of the content of the book will be of significant relevance for many years to come.

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The content of the book contains ideas and examples from a variety of different sources. Where possible, we have tried to acknowledge the origin of these sources. Where this has not been possible, we offer our apologies. Our thanks go especially to those of our colleagues who have helped us, but who are not directly acknowledged.

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Introduction and background Introduction Logistics and supply-chain management have become increasingly important over the last two decades. Over that period most businesses have gone through a significant period of change. Growth has become all important for companies, together with achieving scale. This has prompted an unprecedented wave of acquisitions and mergers across all industry sectors. New technology combined with consumer demand has driven companies to expand their range of products, and indeed to significantly increase the level of new product introduction. The need to satisfy demanding shareholders has meant that businesses have focused on manufacturing and distribution efficiencies, seeking ways to reduce costs. This in turn has prompted companies to seek lower-cost locations for their manufacturing bases, moving factories to Asia, Central and South America, and Eastern Europe. Companies now operate in a global market that, while offering opportunities, is extremely competitive and demanding. All of these changes have affected companies’ supply chains and logistics requirements. Now supply chains are extended over several continents and include suppliers as well as customers. They are significantly more complex, involving sea, air, rail and road movements, and different types of storage requirements, as well as the multitude of ancillary activities such as relabelling, repacking, configuration, postponement, line sequencing and reverse logistics. Already challenging for most companies, supply chains have become even more difficult for many businesses. Of course, all of this has had a profound impact on outsourcing. Whilst some companies have outsourced parts of their logistics activities for some

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time now, these changes in business practices and supply chains have driven businesses to seek more efficient and effective ways to provide products in marketplaces across the world. The result is that according to research by investment banker Lazard Freres and BG Strategic Advisors, the outsourced logistics and supply-chain market has grown at a rate greater than 20 per cent per year since the mid-1990s (Gordon, 2006). Globally around US$148 billion is spent on outsourced contract logistics, with a further US$117 billion spent with freight forwarders (Transport Intelligence, 2006). Clearly, logistics and supply-chain outsourcing has come of age.

Scope and definitions Scope This book is concerned with the outsourcing of logistics and supply-chain activities to third parties, and addresses the outsourcing of contract logistics, freight forwarding and other supply-chain activities. It does not specifically address the express parcels market, nor does it focus on the shipping line and air carrier industries. One of the most important elements within the book is the recognition of the many areas of growth and change concerning logistics outsourcing. This is reflected, in particular, through the sub-title of the book, ‘From local to global’. In the past few years the extent of business and industry globalization has expanded prodigiously. At the same time, there has been a similar growth in the demand for global outsourcing. Yet the supply of suitable global outsourcing operations has been slow in coming, with users and potential users constantly bemoaning the lack of true global providers. We believe that this is now at a moment of change, as many of the largest providers are now in a position to offer appropriate global services. Despite these new developments, many global businesses do need to offer localized solutions on both the inbound (supply) and outbound (demand) sides of their operations. Hence the rather hackneyed phrases ‘think global, act local’ and ‘global reach with localized excellence’ remain even more relevant today, and will be so as we move into the future. This viewpoint is reflected in the scope and content of this book. As well as committing large amounts of research and space to global outsourcing and its associated markets and providers, it retains a significant emphasis on the more traditional elements of outsourcing, such as key drivers, the provider selection process and the importance of contractor and contract management. Logistics outsourcing is currently an area of fast change and constant growth. Although the company and country-specific data and infor-

Introduction and background

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mation are correct at the time of writing, it is to be expected that some of this will become outdated. We can only apologize for this. Nevertheless, the bulk of the content of the book will be of significant relevance for many years to come. Logistics and outsourcing statistics can be both difficult to identify at source and somewhat conflicting in content. We have, however, identified some very useful and up-to-date sources, and can only apologize where there is any conflict with the different outputs from the various surveys that are quoted. One final point regarding the scope and content of the book is to recognize that several of the key discussion areas may appear on more than one occasion. Examples include globalization and key drivers for outsourcing. This is because they are very relevant to a number of the different themes that we have explored, and to leave them out would be inappropriate. On occasions they will merely be alluded to, and further discussion or description elsewhere in the book will be indicated. To help with this, a very detailed index has been included at the end of the book.

Definitions Here are some definitions for terms that are frequently referred to within the book.

Contract logistics Contract logistics is used to define the logistics activities that relate to warehousing, distribution and other associated activities that are outsourced. The term refers to the asset-intensive nature of the activity and the need for a contract to be in place between the third-party logistics provider and the customer.

Distribution Distribution can be defined as the process of delivery of manufactured products to the customer.

Fourth-party logistics A fourth-party logistics service provider can be defined as an integrator that assembles the resources, capabilities and technology of its own organization and other organizations to design, build and run comprehensive supplychain solutions.

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Freight forwarding Freight forwarding may be defined as the secure and efficient movement of goods on behalf of an exporter or importer, commonly known as the shipper. Freight forwarders might use the services of shipping lines, airlines or road and rail freight providers, or in some cases the freight forwarding company itself provides the service.

Logistics Logistics can be defined as the process of planning, implementing and managing the movement and storage of raw materials, work-in-progress inventory, finished goods and the associated information from the point of origin to the point of consumption.

Logistics service provider (LSP) Logistics service providers are external providers who manage outsourced activities on behalf of the shippers or customers whose business processes they support. They are also commonly referred to as 3PLs (see below).

Offshoring Offshoring is the relocation of the provision of services from one country to another to benefit from cost savings (for example through lower labour costs in India). Organizations can undertake offshoring without outsourcing and vice versa, be they manufacturers or service providers. Car manufacturers have been both offshoring and outsourcing for years. They select the most effective locations around the world for their manufacturing facilities, and outsource some, but by no means all, of their manufacturing supply.

Outsourcing Outsourcing can be defined as the strategic use of external specialized service providers to execute and manage activities or functions that are normally seen as non-core to the business. Outsourcing should not be, but often is, confused with offshoring (see above).

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Supply chain Supply chain can be defined as the flow of materials and products through the process of procurement, production, storage, distribution and disposal.

Supply-chain management Supply-chain management may be defined as the integrated management of all parts of the supply chain from the originating supplier to the final customer.

Third-party logistics (3PL) Third-party logistics can be defined as the management of outsourced logistics, transportation and distribution activities. 3PL is commonly used as the term to describe an external provider who manages outsourced activities on behalf of the shippers or customers whose business processes they support. 3PL services typically include: ឣ ឣ ឣ ឣ ឣ ឣ ឣ

outbound transportation; warehousing; inbound transportation; freight bill auditing/payment; customs brokerage; freight forwarding; customs clearance.

Transportation or freight transport Transportation or freight transport may be defined as the physical movement of goods, both inbound and outbound, including the collection of product and its delivery to the end user. Transportation can be executed across a variety of modes including air, sea, rail and road.

Background A historical perspective The emergence of outsourcing After the Second World War, businesses sought diversification in order to achieve scale and protect profits. In the 1970s and 1980s organizations found

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themselves struggling to compete in a more global environment because of their lack of agility, caused by over-complex and over-staffed management structures. To resolve this, many large companies developed a strategy of focusing on their core business. This meant selling off some non-core activities, but also identifying those non-critical processes that could be outsourced. Meanwhile, transportation deregulation occurred across the Western world, making it much easier and more attractive for companies to contract out their road freight transport function. In many countries external purchases of freight transport services had been constrained by government controls on the capacity of the road haulage industry. These controls excluded road freight vehicles from operating on an ‘own-account’ basis and thus encouraged companies to operate their own road freight operations. Deregulation allowed new and more sophisticated haulage and freight companies to emerge. The growth in contracting out cannot, however, simply be attributed to deregulation because the move away from in-house transport did not accelerate until the general change in managerial attitudes to contracting out that occurred in the late 1980s. At this time, companies also began to contract out other physical distribution activities such as warehousing and materials handling. Interestingly, outsourcing was not officially identified as a business strategy until 1989 (Mullin, 1996). During the 1990s businesses, by now under cost pressures, reviewed their core competencies and as a result outsourced more and more activities, such as accounting, human resources, data processing, security and maintenance. In logistics this was mostly confined to outsourcing dedicated distribution and transportation activities, but gradually other logistics services were outsourced, including stock control, order processing and returns operations.

The logistics service provider and 3PL As globalization began to dawn, freight forwarders began to emerge to support the increased movement of goods across the world. Transportation and distribution companies began to see an opportunity to operate warehouses and other parts of the logistics process. The term ‘logistics’ started to be used in the early 1990s, and haulage and distribution companies reinvented themselves as ‘logistics providers’. One such company was the National Freight Corporation (NFC) in the United Kingdom. NFC, which had emerged from the nationalized freight industry, trading as National Carriers, reinvented itself as Exel Logistics over just one weekend in the mid-1990s. It was around this time that industry coined the name ‘3PL’.

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Supply-chain management In the UK, the retail industry was quick to see the opportunity of outsourcing and a number of large deals were completed during the 1990s, usually on an open-book contract (cost plus management fee). In the late 1990s, with the advancements of information technology (IT) and globalization impacting on more businesses, logistics service providers broadened their service offerings and reinvented themselves yet again, this time positioning themselves as providers of supply-chain management. Subsequently all industry sectors across the world have seen the benefits of outsourcing some or all of their logistics or supply-chain activities.

Impact on outsourcing In the 2006 study of third-party logistics (Langley, 2006), it was found that during the first six years of the study (1996–2001) about 72 per cent of the respondents surveyed described themselves as ‘users’ of 3PL services; this has increased to 80 per cent in 2006. Bearing in mind the growth in the 3PL market of around 20 per cent per annum, this also means that existing customers were outsourcing significantly more to 3PLs. The study went on to say that the most common logistics services outsourced to 3PL providers are still transportation and warehousing, although during the last 10 years many other services have increasingly been outsourced, including customs clearance and brokerage, freight forwarding, crossdocking/shipment consolidation, and order fulfilment and distribution. Further, the majority of 3PL customers rated their overall relationship as a ‘success’, albeit they expected improvement in a number of areas. Finally, the study concluded that the 3PL industry is still growing, with regional expansion, the development of services, integrating information technologies and developing customer relationships as key focuses for thirdparty providers (Langley, 2006). The type of logistics outsourcing by companies indicated above was endorsed in a study of Europe’s Fortune 500® companies (Eyefortransport, 2006a). This also indicated that transport and warehousing were the most common logistics services outsourced to 3PLs. The third most popular was information technology, as Figure 0.1 shows.

External drivers of the growth of logistics outsourcing As well as a number of internal company-related drivers for logistics outsourcing, typically categorized as organizational, financial, service and physical, there are also several external drivers that have helped to accelerate the growth of outsourcing.

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Transport Warehousing Information systems Others Reverse logistics Fleet management Customization Inventory management Order processing Customer support

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Figure 0.1 Logistics functions outsourced in Europe 2006 Source: Eyefortransport (2006a)

Globalization Perhaps the most prominent factor has been the increase in the number of companies operating in the global marketplace. This necessitates a broader perspective than when operating as an international company, which may include, amongst others, attributes such as global branding, global sourcing, global production, centralization of inventories and the centralization of information. All of these aspects serve to emphasize the added difficulty of operating effectively in a global environment. Logistics and supply-chain networks have become far more complicated, and meeting the need to plan and manage logistics as a complete and integrated system has become far more difficult. Because of this, the best solution for a global company is very often to outsource its logistics operations. The types of services required by global companies are much more sophisticated than those that have been traditionally offered by 3PLs (Howlett, 2005). These include, for example: ឣ

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manufacturing support: undertaking or supporting sourcing, managing procurement, owning finished products, completing light manufacturing and assembly activities; origin management: managing vendors, purchase orders, in-country collections, order consolidation; freight management: managing and coordinating global freight movements, covering all different major modes of transport; destination management: managing downstream operations, port to distribution centre (DC) delivery, deconsolidation, customs brokerage, demurrage, quality checking;

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contract distribution: the more traditional aspects of storage and delivery, and certain value-added elements such as inventory management, DC management, pre-retailing (labelling, etc), reverse logistics, retail delivery, home delivery.

Complexity Linked closely to the globalization of business is the increase in the complexity of supply-chain management. As already indicated, globalization almost certainly leads to greater complexity, which in turn provides some significant implications for logistics operations. These include extended supply lead times, production postponement with local added value, complicated node management, multiple freight transport options, extended and unreliable transit times, and the need for greater visibility in the supply chain. In order for a manufacturer or retailer to succeed in this new, more complex, environment, many companies choose to outsource their supplychain management. This reflects one of the key business reasons for outsourcing logistics, which is to concentrate on core competencies or key business areas; however, the need to do this is very much involved with the increased complexity of logistics and supply-chain management.

Emerging markets In the current business environment there are some very significant regional market developments. The most important is probably the Far East, in particular the opening up of China. There are obvious implications for logistics regarding the flow of products out of the Far East, whether raw materials, components or finished goods, and the inward flow of mainly finished goods into the Far East. There are significant implications for logistics as a result of these long and unsophisticated supply chains. One solution that many companies adopt is to outsource these operations. Key reasons for this include the difficulty of setting up in-house operations in these regions and the risk of investing in organizations and structures that may not see the growth in supply and demand that is initially forecast. Another important area for change and growth is Eastern Europe, which has seen significant developments in the relocation of low-cost manufacturing and also opportunities for new markets and a growth in demand. Here, the main issues for logistics are the poor transport infrastructure, the inexperienced and untrained labour market, and the lack of guaranteed product flows. Thus, there are good reasons for manufacturers and retailers to avoid the high risk and high cost of setting up in-house logistics

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operations, and to use the outsourcing alternatives that are on offer. Thirdparty providers are in a much better position to undertake investment because they can spread the costs across a number of different customers. A survey undertaken in July 2006 (Eyefortransport, 2006b) endorses the importance of these emerging markets to the outsourcing market. This indicated that, from a European 3PL perspective, the geographic region rated as having the highest growth potential in the next few years was China, followed by India and then Eastern Europe and Russia. On a five-point scale, China was identified by 37 per cent of companies as having the most (scoring 5 out of 5) growth potential. Indeed, more than two-thirds of the respondents believed that China had either ‘the most’ or ‘very good’ growth potential. The results for regions and countries believed to have the most growth potential are given in Figure 0.2.

E-commerce and e-fulfilment One major development in recent years has been the growth in the use of the internet and the World Wide Web. This has created the opportunity for both business and consumers to purchase goods online from a variety of sources. Internet shopping has led to a growth in the demand for the fulfilment (or e-fulfilment) of internet orders, the actual physical fulfilment still being undertaken through physical distribution operations. This can lead to the need for new methods of physical distribution because traditional channels are often inappropriate for delivery into residential areas. This type of operation is one that few internet companies wish to develop, so there are major opportunities for new and established 3PLs to specialize in e-fulfilment delivery operations and to offer these as value-added services. China India Russia Eastern Europe Turkey Middle East Asia (excl China & India) Brazil North America S America (excl Brazil) 0

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Figure 0.2 Geographic regions with the most growth potential for outsourcing Source: Eyefortransport (2006b)

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There are many different reasons for outsourcing e-fulfilment. These include lower set-up costs, faster set-up times, scale economies with multiuser operations, reduced transport costs through order consolidation with other users, and easier expansion of geographic coverage. These and other influences are discussed in the book.

Opportunities for growth Finally, in this section, it is worth dwelling briefly on the likely opportunities for new growth and developments in outsourcing. These cover both external and some internal opportunities. It is no coincidence that the traditional areas of warehousing and transport are a long way down the list in terms of opportunity; the reason for this is that there is a strong feeling (in Europe) that these aspects are virtually saturated. In many other areas of the world these are still, of course, significant areas of opportunity. The study that is reviewed here (Eyefortransport, 2006b) is considering outsourcing growth opportunities in Europe. Results for those elements showing the best opportunity for growth are given in Figure 0.3. Providing technology or IT solutions was identified by 29 per cent of companies as having the best opportunity for growth (scoring 5 out of 5 on a five-point scale). This was followed by supply-chain design (25 per cent), reverse logistics (23 per cent) and global freight management (20 per cent). This is quite a varied selection of activities, ranging from the strategic to the operational. Perhaps the most interesting factor is that it demonstrates the wide range of value-added opportunities that 3PLs will be able to provide both now and into the future. These are a distinct move away from the low profit, commodity markets of storage and transport.

Providing technology/IT solutions Supply chain design Reverse logistics Global freight management Spare parts logistics 4PL/LLP services Providing RFID solutions General transportation/distribution WEEE Directive opportunities General warehousing Packing/picking Freight audit payment

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Figure 0.3 Elements likely to have the best opportunity for growth in the European 3PL industry Source: Eyefortransport (2006b)

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Content This book seeks to provide a comprehensive review of logistics and supplychain outsourcing and, as its title suggests, looks at the subject from both a global and local perspective. In order to understand the key drivers for outsourcing it is necessary to examine the factors that have most affected the growth of 3PLs. Chapter 1 looks at these factors in some detail, including how globalization and world economic development and trading have influenced key industry sectors. The chapter also reviews the size of the overall logistics market, comparing it with the total value outsourced. In summary, the chapter provides the backdrop for logistics and supplychain outsourcing globally. Chapter 2 follows on by providing a valuable insight into the key logistics and supply-chain markets of the world. The three key regions of EMEA (Europe, Middle East and Africa), the Americas and APAC (Asia Pacific) are examined, and key logistics market values are analysed. Key countries within each region are also reviewed, with interesting facts and figures that provide an insight to the status of each country within the logistics and supply-chain market. In Chapter 3, the various outsourcing operations and services that are offered by third-party logistics service providers are described. Third-party companies have continued to expand the many operations and services that they offer in order to succeed and progress within a very competitive marketplace. Initially, the breadth of outsourcing opportunities is outlined, from very limited participation to total asset management, including all of the many other opportunities between these extremes. The concept of the outsourcing continuum is discussed, emphasizing the need for potential users to be absolutely clear where different responsibilities lie and where the boundaries between these responsibilities occur. Various standard types of operation are introduced and described, and then the question of whether to adopt a dedicated or a multi-user approach is reviewed. This is followed by a broad breakdown of the different services available with respect to the main logistics components of warehousing and transport. Also considered are some alternative opportunities for occasional outsourcing. Many companies now realize the advantage of taking a complete supply-chain perspective when planning their logistics and supply strategy because there are significant cost and service benefits to be gained. This concept is reviewed in the context of how it might be applied to the outsourcing of logistics operations. Chapter 3 concludes with a discussion of the many additional services offered by third-party logistics providers, often known as ‘value-added’

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services. They represent opportunities for 3PLs to develop services that are more profitable than the more standard storage, picking and transport of goods. The book would not be complete without a review of the leading thirdparty logistics providers from around the world. In addition to providing key facts and information about the history and services of individual 3PLs, Chapter 4 also provides analysis and comparisons across the industry. The chapter looks at the emerging global providers and 3PLs from Europe, the Americas and APAC. In Chapter 5, the many reasons that companies either should or should not outsource their logistics operations are discussed. It is noted that the pros and cons of outsourcing are viewed very differently, dependent on which company you talk to and who you talk to within that company! In addition to this, similar advantages are often claimed for both third-party and own-account distribution operations. Thus, it is important to be able to assess the potential benefits and drawbacks of outsourcing with particular reference to each company that is considering the option. In this chapter the key drivers for outsourcing are outlined. The chapter begins with a consideration of the outsourcing decision and the reasons or drivers for outsourcing in terms of the context of the company business and logistics environment; alternative channels of distribution are described, a series of channel objectives are defined and various different channel characteristics are outlined. The use of outsourcing in other industries and functions is also reviewed to see if there are any lessons that might be learnt. In particular, the main drivers for outsourcing the IT function are discussed. It will be seen that there are some similar reasons for IT outsourcing compared to logistics, and also some that are surprisingly different. A number of external drivers for outsourcing are indicated in Chapter 5, particularly globalization, supply-chain complexity, emerging markets and e-commerce. The importance of understanding and taking account of a company’s competitive advantage is also discussed, particularly the need to understand the balance between trying to achieve a cost or a service advantage. It is noted that this will have a major impact on determining outsourcing objectives and requirements, and in identifying the preferred type of outsourcing relationship. The major logistics drivers for outsourcing are then described, together with a consideration of some of the drawbacks. Finally, there is a review of the factors that seem to be most critical for the outsourcing decision. Several company case histories are included. Logistics is a good example of a business function under constant review and experiencing constant change. In Chapter 6, the many issues and influences that impact on logistics outsourcing are described. In recent years

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there have been very significant developments in the structure, organization and operation of logistics, notably in the interpretation of logistics within the broader supply chain. In addition, there are a number of other influencing pressures that are now impacting on companies’ logistics systems. These include both factors that are external to logistics, such as deregulation, and internal ones that derive from changes within logistics, such as improved handling or information technology; Chapter 6 is divided into two sections to reflect this. The first section covers aspects such as the external environment, manufacturing and supply, technology, retailing and the consumer. The second section considers some of the main internal outsourcing issues that are currently important, both from a user and a 3PL perspective. Some surveys results are used to help highlight these issues. While the many elements introduced in this chapter are all important influences on logistics outsourcing, it is noted that the traditional key drivers of cost and service are still of paramount importance. In Chapter 7, an overall approach to the contractor selection process is described. The importance of a carefully structured process is emphasized and the key steps are described in detail. The main task for the client company is shown to be to put together a detailed invitation to tender. This is used by the contract companies to prepare a suitable proposal for their running of the operation to be outsourced. A method of evaluating tender proposals is outlined so that the most suitable contractor can be identified. The key elements that should be included in the final negotiation and assessment phase are reviewed, and the use of a contract that should form the basis for a positive provider–user relationship is discussed. The management of outsourcing arrangements is fundamental to the success of the relationship between the 3PL and the customer, and this is discussed in Chapter 8. In this chapter, the need for managing an outsourced contract is investigated, alongside the causes and implications of failure. Some of the key factors required in managing a successful relationship are reviewed, including partnership and collaboration, the engagement model, continuous improvement and communications. The initial issue after the contract has been negotiated is the successful implementation of the operation. This process is discussed. The basic reasons for monitoring a logistics operation are reviewed. A formal approach to the monitoring and control of logistics and distribution operations is outlined. There are several techniques that can be used and these are discussed. There are also a number of different methods that can be adopted to determine appropriate goals. A number of alternative methods are described. It is concluded that most well-developed systems are internally budget-oriented, but are also linked to external performance measures.

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A typical logistics operational planning and control system is outlined, and this is developed within the context of a specific approach for a client’s monitoring of a 3PL. The key performance indicators (KPIs) for measuring a logistics operation are considered in some detail and a number of case histories are presented with particular reference to the monitoring of outsourced logistics operations. Chapter 9 looks beyond 3PL outsourcing and examines the 4PL (fourthparty logistics) model. This model is compared to 3PL and lead logistics providers (LLP). The chapter also reviews whether 3PL or the consultants are best placed to provide these services. The reasons why customers choose a 4PL solution, including the key drivers, are also reviewed, together with the 4PL value proposition. In addition, the reality and development of 4PL is examined, together with the issues facing 3PLs who are seeking to migrate to this model. Finally, Chapter 9 looks at the future for outsourcing in general and the key influences for its future.

Summary This introductory chapter has set out the backdrop for the book, providing clarity around the scope and definitions used throughout. The background and history of outsourcing has also been outlined, including the emergence of outsourcing generally, the development of the third-party logistics providers (3PL) and their reinvention into managers of the supply chain. This section also reviewed the current status of outsourcing, providing some statistics and views from a recent study. Some of the key external drivers of outsourcing have been identified and these will be considered in more detail later in the book. Finally, there has been a brief description of each of the different chapters, to give the reader an overview of the content of the book as a whole.

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The outsourcing market Introduction IBM has estimated that approximately US$3 trillion is spent globally on supply chains, a market which in 2005 prompted it to establish a supplychain optimization and management business (Supply & Demand Chain Executive, 2005). This huge spend represents arguably the most fragmented market in modern business, being impacted by virtually every company in the world, across individual industry sectors, some of which are global, some pan-regional and many local. It is not surprising, then, that in this highly complex and fragmented market only a relatively small proportion of logistics and supply-chain activity is outsourced. This book is interested in the logistics portion of the total supply-chain spend, including storage and warehousing, domestic road and rail transportation, cross-border transportation (road and rail) and freight forwarding (air and sea). This chapter seeks to set the scene for logistics and supply-chain outsourcing across the world, and as such the chapter looks at the market forces and drivers that influence the outsourcing market. The size of the overall logistics market is analysed and compared with the total value outsourced. The chapter also examines globalization and world trade as well as key industry sectors and their impact on outsourcing.

The global market Size of the global market Global logistics market value The global logistics market has an estimated value of US$972 billion (R770.7 billion) (Transport Intelligence, 2006). The emerging market of Asia Pacific

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(APAC) has the largest market with US$412 billion (R327.1 billion) spent on logistics (Transport Intelligence, 2006). As shown in Figure 1.1, this represents 42 per cent of the global spend. The more mature Europe, Middle East and Africa (EMEA) region has an estimated US$290 billion (R230 billion) spend on Logistics (Transport Intelligence, 2006), whilst the Americas accounts for the balance of US$270 billion (R214 billion) (Transport Intelligence, 2006).

Outsourced logistics value Of the total US$972 billion logistics market, around US$265 billion is outsourced to contract logistics providers and freight forwarders, as shown in Figure 1.2 (Transport Intelligence, 2006). As shown in more detail in Chapter 4, the 25 largest third-party providers make up just 56 per cent of the outsourced revenue, leaving a very long tail of thousands of other thirdparty providers representing the balance. The largest third-party logistic provider, DHL Logistics (a member of Deutsche Post World Net, DPWN), represents just over 10 per cent of the outsourced spend and just 3 per cent of the total addressable global logistics market, further underlining the fragmented nature of the market.

Key sectors and services According to Armstrong & Associates (2006b), the global Fortune 500 outsourced 3PL market was US$98.4 billion in 2004. The automotive and technology sectors spent the most on 3PL services (US$32.1 billion and US$30.9 billion, respectively). Overall, the services provided by 3PLs were led by transportation management, warehousing, value-added services and international 3PL services, as shown in Figure 1.3.

30% 42% EMEA Americas Asia Pacific

28%

Figure 1.1 Logistics percentage spend by region Data source: Transport Intelligence (2006)

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27%

In-house Outsourced

73%

Figure 1.2 Global logistics in-house spend versus outsourced Data source: Transport Intelligence (2006)

Transportation management 22.3%

29.4%

Warehousing Value-added services

21%

8%

International 3PL services

19% Other

Figure 1.3 Percentage of Fortune 500 3PL services by types Source: Armstrong and Associates (2006b)

Regions and outsourcing European businesses are more likely to outsource logistics and supply-chain activity, as the 2004 study by Capgemini showed (Capgemini and Langley, 2004). Western European businesses that responded to the study spent 61 per cent of their logistics spend on third-party provider services against 44 per cent in North America and 49 per cent in Asia Pacific. Interestingly, respondents from the emerging market of Latin America reported they spent 65 per cent of their logistics budget on third-party provider services, probably reflecting the emerging markets in the region and the relative lack of local expertise in the area. This study was based on responses from 222 businesses from North America, 263 from Western Europe, 43 from Asia Pacific and 128 from Latin America. Over 65 per cent of responses came from the manufacturing sector (Capgemini and Langley, 2004).

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Reasons for not outsourcing Of course many of the businesses who do outsource to third-party providers do not outsource all their logistics or supply-chain activities to those providers. In the Capgemini study (Capgemini and Langley, 2004) the biggest reasons respondents reported they did not outsource to third-party providers were: ឣ ឣ ឣ ឣ

They saw logistics as a core competency. They saw logistics as too important to outsource. They believed that the costs would not be reduced. They believed that they would lose control.

Global market drivers The key global market drivers can be summarized as follows: ឣ ឣ ឣ ឣ ឣ ឣ ឣ

global trade; manufacturing moving to low-cost economies; global brands and retailers; information and communication technology (ICT); focus on inventory reduction; consolidation across all industry sectors; new logistics and supply-chain services.

These key drivers will now be explored in more detail.

Global trade GDP In order to understand the logistics and supply-chain outsourcing market, it is necessary to review the global economy and its impact on outsourcing. Gross domestic product (GDP), defined at a country level as consumption plus investment plus exports minus imports, is an important measure of the growth of economies, World GDP growth, which is estimated as a weighted average of economies’ real GDP growth, has been growing at between 3.5 per cent in the 1980s and just over 4 per cent in the 2000s (IMF, 2005).

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World trade Growth More importantly for logistics and supply-chain outsourcing is the growth in world trade. World trade is defined as the exchange of goods and services across international boundaries or territories. Over the same 20-year period world trade has grown at nearly double the growth in GDP: from just over 6 per cent in the early 1980s to just over 7 per cent in the 2000s (IMF, 2005). The forecasts for world trade growth for the years 2005–07 are from 6.2 per cent to 7.3 per cent (World Bank Global Economic Prospects, 2006). It is estimated that up to 30 per cent of world GDP currently crosses borders (Vigoroso, 2003). This steady growth in world trade has been largely due to deregulation, reduced barriers to trade and increased investment. Significantly, the value of world trade in goods has increased in the last 10 years to the level of US$8.88 trillion in 2004 (WTO, 2005).

Developing regions In 2004, world merchandise trade (exchange of goods only, internationally) grew by around 9 per cent, reflecting improvements in the global economy and in particular the price of oil and metals. The manufacture of products has grown rapidly in countries with large, low-wage labour-force countries such as China and India, which have opened up their markets in recent years. To underline the growth in developing countries, their share in world merchandise trade increased to 31 per cent in 2005, the highest level since 1950 (WTO, 2005). Specifically, the Asian region recorded export growth of 14 per cent in the year, with China, Korea and Singapore showing growth rates in excess of 20 per cent (WTO, 2005). In contrast North America showed the slowest growth in exports and imports of any region during the year, and actually recorded a trade deficit in 2004, while Europe’s growth rose moderately over the previous year, spurred by the enlargement of the European Union, albeit it was the lowest real merchandise import growth across all regions (WTO, 2005).

Impact on outsourcing The increase in world trade has been the powerhouse for growth in the outsourcing market. As more products are sourced across borders, the complexity of the supply chain increases, driving many companies to outsource to third-party providers. This is particularly true as companies move manufacturing and operations to regions such as Asia, Eastern Europe or South America, where they seek to mitigate risk by outsourcing their logistics and supply-chain operations. Additionally, companies have taken

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advantage of increasing consumer demand in developing countries, leading to increases in goods from groceries to televisions and cars. The third-party providers have followed their customers into these regions, establishing capabilities to support both manufacturing and finished goods distribution.

Globalization Globalization has been revolutionizing our world since the Second World War and particularly over the last 20 years or so. To understand the impact of globalization on the logistics and supply-chain industry we need to understand more fully what globalization is and what the drivers are for this phenomenon.

Definition The International Monetary Fund (IMF) has described globalization as ‘the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, freer international capital flows, and more rapid and widespread diffusion of technology’ (IMF, 1997). The essence of globalization is the exchange of cultures, politics, goods and services between countries of the world. This has happened as a result of the opportunities created by modern communication and transportation as well as the political resolve to open international borders for trade. Indeed, globalization has been defined as the movement not just of product and services but also money, information and people. This perhaps provides a more commercial view.

Impact on the world What is clear is that through globalization people across the world are becoming connected to each other culturally, politically and economically. There is significant migration of workers from less-developed countries to the wealthier economies, both legally and illegally. This migration, which has been occurring since the 1950s, has brought with it a sharing of cultures into the developed world. Albeit adapted for Western tastes, Chinese, Indian and Italian restaurants have been fully embraced by the West and can now be found in most major cities and towns in the Western world. Developed countries have also been exposed to the cultures and religions of immigrants, while in turn the Western world has propagated its culture and prosperity on the developing world through advertising and the export of Hollywood movies. Additionally there is more foreign travel and tourism than ever before, with Westerners visiting Asia, Africa and South America, something that was a rarity just 20 years ago.

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Enablers for globalization A key enabler for globalization is the political will to open up trade across the world through the establishment of organizations and agreements such as: ឣ

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GATT (General Agreement on Tariffs and Trade), a treaty organization established in 1944, associated with the United Nations, focused on facilitating international trade; the WTO (World Trade Organization), which superseded GATT in 1995, established to promote free trade between member nations, reduce or remove tariffs, administer global trade agreements and resolve disputes; NAFTA (the North American Free Trade Agreement), a 1994 agreement reached by the United States, Canada, and Mexico, focused on the phasing out of tariffs and elimination of fees and other trade barriers in order to encourage free trade between the three North American countries; the EU (European Union), an economic association of European countries seeking to create a unified, barrier-free market for products and services and a common currency.

These initiatives have focused on reducing barriers to trade since the Second World War and have encouraged businesses to invest outside their domestic bases. Specifically, the Uruguay Round of GATT negotiations, which concluded in 1994, removed many barriers to free trade, including import tariffs and quotas. This has been a key driver in the increase of the volume of world trade to the value of US$8.88 trillion in 2004 (WTO, 2005). This growth was facilitated by developments in information and communication technology, allowing faster movement of data and transactions, as well as lower transport costs for both sea and air freight. Indeed ocean freight costs have dropped by over 70 per cent since the 1980s, while air freight costs have been reducing by 3–4 per cent per year over the same period (WTO, 2005).

Freight market The freight market has seen significant growth as a result of globalization, with ocean freight being used for many inbound materials and lower-value finished products. Ocean freight has seen growth rates of 5–6 per cent over recent years; container shipping is the fastest growing element with predicted growth rates of 6–8 per cent (DPWN Factbook, 2005). Sea freight is measured in volume of containers using a standard measure of 20-foot equivalent units known as TEUs. The estimated ocean market size measured in TEUs in 2003 was 17.2 million, which is predicted to grow to

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23.5m by 2008, a compound annual growth rate (CAGR) of 6.8 per cent (DPWN Factbook, 2005). The air freight industry too has seen significant growth for inbound components and higher-value products outbound to the developed markets of the world. In 2003, the global air freight market was estimated at around R22 billion, having increased at a similar rate to sea freight (DPWN Factbook, 2005). With a CAGR of 6.7 per cent, this market is expected to grow to R34.5 billion by 2008 (DPWN Factbook, 2005). These increases in freight volumes, although welcomed by freight shippers, have driven the reduction of costs for sea and air freight, putting third-party providers under margin pressure.

Manufacturing moving to low-cost economies Migration Aided by the development of free trade, lower transport costs and fast communications, Western businesses have seen the advantages of moving their manufacturing to lower-wage economies. The last 15 years have seen a migration of factories from the developed world to Asia, South America and Eastern Europe, often setting up automated manufacturing facilities to take advantage of the low-skilled cheap workforce in developing countries. Indeed, Deloitte’s study conducted in 2003 showed that 61 per cent of manufacturers surveyed had moved production to lower-cost countries (Deloitte, 2003). Initially the charge was led by technology manufacturers, closely followed by automotive parts manufacturers and OEMs (original equipment manufacturers), most of which saw great opportunities in the low-cost Asian economies. Consumer goods manufacturers have since reviewed their own manufacturing and supply-chain strategies, and a number have moved to low-cost countries, albeit nearer their market because of the lower-value products being manufactured. Western European manufacturers have seen Eastern Europe as an opportunity to reduce cost with only a modest impact on supply-chain delivery times, whilst North American companies have preferred Central America as a destination. Fashion and apparel manufacturers too have seen the opportunity and have moved into countries such as China, India, Sri Lanka, Vietnam, Mauritius, Turkey, Hungary and Romania.

Complex supply chains This migration of manufacturing has brought with it ever more complex and lengthy supply chains, requiring more transportation to move the product into the main marketplaces of the world and significantly more

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coordination and management for both inbound materials and outbound finished goods. Global manufacturers need to manage and have visibility of all inventory including inbound materials, raw materials stock, work in progress, finished goods, goods in transit and service parts and returns. However, they also need to be able to balance the trade-off between origin costs and savings made at destination. They have to consider all aspects of a product’s landed cost, including transportation, duty, order lead time and inventory holding costs. This clearly requires full cooperation from all partners across this global supply chain.

Visibility A major objective for global manufacturers is ensuring that their products are flowing to the right places at the right time. A key requirement to making this work is the need for full visibility of the whole supply chain. From raw materials in transit to finished goods at destination and all points in between, the manufacturers must know the exact location of their inventory and when it will reach the destination. This relies on managing information about inventories and shipments and not just the physical stock.

Challenges Many companies that have become global manufacturers are struggling with the impact of the complexity on their businesses. In their 2003 study of 800 manufacturers studied from the Asia Pacific (10 per cent), Central and Eastern Europe (10 per cent), North America (34 per cent) and Western Europe (44 per cent), Deloitte (2003) identified just 7 per cent of manufacturers that had excelled across what Deloitte refers to as the ‘value chain’. On average these companies achieved 73 per cent higher profits than the other companies in the study. This complexity has prompted businesses both to review their supply chains and to seek the support of third-party providers that have built up capabilities and expertise in global supplychain management.

Third-party providers This in turn has provided an opportunity for third-party providers to develop their capabilities in these developing countries in support of their customers. All of the major third-party providers have set up operations in Asia, in most cases in support of existing customers that have moved their manufacturing there from their developed markets. This involves not just physical activities such as shipping and warehousing but also management of supply chains through the use of visibility and event management tools. The third-party provider has had to develop its skills in order to support this

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new requirement to manage global supply chains. Key to this is information management, and all major third-party providers have invested in visibility and event management software. The global providers have become as much supply-chain information brokers as logistics providers.

Case study: Dell Founded in 1984 by Michael Dell, Dell Inc. has become a market leader in selling a range of personal computer products and services directly to customers worldwide. Revenue for 2005 totalled US$49.2 billion, and the company employs approximately 63,700 staff around the world. Dell’s simple concept of selling computer systems directly to customers allows it to build every system to order and offer customers preconfigured systems at highly competitive prices. Dell introduces latest technology much more quickly than its competitors, uses demand-driven manufacturing and supply-chain techniques, and turns over inventory every four days on average. As a result nearly one out of every five standards-based computer systems sold in the world today is a Dell. In 2006, Dell reported that 44 per cent of its sales were from outside the United States, with revenue in China growing by 29 per cent yearon-year. In addition shipments in Europe, Middle East and Africa had increased by 18 per cent year-over-year, while sales in the Americas excluding the United States showed growth of 26 per cent. Dell maintained its position as number one in the US personal computing market with a 32 per cent market share. In 2006, Dell announced the intention of increasing its workforce in India by 50 per cent in the following two years. This will take the total number of Dell employees in India up to 15,000. Dell is planning to set up a manufacturing facility in the country with the intention of boosting its 4 per cent market share in India. The company will also be setting up its fourth Indian call centre in the country, with nearly 1,000 workers. Dell also reported that by the end of the 2006 fiscal year, it will have opened 14 new manufacturing, call centre and design and development facilities over a two-year period. In addition it is making significant investments in China, India, Germany, Brazil and the United States. Source: Dell, 2006.

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Global brands and retailers Global brands In addition to the movement of manufacturing to lower-cost economies, manufacturers have also been focusing on establishing global brands. Developed to appeal to a global market to drive growth and for manufacturing and logistics efficiency, global market branding has been a real focus for large manufacturers over the past 20 years or so. Businesses have recognized the importance of protecting their global brands across all markets, and together with the need to develop logistics efficiencies, they have focused on the development of effective global supply chains. Brands like Sony, Nike, Nokia, Gillette and BMW are known across the world and have been associated with desirable lifestyles. These global brands, fuelled by advertisements, have created an expectation for such lifestyles among people all over the world, thus creating global demand for these products.

New products The success of these brands is also dependent on the introduction of new products to drive turnover. In its study of 800 global manufacturing companies, Deloitte (2003) identified that 35 per cent of revenues will come from new product programmes started in the previous three years, compared with 21 per cent identified in 1998. This sharp increase in new product development and introduction, together with the need to get the product to market in record time, has added significantly to the complexity faced by these manufacturers (Deloitte, 2003). In the mobile phone industry, new products are now being introduced in six to nine months, while the car industry, led by Nissan, is developing new cars in less than a year.

Consumer demand and the retailers The combination of advertising and enticing new products has created a significant demand for consumer goods in developing countries. Retailers have not been slow to see this opportunity and have responded by moving into potentially lucrative developing markets. Retailers such as Carrefour, Metro, Wal-Mart, Tesco and Ahold have all moved into developing countries. The most popular developing market destinations for the major retailers are Argentina, China, the Czech Republic, Mexico, Poland, Slovakia, South Korea and Thailand.

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Case history: Carrefour Created in 1959 by two families, French retailer Carrefour has become the largest retailer in Europe and the second-largest supermarket in the world after Wal-Mart. What is perhaps more remarkable is that, based on the 2004 results, less than 50 per cent of its revenues are from France, with just over 37 per cent from the rest of Europe, while 6.5 per cent are from the Americas and 7 per cent from Asia. It operates out of four leading formats: hypermarket, supermarket, hard discount and convenience store. At year-end 2004 Carrefour posted 190.681 billion of consolidated sales including VAT, and employed 430,000 staff. Despite being behind Wal-Mart in turnover, Carrefour operates out of more countries worldwide than its American rivals, with operations in 29 countries. With nearly 1,200 of its total 6,500 stores outside Europe, Carrefour is generally considered the most ‘global’ retailer in the world. It has stores in over 30 countries, including Poland, the Czech Republic, Slovakia, Romania, Turkey, Egypt, Mexico, Argentina, Chile, Colombia, South Korea, Indonesia, Malaysia, Thailand and China. On 20 January 2006, the Qibao Carrefour hypermarket opened as Carrefour’s 71st hypermarket in China. The store offers a sales area of 9,830 square metres, 65 checkouts and 425 parking spaces. Source: Carrefour, 2006.

Information and communication technology (ICT) Technological advance The extent of change in information and communication technologies over the last 20 years, and in particular since the 1990s, has had a profound impact on how businesses operate. The pace of change over this period has been breathtaking, which is evident in how technology is an integral part of supporting business in the 21st century. It is almost unbelievable that the internet has only been commercially available since the early 1990s! To underline this level of growth, the global ICT market grew at a compound annual growth rate (CAGR) of 7.6 per cent between the years 1993 and 2001. Over this period the market value grew from US$1.3 trillion to over US$2.4 trillion (ASOCIO, 2003).

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Availability of ICT Western world The number of personal computers (PCs) and access to the internet are two key measures of the importance of ICT for both business and personal use. The use of wide area networks for business and broadband connectivity in homes underlines the speed of communications across the world. All of these advances have allowed the sharing of information between people irrespective of their geographic location. This has made the exchange of large amounts of data possible, almost instantaneously. For business the development of electronic data interchange (EDI) has made it possible for this data to be exchanged from system to system through the use of common standards.

Developing countries The lack of infrastructure in underdeveloped countries has been a constraint for the development of those economies. The developed world has taken an interest in this as the lack of development in these areas has had the effect of inhibiting entry and continued growth of businesses in the underdeveloped countries. To that end global policy venues have been created to address this, including the WTO and International Telecommunications Union as well as other institutions such as World Wide Web Consortium (W3C) and Global Business Dialogue (GBD), which have focused on supporting global commerce and social development in developing countries.

E-commerce B2B Many businesses have seen e-commerce as an opportunity to provide new channels to market and enable efficiency gains. The development of e-markets that allow business-to-business (B2B) transactions to be conducted has had a significant impact in the buying and selling of goods, especially standard components and services. These often private e-markets with a pre-vetted membership not only allow businesses to conduct business across geographical divides, but also ensure high levels of efficiency for the transaction.

B2C Business-to-consumer (B2C) websites have exploded over the last five years or so. From groceries to DVDs, to property and real estate, retailers have

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discovered that a large number of products can be sold via the internet. Not only does this provide consumers with an opportunity to purchase from their homes, allowing retailers to break into new market opportunities, but the transaction itself can be conducted extremely efficiently without the overheads of the normal retail shopping environment. Some businesses have been developed using solely this model, for example LastMinute.com, while eBay has used the internet to provide an e-marketplace for its members. The linking of execution systems such as warehouse picking and distribution systems to these websites and e-markets allow for an efficient end-to-end process for delivery to the door of the customer.

Transportation industry Finally there are transportation management companies that operate primarily through web-based companies such as freightquote.com, freightpro.com and transportation.com in the United States. They provide small to medium-sized markets with the opportunity, often on a transactional basis, to have relatively sophisticated solutions.

Focus on inventory reduction With the demand for better returns on capital, the need to develop and launch more new products than ever before, and manufacturing plants that are often thousands of miles from their markets, global manufacturers are focusing on becoming lean and more responsive to their customer demand. Manufacturers are focused on ensuring that their production lines are kept supplied with inbound materials, but without large inventories of components, many of which have a short shelf life because of rapid obsolescence. In summary, businesses must balance supply and demand whilst reducing inventories by developing inventory reduction strategies. In his article ‘Seven mega-trends shaping modern logistics’, Benjamin Gordon (Victoria University, 2006) identifies that a key driver in the 50 per cent reduction of logistics costs as a percentage of gross domestic product (from 16.2 per cent in 1981 to 8.5 per cent in 2003) is reductions in inventory levels. Inventory carrying costs reduced by 60 per cent over the same period.

Demand models A key strategy in the reduction of inventories is the move to a pull-based demand model, where instead of product being purchased or manufactured on the basis of a forecast, its procurement depends on consumption or

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demand further up the chain. For example, within a factory kanban replenishment process (a just-in-time technique to signal the need for a part), materials will only be moved to beside the line as they are required. In turn the consumption will be electronically advised to the supplier so that it can replenish the products taken from the stores or warehouse. In this model there is no speculative or forecast stock or supply. Each part of the chain only supplies against the consumption of the next process. This addresses the traditional approach of holding forecast stock to address customer service, where there is always a balance between the amounts of stock to hold versus the level of customer service to be attained. In the demand model there is no trade-off, provided that the supply chain is flexible and responsive.

Flexible manufacturing Most manufacturers that embark on this strategy also develop flexible manufacturing techniques. This allows them to move from long production runs, which focus on the efficient use of production lines, to short runs that support and focus on the customer demand, only manufacturing products that are required to be replenished against real demand.

Retail demand model This can also work in the replenishment of manufactured or purchased products into the retail market. As products are consumed and registered on EPOS (electronic point of sale) tills, a signal can be sent to the warehouse and in turn to the supplier to replenish the product, based on the agreed timescales. This move to a demand model has a significant impact on the levels of inventory, but also creates the need for accuracy and close relationships with suppliers.

Supplier relationships Closer relationships with vendors usually involve a supplier rationalization programme. This means that only one or two suppliers are selected to supply each material or component, so that a more integrated relationship can be established. This typically includes more meetings and communication between the two parties, providing improved management, but also electronically integrating the two businesses. This is achieved through the use of electronic data interchange (EDI) to link businesses’ systems together through the electronic transfer of transactions and data such as orders, acknowledgements, inventory levels and invoices. At the very least, manufacturers that are focused on reducing inbound materials and components provide their suppliers with visibility of the inventory levels in warehouses and factories, so that the suppliers can monitor the need for replenishment and manufacture of replacements.

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The delivery cycle A key component for reducing inventories is the re-engineering of the order-to-delivery cycle. This involves reviewing and examining every process within the cycle, focusing on reducing the time and complexity of each component. This is particularly vital with extended and complicated supply chains, and companies often engage the services of a consultant or third-party provider to support some or all of this activity.

Third-party providers The viability of reduced inventories relies on an integrated supply and demand model, where vendors are fully involved and manufacturing and supply is focused on demand replenishment. Many third-party providers have developed capabilities to support these strategies and play a part in the integrated model.

Case history: Procter & Gamble Procter & Gamble is a major consumer manufacturing company that boasts on its website that its brands touch the lives of people all across the world 2 billion times a day. It posted a turnover of US$56.7 billion for the year ending June 2005, of which 23 per cent was achieved in developing countries, including China and Latin America. The business has around 110,000 people working in 140 plants and offices in almost 80 countries worldwide, supplying products to consumers in 140 countries. Its brands include Pampers, Tide, Ariel, Always, Pantene, Bounty, Folgers, Pringles, Charmin, Downy, Iams, Crest, Actonel and Olay (P&G, 2006). Focused on the consumer, Procter & Gamble has developed a business strategy called the consumer-driven supply network. The strategy aims to deliver real value for its retail customer and growth and profit for all parties. The essential principle of this demand-focused strategy is that the supply of products works off real demand, basing production on what actually sells and not on forecasts. The aim is for all the company’s manufacturing plants and its 100,000 suppliers to work directly off this demand data. The concept of mass customization has been adopted, with flexible manufacturing techniques that allow for short production runs. The company has changed its customer service measure from the perfect order to measuring on-shelf availability, focusing on the impact on the customer and consumer. Source: Global Logistics & Supply Chain Strategies, 2006.

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Global industry sectors Automotive Global manufacturers The top 10 global car manufacturers – Toyota, Ford, Honda, GM, RenaultNissan, BMW, Volkswagen, DaimlerChrysler, Hyundai and PSA Citroen – account for 90 per cent of the global automotive market, with producers in China, India and Malaysia making up the balance. Toyota is the world’s largest car manufacturer, producing over 7 million cars in 2005 with a market capitalization of around US$150 billion (Economist, 2006a).

Emerging markets The emerging markets in Asia, particularly in China and India, are growing steadily. It is predicted that in a few years China will replace Japan as the second-largest car market after the United States. In turn this incredible increase in the car market will require an increase in manufacturing capacity to almost double in the next 20 years. Further, car manufacturers in China have already shown their models at motor shows in Europe, seeking to sell into the developed markets (Economist, 2006a).

Global manufacturing The automotive industry has fully embraced the concept of global manufacturing and supply chains. All of the major car manufacturers have set up manufacturing operations in Asia, and many in Latin America. The car component suppliers are obviously an important part of the automotive industry and supply chain. Under pressure from car manufacturers, supplier profit margins have become extremely tight. Western component suppliers are also under huge pressures from low-cost Chinese manufacturers. In addition, as car manufacturers move their production to Asia and other low-cost geographies, they expect their suppliers to move with them and set up factories nearby, usually on a supplier park. Suppliers are more and more producing subassemblies for sequencing supply to the car production line. Car manufacturers have set up processes based on line sequencing, pull-demand manufacturing techniques and kanban. In addition manufacturers have focused on a rapid decrease in time-to-market at a time when products are becoming more complex and incorporating more advanced technology.

Outsourcing This complexity and need for intricate timing and demand planning and execution have been the key reasons that logistics service providers have

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been involved in global automotive supply chains. Certainly automotive companies have outsourced their non-core value functions for some time, but increasingly are looking for third-party providers to manage key aspects of their supply chains like final configuration services, line sequencing and inventory management.

Healthcare Market pressures increase complexity Market pressures have caused pharmaceutical companies to start focusing on the supply chain as a strategic tool. The reduction in the launch of new drugs driving high revenue has been a key pressure for the major pharmaceutical companies. In turn, generic manufacturers are launching competitive products at vastly reduced prices, piling more pressure on the branded manufacturers. As will be discussed later in the chapter, pharmaceutical and other healthcare companies have also been consolidating to achieve efficiencies and scale. These issues, plus the pharmaceuticals’ move towards globalization, have been a key driver in manufacturers now operating with increasingly complex supply chains and higher costs.

Third-party outsourcing Pharmaceutical companies have increasingly turned to third-party service providers for support in managing their complex supply chains. Many third-party logistics providers already have much of the infrastructure and specialist skill in place to achieve supply-chain efficiency on both a national and global level. The pharmaceuticals seek services such as warehousing (often pan-regional), integrated transportation and visibility of where their products are within the supply chain for both inbound to manufacturer and outbound to their customers. Increasingly they are also seeking valueadded logistics services including pre-wholesaling (where products are consolidated and prepared for delivery to the retailer), co-packing and clinical trials logistics.

Consumer packaged goods (CPG) Pressure from retailers Under extreme pressure from retailers, led by Wal-Mart, the competition in the CPG industry has never been so intense. Suppliers to the retail sector are faced with ever-increasing demands in such areas as packaging, promotions and delivery, in both frequency and presentation. Supplier compliance is

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vital to the success, and compliance is mostly achieved via changes and improvements in the supply chain. These pressures are forcing manufacturers to drive for improvements in supply-chain efficiencies, product availability, lower inventory holding costs, reduced order cycle times and accelerated new product development and launch processes.

Initiatives CPG companies led by the likes of Procter & Gamble, Unilever, Coca-Cola, Kraft, Pepsi-Cola, Colgate Palmolive and Nestlé have established a number of initiatives since the 1990s to help them realize these improvements. These initiatives include: ឣ ឣ ឣ ឣ ឣ ឣ ឣ

efficient consumer response (ECR); collaborative planning, forecasting and replenishment (CPFR); vendor-managed inventory (VMI); electronic product codes (EPC); global data synchronization (GDS); radio frequency identification (RFID); business process management (BPM).

Third-party support Manufacturers now have to manage such services as customized packaging, kitting, and labelling for promotions. Increasingly they are seeking the support of third-party logistics providers to assist with these activities and also provide cost savings through the consolidation of warehousing and deliveries across multiple manufacturers. Third-party logistics providers assist manufacturers with combining bulk and loose shipments, handling custom case packaging and pallet configurations, for example rainbow pallets that contain multiple products from various manufacturers.

Electronics and high technology The market The high technology and electronics market is worth an estimated US$1,300 billion worldwide and is growing at around 8 per cent per year (DTI, 2006). The industry has a number of key drivers and forces that are impacting on its supply-chain complexity. Digital convergence of products, product miniaturization, wireless technology, globalization of manufacturing, the need to introduce more new products more quickly and the emerging demand in developing regions like China, India and Eastern Europe are all impacting significantly on manufacturers’ supply chains.

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Based on 2005 sales, the world’s top five electronics manufacturers were Taiwan’s Hon Hai, Singapore’s Flextronics and the US Sanmina-SCI, Solectron and Celestica (Forbes, 2006).

Supply-chain transformations Key verticals such as mobile phone and personal computer manufacturers have totally re-engineered their supply chains in recent years to cope with these pressures on their supply chains. Manufacturers such as Nokia, Motorola, HP, IBM and of course Dell have reinvented their supply chains, moving to demand-led pull processes. This has created services and processes like VMI, inbound to manufacturing (I2M), just-in-time line-side material supply, production staging and line feed. These processes and services have required the coordination of all parts of the supply chain, from demand planning through manufacturing and of course vendor supply. This coordination in turn requires the full visibility of all inventories across the supply chain from vendors through to finished goods. Many manufacturers have seen the advantage of outsourcing some or all of their supply chains to third-party service providers to support these dynamic and complex supply chains.

Case history: HP HP is a major player in printer and imaging solutions, personal computers and technical solutions. For the year ending January 2006, HP’s revenue totalled US$87.9 billion, and it served more than a billion customers in more than 170 countries on five continents. HP has approximately 150,000 employees worldwide. Each day, it delivers around 1.3 million inkjet cartridges, 110,000 printers, 75,000 personal computer systems and 3,500 servers. These are mostly produced by contract manufacturers or OEMs. The company spends about US$50 billion on supply-chain activities and also has a fast-moving new product pipeline which launches hundreds of new products each year. With this level of spend and complexity, it was essential for HP to ensure control of the supply chain in order to reduce costs and ensure successful relationships with its suppliers. Accordingly, HP management treats supply-chain optimization as top priority. Before the transition, HP served its customers through one of 35 different supply chains, but it has since consolidated these into five: ឣ ឣ

no touch; low touch;

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configure-to-order; high volume; solutions and services.

HP relies heavily on third-party providers for warehousing and shipping and has established an integration hub to provide a single point of entry to HP globally, reducing the time and expense involved with making connections to third-party providers. This focus on the supply chain has provided many benefits, including significant savings and has also earned the company the Managing Automation Progressive Manufacturer Supply Chain Mastery Award. Source: HP, 2006.

Fashion and apparel The sector The fashion and apparel industry is segmented, with at the low end, retailers such as Wal-Mart, Tesco and Carrefour that buy huge quantities of garments and sell predominantly own brands at low prices. In the centre are mid-priced quality brands and retailers such as Levi-Strauss, Gap and Marks & Spencer, while companies such as Hugo Boss, Ralf Lauren and Burberry represent the high-quality premium-priced brands. Each of these segments brings with it a different challenge, each requiring a unique supply-chain solution.

Manufacturing outsourcing Retailers and manufacturers have for some time outsourced to relatively low-cost economies like Eastern European countries (from Western Europe) and Latin America (from North America). However since the WTO embargoes were rescinded in 2005, outsourcing to China has exploded and it is set to become the world’s largest manufacturer and net exporter of clothing by 2010. India is also well positioned to become an export powerhouse. Virtually all European and North American retailers and manufacturers now produce a significant percentage of their clothing offshore. Most still launch four to six seasonal collections per year, although leaders such as Zara can launch a collection every two weeks, putting pressure on their competitors’ supply chains. Zara’s focus on having a high proportion of

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new lines on shelf at all times is leading the way, and retailers are being forced to accelerate their supply chains and turn stock over much more quickly in order to compete. The agility and speed of fashion and apparel supply chains is absolutely vital to the success of the business. Failure to have product available almost certainly means a lost sale, and could mean thousands of garments unsold in the supply chain.

Asia and the supply chain Together with the need to drive new launches through the supply chain more frequently and faster, the outsourcing of manufacturing to Asia has brought an altogether more complex supply-chain challenge to the industry. The new supply chains require greater emphasis on consolidation, flow-through and cross-docking of shipments before they reach Western markets. This is forcing retailers and manufacturers to seek supply-chain management specialists that have a comprehensive global network and capability.

Third-party supply-chain specialists These new breeds of third-party providers need to be capable not only of supplying the standard logistics and shipping activities, but also of providing real-time visibility of all garments, both in transit and in storage across the world. This requires specialist IT systems and processes which leading third-party providers have been investing in for some time. Manufacturers are also seeking to limit unnecessary expenditure in highcost countries, so activities such as quality control and labelling are increasingly being conducted at source, often by third-party providers. Finally, in order to optimize the supply chain, manufacturers and thirdparty providers need to look at the end-to-end supply chain and understand upstream activities such as the sourcing of yarn, weave and accessories, the manufacturing process and of course the logistics requirements into the retail store. Not only can costs be optimized, so can the availability of product on the store shelf or rail.

Retail The market Retailers have become increasingly powerful in recent years with Wal-Mart (United States), Carrefour (France), Ahold (Netherlands), Metro (Germany), Kroger (United States) and Tesco (United Kingdom) leading the way in grocery. Between them these six top retailers’ turnover is in excess of a

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staggering US$600 billion (Forbes, 2006). However, this figure is put into perspective by the total global retail market, which was calculated by market intelligence group Euromonitor at an incredible US$8,694 billion sales value in 2005 (Franchise International, 2006).

Supply chain The supply chain has become increasingly important for retailers in Western Europe and North America as they face competition from new trading formats and foreign entrants. Retailers must ensure that costs are contained or preferably reduced, and profits increased. Their strategy is based on improving product availability while at the same time reducing lead times, inventory levels and other operating costs. This strategy has focused on changes to the supply chain to realize these improvements, including sourcing from developing countries and regions and moving towards demand-driven supply strategies.

Outsourcing Despite the importance of the supply chain for retailers, very few employ third-party logistics providers to manage all their logistics or supply-chain needs, and in most cases only a small percentage is outsourced. In general, the larger the retailer, the less likely it is to outsource all its logistics of supply-chain needs. This is especially true in grocery retailing, while nonfood retailers tend to outsource a larger proportion to third-party providers. This may be because of the size of many grocery retailers, which provides the scale to operate logistics activities and the supply chain as efficiently (or more so?) as a third-party provider. Indeed if retailers do outsource, they are much more likely to retain the capital in building and vehicles and simply contract out the management and resources, usually on an open-book plus management fee contract. They are also more likely to outsource transportation than warehousing, and if they do outsource both, this may well be with two different contractors. Often retailers outsource some operations and retain others in-house in order to benchmark operational performance and costs. As retailers have moved out of their domestic heartland into developing markets like Eastern Europe and Latin America, they have called upon third-party providers to support their logistics activities, perhaps wanting to mitigate risks and take advantage of providers’ capabilities in the geography.

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Case history: Wal-Mart Founded in 1962 by Sam Walton, Wal-Mart was reported as the largest sales company in the world in 2005, reporting a turnover of US$285 billion with a net income (profit) of US$10 billion. By the end of 2006 the company operated out of 6,500 stores and outlets worldwide, including more than 2,700 stores outside the USA. Their operations spanned 15 countries, including Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Germany, Japan, Mexico, Puerto Rico and the United Kingdom. Wal-Mart has a total worldwide staff of 1,800,000, with 75,000 in Logistics and IT alone. Wal-Mart’s total 5,000 stores worldwide are supplied with up to 100,000 product lines each from around 68,000 suppliers. While many of Wal-Mart’s logistics operations in the United States are operated internally, a significant amount of transportation, known as ‘trucking’ in the United States, is outsourced. Outside the United States, however, operations are more likely to be outsourced, including Canada and Germany. As part of its drive to improve supply-chain efficiency, Wal-Mart has instructed that it requires its top 100 suppliers to use RFID to identify pallets of products being delivered into its distribution network. The plan is to use RFID to manage and identify the location of stock all the way from the receiving door of a warehouse to the store shelf. Source: Wal-Mart, 2006.

Consolidation across all industry sectors Over the last 20 years or so there have been unprecedented levels of acquisition and mergers across the world in every business vertical. This activity has been driven by companies’ desire to grow, but also to acquire scale to reduce costs and strengthen their position in the marketplace. Geographical spread and presence has also been a key driver for acquisitions. This consolidation has resulted in greater operational efficiencies and economies of scale. However, this has in turn created larger and more complex supply chains for companies, which has driven the need of many companies to consider outsourcing their supply-chain and logistics activities to thirdparty providers.

Automotive The highly competitive automotive industry realized that focusing on lean practices alone to achieve competitiveness was insufficient, and that the

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benefits of economies of scale are essential for long-term growth and profitability. The industry has seen significant consolidation since the 1980s. Small independent manufacturers, such as Aston Martin, Jaguar, Saab and Volvo, have been acquired by their larger American rivals. Ford has been very active, acquiring Jaguar, Volvo, Land Rover, Aston Martin and Mazda in recent years. General Motors (GM), which bought Saab and Daewoo in 2000, has focused the rest of its attention on investing in partners such as Japan’s Suzuki, Isuzu and Subaru. The two biggest deals in the automotive industry have been the takeover of Chrysler by Daimler-Benz in 1998 and the alliance of Renault and Nissan in the following year. Other manufacturers such as Volkswagen, who itself acquired Seat and Skoda, have become potential targets for acquisition, although the 19 per cent ownership by the German state of Lower Saxony is some protection for the historic German car maker. Other German manufacturers, like BMW (which itself purchased the Rover Group, retaining the Mini marque) and Porsche, are very attractive to the larger global car companies. However, their independence and family heritage (both are controlled by descendants of the founding families) makes an acquisition less likely, although if the price were right both might be tempted. Japanese manufacturers such as Toyota and Honda have focused more on organic growth, although Toyota have done a deal with PSA Peugeot Citroen to jointly build a new small car in Europe. What is interesting about consolidation in the automotive industry is that in the main the car badges have been retained, whilst consolidation has taken place around manufacturing and the supply chain. Indeed the top 10 largest manufacturers still account for over 50 brands, and the top five manufacturers an incredible 75 per cent of the global market (Economist, 2006a).

Healthcare Consolidation has been critical for the healthcare and pharmaceutical industry, as companies are forced to bring escalating costs under control and develop more new products for the market. It is reported that patents on US$100 billion worth of drugs are expiring over the next few years (Thayer, 2002). As a result, pharmaceutical manufacturers and biotech companies have undertaken huge mergers to seek cost savings and scale in R&D and marketing. Three key consolidations took place in 2000, namely Wellcome’s merger with SmithKline Beecham, Pfizer ’s acquisition of Warner-Lambert, and Pharmacia & Upjohn’s merger with Monsanto to form Pharmacia Corp. 2001 saw Johnson & Johnson buying Alza, and Bristol-Myers Squibb acquiring DuPont Pharmaceuticals. Then in 2002 Pfizer acquired Pharmacia in a deal estimated to be worth US$60 billion. This deal reinforced Pfizer’s position as

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the world’s leading pharmaceutical company, with a 2005 turnover of over US$52 billion. Meanwhile UK drug manufacturer AstraZeneca made four significant acquisitions in 2005. In 2006, Bayer Consumer Care bought Roche Consumer Health to supplement its over-the-counter (OTC) products with brands such as Rennie and Feminax, while Bayer’s acquisition of Schering AG for R16.5 billion was the largest in Bayer’s 140-year history.

Retail The pressure on the retail sector has continued, with the might of Wal-Mart forcing competitors across the globe to seek ways to defend themselves. Additionally in many markets, discounters are challenging the traditional retailers. Consolidation provides both growth and scale to achieve cost reductions, both of which are important defences against competition. Retailers have also used consolidation to focus more on global sourcing. There have been a number of high-profile and significant acquisitions and mergers over the last few years. French retailer Carrefour purchased Promodes in 1999, helping it to become the leading European food retail group, and number two in the world behind US giant Wal-Mart. In turn, Wal-Mart acquired Asda in the United Kingdom, whilst UK supermarket chain Morrison bought UK rival Safeway. Further, Group Mulliez, the parent company of French retailer Auchan, is looking at potential British targets, including Allied Carpets, and UK retailers Tesco, Sainsbury and Kingfisher are all seeking partners either in the United Kingdom or abroad.

Consumer packaged goods Under pressure from the retailers, CPG manufacturers are seeking to defend their position through consolidation. This provides them with an opportunity to reduces costs and potentially realize a little more power in their relationships with retailers. In addition, CPG companies are seeking to move into developing countries and have seen consolidation as a means to achieve this. The acquisition of chewing gum company Adams by Cadbury Schweppes fits into its long-term strategy of focusing on growth sectors such as gum, and developing markets including Eastern Europe and Latin America. The acquisition of niche ice-cream business Ben & Jerry’s by Unilever to add to its existing ice-cream brands Walls, Good Humor and Breyers highlights the opportunity to reduce operational and material costs. Both Heineken and Interbrew have made key acquisitions and alliances in Eastern Europe and Asia, focused on targeted growth in specific regions. Finally, Procter & Gamble’s takeover of Gillette is one of the largest of its type in recent years, providing an opportunity for the buyer to redesign its supply-chain and sourcing strategies.

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New logistics and supply-chain services Over the last few years several new logistics and supply-chain services have emerged, which are discussed below.

International supply-chain, consolidation and value-added services The globalization of manufacturers has created the need for international supply-chain services where contract logistics activities at both source and destination are integrated with freight-forwarding services to create an endto-end supply-chain solution. These end-to-end services focus on reducing operational costs through lower freight rates, changing modes of freight and improving container fill rates. Third-party providers seek to deliver supply-chain value through consolidation services, added-value services at origin, vendor management and providing business value through lower inventories, improving product availability and overall lower product costs. Added-value services at origin, include quality control at origin, pre-retail and ticketing activities, product assembly, repacking and reworking.

Reverse logistics Reverse logistics is now an estimated US$35 billion market (Victoria University, 2006), involving the management of returned goods and products across the entire supply chain. Retailers have become focused on the opportunity to improve margins by improving the efficiency of their returns processes. Store retailers can expect between 4 and 15 per cent of their goods to be returned, depending on the products, whilst catalogue retailers can expect up to 18 per cent returns (Gordon, 2003). Retailers have deployed systems and third-party providers to assist in this complicated and inherently inefficient process. Specialist third-party providers, such as US-based Genco, have built successful businesses by focusing on this new and growing service. The introduction of the Waste Electrical and Electronic Equipment (WEEE) directive in Europe, which aims to encourage recovery, reuse and recycling of products, is likely to drive significant growth in that region.

Packaging Packaging services is also a growing opportunity for third-party providers. Manufacturers require flexible packaging services to support their manufacturing and marketing strategies. By outsourcing packaging, the manufacturer can decouple the manufacture of the product from the finished

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product packaged for a specific market, and effectively achieve postponement. Indeed the globalization of manufacturing is driving this service opportunity for service providers as it allows for manufacturing efficiency and local customization through packaging. The service also provides for marketing initiatives and product combinations to be done locally and flexibly. An example of a third-party provider delivering this service is Power Logistics, acquired by Exel in 2004.

Service parts logistics Service parts logistics has become important for high-technology businesses. This rapidly growing service is based on ensuring the rapid fulfilment of post-sales high-value or critical parts in support of customers worldwide. These services typically include: ឣ ឣ ឣ ឣ

ឣ ឣ ឣ ឣ ឣ

parts logistics; returns management; field technical support; field stocking network, usually enabling between one and four-hour response times; central distribution centres; depot and field repairs; parts planning; asset recovery; recycling management.

Post-sales service can differentiate a company’s offering and provide growth opportunities. However the complexities associated with managing a global or pan-regional service-parts supply chain stops many manufacturers from achieving this. They often struggle with the visibility and control required to deliver the right parts or services to the right place, at the right time and at an acceptable cost. This is prompting many businesses, especially technology and electronic companies, to outsource these activities to a service provider who can demonstrate this skill. Third-party providers have developed skills in this area which they see as added-value services; these often involve the development of advanced IT and visibility systems to support the logistics offering.

Inbound to manufacturing Inbound to manufacturing, often referred to as I2M, is a service used in support of a manufacturer’s need to ensure that parts are purchased in the

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best way in support of its customers’ variable manufacturing demands. Global manufacturers are seeking to reduce the overall supply-chain costs by reducing inventory that they consume in their manufacturing process, reducing operational costs and using expensive factory space more productively. I2M is the supply-chain management of the inbound flow of materials from collection points at component suppliers’ facilities to the consumption point in manufacturers’ production lines, which are usually situated in developing countries. Usually a VMI programme is established in support of this service.

Case history: Nokia Nokia, with listings on four major exchanges, reported 2005 net sales of 134.2 billion, increasing by 16 per cent on the previous year (Nokia, 2006). Nokia’s website (2006) reported that in 2005, Europe accounted for 42 per cent of the company’s net sales (41 per cent in 2004), Asia Pacific 18 per cent (16 per cent), China 11 per cent (10 per cent), North America 8 per cent (12 per cent), Latin America 8 per cent (9 per cent), and Middle East and Africa 13 per cent (12 per cent). The 10 markets in which Nokia generated the greatest net sales in 2005 were, in descending order of magnitude, China, the United States, the United Kingdom, India, Germany, Russia, Italy, Spain, Saudi Arabia and France, together representing 52 per cent of total net sales in 2005 (Nokia, 2006). Nokia has manufacturing facilities across Europe, North and Latin/South America and Asia and has focused on establishing collaborative demand planning techniques and processes with its global suppliers, who deliver products into vendor-managed hubs situated close to each factory. These hubs, known as i-Hubs, are managed by DHL (acquired via Exel) worldwide, which provides not just the logistics services but also the systems integration with both Nokia and its vendors, providing full visibility and alerting across the entire supply chain for all parties. In an article in the Economist (2006b), Nokia was described as managing an extraordinary efficient logistics chain handling over 60 billion components a year.

Summary This chapter looked at the size and composition of the global logistics market, and assessed the value of spend outsourced to third-party providers. The impact of globalization and world trade on outsourcing was

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also examined, demonstrating its importance to the third-party provider industry. Key industry sectors were also reviewed, including supply-chain strategies and drivers and outsourcing trends. The chapter also looked at industry consolidation, often a key reason for outsourcing, and examined new services increasingly being demanded by third-party provider customers.

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Regional logistics markets Introduction This chapter reviews the regional logistics markets by examining key countries’ economic and trading information, and analysing the logistics markets in key geographies. The most mature logistics market, Europe, is analysed, showing the importance of the highly developed logistics countries like the United Kingdom and Germany, together with the opportunities presented by economic growth in Eastern Europe and the recent accession of 10 countries to the European Union. The United States and Canada are reviewed, showing both the risks and opportunities caused by increasing trade with China. The developing markets of Central and South Americas are also examined. Finally, Asia is analysed, with growth powerhouses China and India examined in some detail. Other key countries are also reviewed, including established wealthy countries like Japan and South Korea, together with emerging countries like Thailand and Indonesia. For countries that are examined, there is a summary of facts and figures, together with a summary of the economy and a review of the logistics market.

Europe, the Middle East and Africa (EMEA) Europe European logistics market The European logistics market, generally regarded as the most mature outsourced logistics market in the world, was valued at N182 billion

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(US$230 billion) in 2005 (Transport Intelligence, 2006). Approximately 25 per cent of the total logistics spend is outsourced to third-party contract logistics providers (Transport Intelligence, 2006) as shown in Figure 2.1. The outsourced logistics market is forecast to grow at a compound annual growth rate (CAGR) of 9.5 per cent between 2005 and 2009, with Spain (12 per cent) and the merging markets of Eastern Europe (10 per cent) leading the growth. Within Europe, as shown in Figure 2.2, Germany is the major market, with an estimated logistics spend of N40 billion, followed by the United Kingdom (N31 billion) and France (N29 billion), (Transport Intelligence, 2006). The size of the markets in Italy and Spain demonstrates the opportunity for third-party logistics providers. As is shown in Figure 2.3, these countries have relatively low levels of logistics outsourcing. The emerging markets of Eastern Europe are the majority of what is shown in Figure 2.2 as ‘Other ’. This underlines the opportunity for growth in the logistics markets of these countries. Historically, the logistics industry in Europe has been focused locally for each country with its own particular culture, language, business practices and legal requirements. This makes the region a particularly challenging marketplace for aspiring pan-European third-party providers to develop. However European countries, which have traditionally traded cross-border, have looked to outsourcing as a part of their business model. As shown in Figure 2.3, outsourcing rates in Europe range from around 8 to 50 per cent, with the highest percentage of outsourced logistics spend in the Netherlands followed by Belgium, reflecting Benelux’s position as the location of choice for many companies’ centralized European distribution centres. The mature market of the United Kingdom is third-highest followed by Germany, with both markets dominated by large wellestablished local providers (acquisition notwithstanding).

g46 bn

Europe outsourced Europe in-house

g136 bn

Figure 2.1 European in-house contract logistics spend versus outsourced Source: Transport Intelligence (2006)

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4%

France

2% 2% 3% 3% 2%

21%

Italy

8%

Spain Nordic Netherlands

8%

Belgium

17%

Austria

14%

16%

Ireland Portugal Other

Figure 2.2 Percentage of total logistics spend by European country Source: Transport Intelligence (2006) 60% 50% 40% 30% 20% 10%

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th e O

ai Sp

a tri Au s

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Figure 2.3 Percentage of logistics outsourced by European countries Source: Transport Intelligence (2006)

Enlargement Following the admission of 10 new countries into the European Union in 2004, the enlarged European Union of 25 countries has a population of over 450 million inhabitants, bigger than the United States, Canada and Mexico put together. The economic union has a gross domestic product (GDP) of over US$12 trillion (Central Intelligence Agency (CIA), 2006 (2005 estimation)) and represents 18 per cent of world trade in goods and 24 per cent of world trade in services (Delegation of the European Commission to Australia and New Zealand, 2006).

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Trade The European Union exported US$1.318 trillion goods and services outside the union as a whole, with the following key commodities: machinery; motor vehicles, aircraft; ឣ plastics; ឣ pharmaceuticals and other chemicals; ឣ fuels; ឣ iron and steel; ឣ nonferrous metals; ឣ wood pulp and paper products; ឣ textiles; ឣ meat; ឣ dairy products; ឣ fish; ឣ alcoholic beverages. (CIA, 2006) ឣ ឣ

Figure 2.4 shows the European Union’s key export partners. 24.2%

United States Switzerland China 7.7%

58.4%

5.0%

Russia Other

4.7%

Figure 2.4 The European Union’s key export partners Source: CIA (2006) (2004) figures

The European Union imported US$1.402 trillion in 2004 from outside the union. Key imported commodities were: ឣ ឣ ឣ ឣ ឣ ឣ ឣ

machinery; vehicles; aircraft; plastics; crude oil; chemicals; textiles;

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metals; foodstuffs; ឣ clothing. (CIA, 2006) ឣ ឣ

Figure 2.5 shows the European Union’s key import partners. 15.3% United States 12.4%

China Russia

57.3%

7.8%

Japan Other

7.2%

Figure 2.5 The European Union’s key import partners Source: CIA (2006) (2004 figures)

Freight transport Western European roads are extremely congested, and environmental lobbyists are putting pressure on road transportation. According to a European Commission report (European Railway Agency, 2006), the European freight transport sector saw around 2.5 per cent growth per annum from the mid-1990s. Further the report showed that road and sea freight increased the most (both over 25 per cent over the period 1995 to 2003). In contrast, despite the issues over road congestion and increasing fuel costs, rail freight only grew by around 2.5 per cent over the same period. The report showed that in the 25 member states, rail freight transport amounts to a modal share of 10 per cent of the total freight transported. Rail has shown an improvement in growth in recent years, increasing by 5.8 per cent between 2003 and 2004 in the old member states (EU15) and by 4.4 per cent in the enlarged union (EU25). The reliability of the rail network is still insufficient for supply-chainfocused companies, and more investment and inter-country cooperation will be required to drive more tonnage from the roads onto the tracks. This is being driven by the European Commission, which is promoting technical harmonization and improvements across member states.

Middle East With its wealth from oil the Middle Eastern countries, and in particular the United Arab Emirates, Bahrain, Oman and Saudi Arabia, are developing

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their economies along Western lines. Together with Qatar, Kuwait, Jordan and Yemen, these countries are becoming attractive to third-party providers as consumer manufacturers and other industrial companies move into the region.

Africa In Africa, South Africa is the largest market but has had its fair share of challenges, in particular the declining value of the rand. About 85 per cent of South Africa’s exports are to other African countries. Its largest export industry lies in its automotive manufacture industry, servicing markets in Europe and Oceania. Eight of the world’s largest car manufacturers are in South Africa, supported by the government’s Motor Industry Development Programme. North Africa has often been seen as the gateway to Africa by European countries, many of which have traditional ties with countries such as Morocco, Tunisia and Algeria. Western consumer goods manufacturers are entering these markets, creating opportunities for third-party providers. The rest of Africa is relatively poor, and although some consumer manufacturers are entering countries like Kenya, the region is still some way behind its more wealthy neighbours.

Sector drivers, including prospects for outsourcing Retailers Grocery retailers like Carrefour and Tesco have developed additional nonfood product ranges to add to their food lines, in order to further stimulate growth. This is driving more complexity in their supply chains, which provides opportunity for third-party providers. This is especially the case for the management of the inbound supply chain for garments and other items from Asia. Retailers have also been adopting factory-gate pricing policies, whereby they negotiate product costs with suppliers that do not include delivery. The retailer then uses empty vehicles returning from deliveries to stores to collect the goods. Additionally, as retailers are moving to developing markets in Europe such as Poland and the Czech Republic to take advantage of the growth in economies, they are turning to third-party providers to support them.

Consumer packaged goods (CPG) Consumer companies are steadily moving their production eastwards to Central and Eastern Europe, because of cost pressures from retailers, the rise

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of private label products and the emergence of discounters like Lidl and Netto. With a lack of available expertise and infrastructure in these countries, manufacturers are turning to third-party providers for support. In developed markets, manufacturers are seeking to reduce their costs and see the benefits of becoming part of third-party providers’ shared-user warehouse and transportation networks. This provides for more regular deliveries to retailers at highly competitive costs.

Healthcare and pharmaceutical While the number of pharmaceutical and healthcare businesses has declined in Europe over the last few years as a result of acquisitions and mergers, this activity has created complex and inefficient supply chains. Leaders in the market have recognized the opportunity and are redesigning their European supply chains and creating pan-European distribution networks. This seeks to reduce costs, provide improved visibility across the supply chain and provide an integrated approach to serving customers across the continent. As well as implementing enterprise resource planning (ERP) systems such as the one produced by SAP to link all countries’ demand to a central or small number of European distribution centres (EDC), these companies are engaging third-party providers to run the network.

Automotive Automotive manufacturers are moving production to Eastern Europe in their continuing quest to reduce costs. They require third-party providers not only for logistics activities in these underdeveloped countries, but also to manage the inbound flow of materials, often involving the use of vendormanaged inventory.

The China and Asia impact Imports from China and other parts of Asia have increased steadily in the last few years and are set to grow rapidly for the rest of the 2000s. Although European manufacturers have lost ground, the logistics industry has benefited from longer and more complex supply chains. However, service providers have had to invent new services and solutions to support their customers. Managing inbound product from China and Asia is fundamental to many businesses, and can make the difference to a company’s success or failure. Third-party service providers have been focused on linking their European logistics activities to freight and shipping services to create end-

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to-end supply-chain processes that provide their customers full visibility across the supply chain.

The United Kingdom UK facts and figures Population: 60 million (2006 estimated) Area: 244,820 sq km Currency (code): British pound (GBP) £ GDP: US$2.218 trillion (2005 estimated) GDP real growth rate: 1.7 per cent (2005 estimated) GDP per capita: US$30,900 (2005 estimated) Unemployment rate: 4.7 per cent (2005 estimated) Exports: US$372.7 billion fob (2005 estimated) Imports: US$483.7 billion fob (2005 estimated) Export partners: United States 15.3 per cent, Germany 10.8 per cent, France 9.2 per cent, Ireland 6.8 per cent, Netherlands 6 per cent, Belgium 5.1 per cent, Spain 4.5 per cent, Italy 4.2 per cent (2004) Import partners: Germany 13 per cent, United States 9.3 per cent, France 7.4 per cent, Netherlands 6.6 per cent, Belgium 4.9 per cent, China 4.3 per cent, Italy 4.3 per cent (2004) Roadways total: 387,674 km all paved (including 3,523 km of expressways) Ports and terminals: Hound Point, Immingham, Milford Haven, Liverpool, London, Southampton, Sullom Voe, Teesport Source: CIA (2006).

UK economy While services such as banking, insurance and business services have grown in recent years, the manufacturing industry has declined in importance as manufacturing has migrated eastward. GDP growth slowed in 2001–03 in line with the global economy slowdown and the high value of the pound, impacting manufacturing and exports. Output recovered in 2004, to 3.2 per cent growth, but fell again in 2005, to 1.7 per cent. Despite slower growth, the economy is one of the strongest in Europe, with inflation, interest rates and unemployment remaining among the lowest in Europe (CIA, 2006).

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UK logistics industry UK logistics market As one of the most mature outsourced markets in the world, with around 40 per cent of logistics activities outsourced, the UK total logistics market is estimated to be worth around N31 billion (Transport Intelligence, 2006). The outsourced logistics market is the fifth-largest sector in the United Kingdom, employing over a million people and with a value of around N12 billion (Transport Intelligence, 2006). The industry has traditionally been led by the retail sector, which has sought to optimize and improve its logistics operations and supply chains. This has included the outsourcing of distribution centres and transportation to third-party providers across the 1980s and 1990s. The United Kingdom is unique in having a significant number of dedicated open-book outsourcing deals with major retailers and manufacturers. However, in recent years this outsourcing trend has stalled, with a number of retailers taking operations back in-house in order to take advantage of their scale and overall distribution network. Despite that, the UK logistics outsourced market is forecast to grow at a CAGR of 8.9 per cent from 2005 to 2009 (Transport Intelligence, 2006). Increasingly, the larger fast-moving consumer or consumer packaged goods (CPG) manufacturers have also outsourced, followed by the medium and smaller players who have taken advantage of shared user or network facilities set up by third-party providers. The retailers and larger CPG companies have required dedicated distribution: in other words, a single warehouse dedicated to one customer, which is still somewhat of a British phenomenon. These contracts are usually open book where the contractor provides services at cost, usually open to audit, plus an agreed management fee, often a fixed percentage. In some cases there are value share or bonus opportunities.

UK road haulage According to the UK Road Haulage Market Research Report (Market & Business Development, 2006), road haulage, which is key to the British logistics activity, has virtually stagnated, with around 2 per cent growth since 2001. The report concludes that the volume of goods lifted principally reflects the economic performance, including the decline of heavy engineering in the United Kingdom. The report forecasts that between 2006 and 2010 road freight lifted will increase by 3 per cent. Road haulage is highly competitive, with companies often outsourcing to the lowest-cost provider. The haulage industry continues to suffer from a range of problems. These include rising fuel costs, which are often difficult to pass on to customers, and high levels of government tax, against which

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the haulage industry has protested in recent years. There is also a growing shortage of qualified drivers, made worse by the introduction of the EU Working Time Directive, which according to the Road Haulage Association will require an estimated additional 60,000 drivers across the United Kingdom (Whitfield, 2006). Finally the United Kingdom’s roads are becoming increasingly congested, with the Confederation of British Industry estimating that Britain’s traffic congestion costs the country £20 billion a year (Times Online, 2006).

United Kingdom: changing face of logistics The movement of British manufacturers to low-cost economies and the increase of imports have forced the third-party logistics providers to reexamine their offerings. Consolidation centres and transhipment centres are increasingly being developed instead of large warehouses designed to take manufacturing output. Third-party providers are focused on how to link the inbound movement of products with the UK supply chain, seeking ways to optimize the holding of inventory and transport costs. This not only ensures third-party providers maintain their turnover but provides an opportunity for improved margins through providing added-value activities such as co-packing, customs clearance, quality control and inventory management.

France France facts and figures Population: 60 million (2006 estimated) Area: 547,030 sq km Currency (code): euro (EUR) R GDP: US$2.068 trillion (2005 estimated) GDP real growth rate: 1.6 per cent (2005 estimated) GDP per capita: US$30,000 (2005 estimated) Unemployment rate: 10 per cent (2005 estimated) Exports: US$443.4 billion fob (2005 estimated) Imports: US$473.3 billion fob (2005 estimated) Export partners: Germany 15 per cent, Spain 9.5 per cent, United Kingdom 9.3 per cent, Italy 9 per cent, Belgium 7.2 per cent, United States 6.7 per cent (2004)

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Import partners: Germany 19.2 per cent, Belgium 9.9 per cent, Italy 8.8 per cent, Spain 7.4 per cent, United Kingdom 7 per cent, Netherlands 6.7 per cent, United States 5.1 per cent (2004) Roadways total: 891,290 km all paved (including 10,390 km of expressways) Ports and terminals: Bordeaux, Calais, Dunkerque, La Pallice, Le Havre, Marseille, Nantes, Paris, Rouen, Strasbourg Source: CIA (2006).

French economy French business is going through a transformation from high levels of government ownership to a more open market. The government has partially or fully privatized many large companies, but retains controlling interests in several others, including Air France, France Telecom, Renault and Thales. In addition, the telecommunications sector is being opened to competition. Income taxes have been lowered and measures to boost employment and reform the pension system have been introduced by the government. Significant challenges for the French economy are the high cost of labour and stringent employment laws, making France a high-cost country for business. The tax rate is one of the highest in Europe (nearly 50 per cent of GDP in 2005), whilst unemployment stands at 10 per cent (CIA, 2006).

French logistics industry The total French logistics is estimated at around N29 billion, of which approximately 22 per cent is outsourced to third-party providers, representing N6.6 billion (Transport Intelligence, 2006). Although France is a leading logistics outsourcing market in Europe, worth around N6.6 billion, economic uncertainty and a declining manufacturing industry have provided challenges to logistics service providers based in France. This, together with regular industrial action and rising fuel costs, has impacted on the profitability of third-party provider companies. Many non-French 3PLs have entered the French market, but most have found it very difficult to achieve the desired margins or business growth. The French logistics outsourcing market is estimated to grow at a CAGR of 9.5 per cent over the period 2005 to 2009 (Transport Intelligence, 2006).

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French manufacturing Like many Western countries, France has been adapting to globalization and the movement of manufacturing to low-cost Eastern European countries. With relatively high wages and payroll taxes, together with stringent employment laws, France has become a difficult place for manufacturers seeking even lower costs. However, a growing number of French firms involved in manufacturing and retailing view logistics as a high-cost activity that should be outsourced. This has presented some opportunities for third-party providers which have been focused on helping French businesses by providing shared-user, lower-cost logistics and innovative, value-added solutions. This includes providing customers with track-and-trace capabilities, import services and reverse logistics. Indeed, third-party providers have set up on-site freight management operations for companies, such as Philips, Goodyear, Snecma and Pratt & Whitney.

French retailers The growing retail market in France is also providing revenue growth in warehousing and transportation. Further, French retailers – including the second-largest grocery retailer in the world, Carrefour, together with Auchan, Intermarché and Leclerc – are demanding lower logistics costs, and third-party providers are seeking ways to develop added-value services to maintain margins.

French global fashion and luxury brands In support of global French businesses, including famous fashion names such as Christian Dior, Lacoste and Louis Vuitton, third-party providers are providing fully integrated road, air and sea services in order to manage the inbound flow of goods.

French global companies A number of significant global companies, including numerous US firms such as Columbia Sportswear, Hewlett-Packard and Pfizer, have set up or relocated to European distribution centres in France, in order to take advantage of the country’s strategic positioning. Situated at the crossroads of the UK, German, Italian and Spanish markets, France borders seven countries and is well positioned to provide close access to many key European markets.

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Benelux (Netherlands and Belgium) The Netherlands facts and figures Population: 16.5 million (2006 estimated) Area: 41,526 sq km Currency (code): euro (EUR) R GDP: US$586.7 billion (2005 estimated) GDP real growth rate: 0.7 per cent (2005 estimated) GDP per capita: US$30,600 (2005 estimated) Unemployment rate: 6.5 per cent (2005 estimated) Exports: US$365.1 billion fob (2005 estimated) Imports: US$326.6 billion fob (2005 estimated) Export partners: Germany 17.9 per cent, Belgium 9.9 per cent, United States 7.9 per cent, China 7.4 per cent, United Kingdom 6.4 per cent, France 4.8 per cent (2004) Import partners: Germany 19.2 per cent, Belgium 9.9 per cent, Italy 8.8 per cent, Spain 7.4 per cent, United Kingdom 7 per cent, Netherlands 6.7 per cent, United States 5.1 per cent (2004) Roadways total: 116,500 km, of which 104,850 km are paved Ports and terminals: Amsterdam, Groningen, Ijmuiden, Rotterdam, Terneuzen, Vlissingen, Zaanstad Source: CIA (2006).

The Netherlands economy The Netherlands has a stable and prosperous economy, which depends heavily on foreign trade. The economy has moderate unemployment and inflation and is one of the leading European nations for attracting foreign investment. It has developed an important role as a European transportation hub. Economic growth slowed significantly in 2001–05, as part of the general global economic downturn, but for the four years before that, annual growth averaged nearly 4 per cent, well above the EU average (CIA, 2006).

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Belgium facts and figures Population: 10 million (2006 estimated) Area: 30,528 sq km Currency (code): euro (EUR) N GDP: US$352.6 billion (2005 estimated) GDP real growth rate: 1.5 per cent (2005 estimated) GDP per capita: US$31,900 (2005 estimated) Unemployment rate: 8.4 per cent (2005 estimated) Exports: US$269.6 billion fob (2005 estimated) Imports: US$264.5 billion fob (2005 estimated) Export partners: Germany 19.9 per cent, France 17.2 per cent, Netherlands 11.8 per cent, United Kingdom 8.6 per cent, United States 6.5 per cent, Italy 5.2 per cent (2004) Import partners: Germany 18.4 per cent, Netherlands 17 per cent, France 12.5 per cent, United Kingdom 6.8 per cent, Ireland 6.3 per cent, United States 5.5 per cent (2004) Roadways total: 149,757 km, of which 117,110 km are paved (including 1,747 km of expressways) Ports and terminals: Antwerp, Brussels, Gent, Liege, Oostende, Zeebrugge Source: CIA (2006).

The Belgian economy The Belgian economy is based on a modern, private-enterprise model which has capitalized on its central geographic location, highly developed transport network and diversified industrial and commercial base. With few natural resources, Belgium imports large quantities of raw materials and exports substantial volumes of products, making its economy very dependent on world markets. Around three-quarters of Belgium’s trade is with other EU countries. Economic growth in 2001–03 dropped sharply as a result of the global economic slowdown, showing a moderate recovery in 2004–05 (CIA, 2006).

Benelux logistics market Consisting of the Low Countries, Holland, Belgium and Luxembourg, the Benelux has enjoyed the growth in logistics activity driven by the move

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towards EDCs. The total logistics market of the region is around N12 billion, of which just less than 50 per cent is outsourced (Transport Intelligence, 2006). Benelux is geographically ideally positioned to provide a single optimized distribution point to the major conurbations in Western Europe. Benelux plays host to many significant European and US companies from industry sectors as diverse as high technology and electronics, fashion, tyres and pharmaceuticals. Additionally the growing retail market in Benelux is providing revenue growth in warehousing. The Netherlands has approximately 9,000, mostly family-owned, logistics companies, clearly demonstrating the highly segmented nature of the market (Holland International Distribution Council, 2006). All of the major third-party providers have significant operations in Benelux, with 50 per cent of logistics activity in the Netherlands outsourced, the highest in Europe (Transport Intelligence, 2006). Around 400,000 people are employed in the transport and distribution sector, which handles about 40 per cent of all European sea cargo through its port in Rotterdam as well as 27 per cent of all international road transportation (Holland International Distribution Council, 2006). The Benelux region is benefiting from the increased outsourcing of manufacturing to China. With the largest port in the world in Rotterdam, which is within easy reach of the majority of Europe’s prosperous consumer population, the Netherlands and Belgium have become key centres for the establishment of European distribution centres. Indeed half of Europe’s major markets lie within a 400-mile radius of the Netherlands. With over 90 per cent of the Netherlands and Belgium’s population bilingual with English, and a good transport infrastructure, Benelux is extremely attractive to foreign companies seeking to develop their European markets. Companies including Coca-Cola, Cisco Systems, IBM, Sun Microsystems, Timberland and Reebok have been attracted to set up their European operations in Benelux. To underline this, an industry sector analysis (Holland International Distribution Council, 2006) reports that 57 per cent of all US and 59 per cent of all Asian central distribution centres are positioned in the Netherlands. Further, the report goes on to say that the Netherlands has 57 per cent of all EDCs, of which 71 per cent are outsourced. The Benelux third-party logistics market is anticipated to grow at a CAGR of around 7.5 per cent across 2005 to 2009 (Transport Intelligence, 2006).

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Germany Germany facts and figures Population: 82 million (2006 estimated) Area: 357,021 sq km Currency (code): euro (EUR) R GDP: US$2.764 trillion (2005 estimated) GDP real growth rate: 0.9 per cent (2005 estimated) GDP per capita: US$29,800 (2005 estimated) Unemployment rate: 11.6 per cent (2005 estimated) Exports: US$1,016 billion fob (2005 estimated) Imports: US$801 billion fob (2005 estimated) Export partners: France 10.3 per cent, United States 8.8 per cent, United Kingdom 8.3 per cent, Italy 7.2 per cent, Netherlands 6.2 per cent, Belgium 5.6 per cent, Austria 5.4 per cent, Spain 5 per cent (2004) Import partners: France 9 per cent, Netherlands 8.3 per cent, United States 7 per cent, Italy 6.1 per cent, United Kingdom 5.9 per cent, China 5.6 per cent, Belgium 4.9 per cent, Austria 4.2 per cent (2004) Roadways total: 231,581 km, all paved (including 12,037 km of expressways) Ports and terminals: Bremen, Bremerhaven, Brunsbuttel, Duisburg, Frankfurt, Hamburg, Karlsruhe, Mainz, Rostock, Wilhemshaven Source: CIA (2006).

German economy As Europe’s largest economy, with its second-largest population, Germany’s affluent and technologically powerful economy has become one of the slowest-growing in the European Union. Growth in 2001–03 was under 1 per cent, increasing to 1.7 per cent in 2004 before reducing to 0.9 per cent in 2005. The integration of eastern Germany continues to be an expensive long-term process, while structural rigidities in the labour market have made unemployment a major problem (CIA, 2006).

German logistics market The German total logistics market is estimated at around N39 billion of which approximately 28 per cent is outsourced to third-party providers

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(Transport Intelligence, 2006). Germany has a good strategic location at the heart of Europe and an excellent transport infrastructure that allows it to gain maximum benefit from this advantage. The efficiency of Germany’s transport system, together with its seaports, have played a key role in enabling it to become a key European exporting nation. Germany has long enjoyed a buoyant car manufacturing market with names such as Volkswagen, BMW and DaimlerChrysler, all of which seek lower-cost logistics operations for their increasingly complex supply chains. Electronics companies such as Siemens, now a truly global company, are seeking to compete across the world with low-cost manufacturers out of Asia. Businesses like this are seeking ways in which they can reduce their logistics costs and increase the agility of their supply chain. The CPG market includes household names such as Nestlé, Danone and Coca-Cola, all of which are seeking lower logistics costs as they compete on price to satisfy the major retailers such as Metro, who in turn are competing with discounters like Lidl. With the enlarged European Union, Germany has become the geographic centre of European logistics and a natural staging post for the new markets of Eastern Europe. The third-party logistics market is dominated by large providers such as DHL, Schenker and Dachser (as described in more detail in Chapter 4). Bordering nine countries, analysts expect the German outsourced logistics market to grow by around 9 per cent (CAGR) between 2005 and 2009 (Transport Intelligence, 2006).

Spain Spain facts and figures Population: 40 million (July 2006 estimated) Area: 504,782 sq km Currency (code): euro (EUR) R GDP: US$1.021 trillion (2005 estimated) GDP real growth rate: 3.4 per cent (2005 estimated) GDP per capita: US$25,200 (2005 estimated) Unemployment rate: 10.1 per cent (2005 estimated) Exports: US$194.3 billion fob (2005 estimated) Imports: US$271.8 billion fob (2005 estimated)

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Export partners: France 9.3 per cent, Germany 11.7 per cent, Portugal 9.6 per cent, United Kingdom 9 per cent, Italy 9 per cent, United States 4 per cent (2004) Import partners: Germany 16.6 per cent, France 15.8 per cent, Italy 8.9 per cent, United Kingdom 6.8 per cent, Netherlands 4.8 per cent (2004) Roadways total: 666,292 km, of which 659,629 km are paved (including 12,009 km of expressways) Ports and terminals: Algeciras, Barcelona, Cartagena, Gijon, Huelva, La Coruna, Tarragona, Valencia Source: CIA (2006).

Spanish economy Through its mixed capitalist economy, Spain has a GDP per capita that is 80 per cent of the four leading West European economies. Since the 1990s, Spain has focused on liberalization, privatization and deregulation of the economy. Unemployment has fallen steadily but remains high at 10.1 per cent. Growth of 2.5 per cent in 2003, 2.6 per cent in 2004, and 3.4 per cent in 2005 was seen as acceptable given the downturn in the European economy (CIA, 2006).

Spanish logistics market An estimate of the size of Spain’s logistics market is N15 billion, of which around 15 per cent is outsourced (Transport Intelligence, 2006). However, this is one of the fastest-growing outsourcing markets in Europe, with an estimated CAGR of 12.8 per cent from 2005 to 2009 (Transport Intelligence, 2006). Despite considerable competition from its European rivals, Spain is seen as a good strategic geographical location, as the gateway for business with Europe, to and from Africa, the Middle East and Asia. Spain’s ties with Latin America further strengthen its importance as a location for international business and logistics. Spain has been investing in its infrastructure, including the development of so-called Logistic Activities Zones at the ports of Barcelona and Valencia, expansion of Madrid’s Barajas and Barcelona’s El Prat airports and the improvement of the port of Bilbao and the dry port of Madrid. The Spanish market is essentially a number of regional markets joined by two major hubs in Madrid and Barcelona, and the logistics market in Spain follows this model. The Spanish third-party provider market is home to both domestic and European providers, and has an estimated value of N2.3 billion.

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The automotive industry in Spain is the fifth largest in the world and invests more in logistic operations than any other sector in Spain. The healthcare sector also has large spends on logistics, including automated warehousing, and increasingly Spanish hospitals are seeking to subcontract the management of their logistics operations to third-party providers.

Eastern Europe and emerging markets This section considers the position of the main Eastern European countries.

Poland

Poland facts and figures Population: 38.5 million (July 2006 estimated) Area: 312,685 sq km Currency (code): zloty (PLN) GDP: US$242.7 billion (2005 estimated) GDP real growth rate: 3.5 per cent (2005 estimated) GDP per capita: US$12,700 (2005 estimated) Unemployment rate: 18.3 per cent (2005 estimated) Exports: US$92.72 billion fob (2005 estimated) Imports: US$95.67 billion fob (2005 estimated) Export partners: Germany 30 per cent, Italy 6.1 per cent, France 6 per cent, United Kingdom 5.4 per cent, the Czech Republic 4.3 per cent, Netherlands 4.3 per cent (2004) Import partners: Germany 24.4 per cent, Italy 7.9 per cent, Russia 7.2 per cent, France 6.7 per cent, China 4.6 per cent (2004) Roadways total: 423,997 km, of which 295,356 km are paved (including 484 km of expressways) Ports and terminals: Gdansk, Gdynia, Swinoujscie, Szczecin Source: CIA (2006).

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The Polish economy Poland has been focused on a policy of economic liberalization throughout the 1990s and has become a success story among developing economies. However there is still much to be done, including reducing the unemployment rate which in 2006 was the highest in the European Union. The privatization of many small and medium-sized state-owned businesses and liberal laws on developing new companies have supported the establishment of the private business sector. Poland became a member of the European Union in May 2004, and large exports to the European Union contributed to the country’s strong growth in 2004. The European Union has made nearly US$23.2 billion available to Poland in the course of 2006 (CIA, 2006).

The Czech Republic Czech Republic facts and figures Population: 10 million (July 2006 estimated) Area: 78,866 sq km Currency (code): Czech koruna (CZK) GDP: US$110.2 billion (2005 estimated) GDP real growth rate: 4.8 per cent (2005 estimated) GDP per capita: US$18,100 (2005 estimated) Unemployment rate: 9.1 per cent (2005 estimated) Exports: US$78.37 billion fob (2005 estimated) Imports: US$76.59 billion fob (2005 estimated) Export partners: Germany 36.2 per cent, Slovakia 8.5 per cent, Austria 6 per cent, Poland 5.3 per cent, United Kingdom 4.7 per cent, France 4.6 per cent, Italy 4.3 per cent, Netherlands 4.3 per cent (2004) Import partners: Germany 31.7 per cent, Slovakia 5.4 per cent, Italy 5.3 per cent, China 5.2 per cent, Poland 4.8 per cent, France 4.7 per cent, Russia 4.1 per cent, Austria 4 per cent (2004) Roadways total: 127,672 km all paved (including 518 km of expressways) (2002) Ports and terminals: Decin, Prague, Usti and Labem Source: CIA (2006).

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The Czech economy The Czech Republic has become one of the most successful and prosperous of the former Soviet states of Eastern Europe. The country’s growth in 2000–05 was supported by exports to the European Union, particularly to Germany, as well as strong foreign and domestic investment. Domestic demand is playing an important role in the economy’s growth as interest rates reduce and the availability of credit increases. In addition there is increasing demand for Czech products by the European Union. Accession to the European Union in May 2004 has given further focus to economic reform and improvements in the financial sector, and the availability of EU funds should support increased output growth (CIA, 2006).

Slovakia Slovakia facts and figures Population: 5 million (July 2006 estimated) Area: 48,845 sq km Currency (code): Slovak koruna (SKK) GDP: US$42.74 billion (2005 estimated) GDP real growth rate: 5.5 per cent (2005 estimated) GDP per capita: US$15,800 (2005 estimated) Unemployment rate: 11.4 per cent (2005 estimated) Exports: US$32.39 billion fob (2005 estimated) Imports: US$34.48 billion fob (2005 estimated) Export partners: Germany 34.4 per cent, the Czech Republic 14.6 per cent, Austria 8.2 per cent, Italy 5.8 per cent, Poland 5.3 per cent, United States 4.5 per cent, Hungary 4.3 per cent (2004) Import partners: Germany 26 per cent, the Czech Republic 21.3 per cent, Russia 9.1 per cent, Austria 6.6 per cent, Poland 4.9 per cent, Italy 4.9 per cent (2004) Roadways total: 42,993 km, of which 37,533 km are paved (including 313 km of expressways); unpaved: 5,460 km (2003) Ports and terminals: Bratislava, Komarno Source: CIA (2006).

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The Slovakian economy Slovakia, which joined the European Union in May 2004, has had an excellent transition from a centrally planned economy to a modern market economy. It made excellent progress during 2001 to 2004 in stabilizing the economy and introducing structural reform. Major privatizations of companies are virtually complete and the government has supported foreign investment with appropriate policies, such as a 19 per cent flat tax. Foreign investment in the automotive sector in particular, has been strong and Slovakia’s economic growth exceeded expectations in 2001–05, despite the general European slowdown. However, unemployment is at an unacceptable level of 11.4 per cent in 2005 and remains the country’s biggest challenge (CIA, 2006).

Hungary Hungary facts and figures Population: 10 million (July 2006 estimated) Area: 93,030 sq km Currency (code): forint (HUF) GDP: US$104.5 billion (2005 estimated) GDP real growth rate: 3.9 per cent (2005 estimated) GDP per capita: US$16,100 (2005 estimated) Unemployment rate: 7.1 per cent (2005 estimated) Exports: US$61.75 billion fob (2005 estimated) Imports: US$64.83 billion fob (2005 estimated) Export partners: Germany 31.4 per cent, Austria 6.8 per cent, France 5.7 per cent, Italy 5.6 per cent, United Kingdom 5.1 per cent (2004) Import partners: Germany 29.2 per cent, Austria 8.3 per cent, Russia 5.7 per cent, Italy 5.5 per cent, Netherlands 4.9 per cent, China 4.8 per cent, France 4.7 per cent (2004) Roadways total: 159,568 km, of which 70,050 km are paved (including 527 km of expressways) Ports and terminals: Budapest, Dunaujvaros, Gyor-Gonyu, Csepel, Baja, Mohacs (2003) Source: CIA (2006).

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The Hungarian economy Hungary has made the transition from a centrally planned to a market economy and has continued to demonstrate strong growth since its accession to the European Union in May 2004. The private sector accounts for over 80 per cent of GDP, and foreign ownership and investment in Hungarian business is widespread, totalling more than US$60 billion since 1989. Inflation has declined to 3.7 per cent in 2005 from 14 per cent in 1998, but unemployment has persisted around the 6–7 per cent level. Germany is Hungary’s largest economic partner (CIA, 2006).

Turkey Turkey facts and figures Population: 70 million (July 2006 estimated) Area: 780,580 sq km Currency (code): Turkish lira (YTL) GDP: US$332.5 billion (2005 estimated) GDP real growth rate: 5.6 per cent (2005 estimated) GDP per capita: US$8,200 (2005 estimated) Unemployment rate: 10.2 per cent plus underemployment of 4 per cent (2005 estimated) Exports: US$72.49 billion fob (2005 estimated) Imports: US$101.2 billion fob (2005 estimated) Export partners: Germany 13 per cent, United Kingdom 8.2 per cent, Italy 7 per cent, United States 6.9 per cent, France 5.1 per cent, Spain 4.2 per cent (2005) Import partners: Germany 13.9 per cent, Russia 10.5 per cent, Italy 7 per cent, France 5.6 per cent, China 4.4 per cent, United States 4.1 per cent (2005) Roadways total: 347,553 km, of which 154,807 km are paved (including 1,886 km of expressways); unpaved: 192,747 km (2004) Ports and terminals: Aliaga, Ambarli, Eregli, Haydarpasa, Istanbul, Izmir, Kocaeli (Izmit), Toros. Source: CIA (2006).

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The Turkish economy Modern Turkey was founded in 1923 by national hero Mustafa Kemal, now known as Ataturk, or ‘Father of the Turks’. Under his guidance, the country underwent comprehensive social, legal and political reforms, leading to the 1950 election and the orderly transition of power to the opposition Democratic Party. Since then, Turkey has had periods of volatility and intermittent military coups (1960, 1971, 1980), although each occasion has resulted in the return of political control to civilians. Turkey joined the UN in 1945 and became a member of NATO in 1952. It became an associate member of the European Community in 1964 and has focused hard on making reforms to reinforce its democratic system and economy. It is currently in talks with the European Union with regards to full membership. Turkey has developed an energetic economy, which is an intricate blend of modern industries together with traditional farming, which still accounts for over 35 per cent of employment. The government still plays an important role in industry, banking, transport and communication, but there is a strong and fast-developing private sector. Textiles and clothing is the largest industry sector, accounting for a third of industrial employment. Other sectors, in particular the automotive and electronics industries, are increasing in importance within Turkey’s economy. The economy has been improving steadily and the GDP growth reached 9 per cent in 2004, with inflation falling to a 30-year low of 7.7 per cent in 2005. However the economy is still weighed down by a high current account deficit and high levels of debt. Prior to 2005, foreign direct investment (FDI) in Turkey averaged less than US$1 billion annually; however additional economic and judicial reforms together with the prospect of EU membership are expected to increase FDI in the future (CIA, 2006).

Eastern Europe and emerging countries logistics market EU membership On 1 May 2004, an unprecedented 10 countries were admitted to the European Union. The accession of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia has provided a significant opportunity for economic growth and investment for these previously underdeveloped countries. In addition Bulgaria and Romania hope to join by 2007, while Turkey and Croatia are hopeful of joining before the end of the decade. Together with political and economic developments and with the move of Western manufacturers to lower-cost Eastern European locations, these

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developing markets have become very attractive to manufacturers, retailers and third-party providers alike. The growth of the Eastern European countries is outpacing the rest of Europe. As manufacturers move their production to countries like Poland, the Czech Republic, Slovakia and Hungary, their economies are being fuelled and retailers are following. Because of relatively poor infrastructure and logistics knowledge, both manufacturers and retailers are seeking third-party providers to support their Eastern European logistics activities. The services required in these countries are virtually the same as those offered in Western Europe as manufacturers and retailers seek to establish blue chip operations, albeit at low cost. While the number of third-party provider operators in Poland, Hungary, the Czech Republic, Slovakia and the Baltic States is still small compared with developed Western European markets, they are steadily increasing and attracting the larger pan-European players. These larger players are looking to establish generic growth with existing customers moving into the region as well as making acquisitions to break into the market. Countries including Croatia, Rumania, Ukraine, Bulgaria and Russia are growing at a slower pace and as such the requirement for outsourcing is lagging behind.

Key industry sectors Key industry sectors such as automotives, high-tech/electronics, CPG and retail have been increasing the demand for logistics activities such as transportation, contract logistics and other added-value activities. In particular, the Czech Republic, Poland, Slovakia, Hungary, Slovenia and the Baltic States have attracted substantial investment by consumer manufacturers. Furthermore, a wealthier middle class with disposable income has emerged in Poland, the Czech Republic and Hungary, and they are being targeted by retailers such as Carrefour, Tesco, Hornbach, Billa, Marks & Spencer and Mango.

Outsourced logistics market The outsourced logistics market is estimated to be around N680 million but with a significant CAGR of 20 per cent (Transport Intelligence, 2006). The Polish third-party logistics market is expected to see significant growth from the growing numbers of automotive and CPG manufacturers setting up in the country as well as retailers, who are seeing the opportunity of the growing economy. Spend on outsourced contract logistics in Poland was estimated at N145 million in 2003 with a CAGR growth rate of 24.2 per cent up to 2007 (Transport Intelligence, 2006). The Czech Republic can expect increased growth due to its strategic location and highly disciplined workforce, while

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the Slovakian logistics market is growing because of its strong economy and availability of labour, and in particular through a strong automotive industry. The Hungarian logistics market is in a powerful position largely due to more than 40 airports, which require logistical support for air freight operations. The Hungarian outsourced contract logistics market was valued at N90 million in 2003, with a CAGR growth expectation of 18.7 per cent over the following five years (Transport Intelligence, 2006). Turkey has been developing its logistics market since the 1990s and many leading 3PLs have moved into the country to take advantage of developing textile, fashion and automotive markets. The logistics market is relatively unsophisticated, although local providers are well organized and disciplined. As European providers enter Turkey, a number of local providers are being acquired or becoming members of joint ventures, and as a result, third-party capabilities and services are improving.

The Americas The Americas, made up of the United States, Canada and Latin America, has a total logistics market with an estimated spend of US$270 billion (N214 billion) (Transport Intelligence, 2006). The United States of America dominates the Americas market and together with Canada and Mexico is party to NAFTA (the North American Free Trade Agreement), a treaty which is focused on removing trading barriers between the three countries. Latin American countries have been developing their economies, fuelled by foreign investment largely by global manufacturers. Third-party providers have followed their customers into the region and established capabilities.

United States US facts and figures Population: 298 million (July 2006 estimated) Area: 9,631,418 sq km Currency (code): US dollar (US$) $ GDP: US$12.47 trillion (2005 estimated) GDP real growth rate: 3.5 per cent (2005 estimated)

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GDP per capita: US$42,000 (2005 estimated) Unemployment rate: 5.1 per cent (2005 estimated) Exports: US$927.5 billion fob (2005 estimated) Imports: US$1.727 trillion fob (2005 estimated) Export partners: Canada 23 per cent, Mexico 13.6 per cent, Japan 6.7 per cent, United Kingdom 4.4 per cent, China 4.3 per cent (2004) Import partners: Canada 17 per cent, China 13.8 per cent, Mexico 10.3 per cent, Japan 8.7 per cent, Germany 5.2 per cent (2004) Roadways total: 6,407,637 km, of which 4,164,964 km are paved (including 74,950 km of expressways) Ports and terminals: Corpus Christi, Duluth, Hampton Roads, Houston, Long Beach, Los Angeles, New Orleans, New York, Philadelphia, Tampa, Texas City Source: CIA (2006).

The US economy The US economy is the largest and most technologically powerful in the world, and businesses enjoy a more flexible and open market than their counterparts in Western Europe and Japan. Rises in GDP in 2004 and 2005 were underpinned by substantial gains in labour productivity, providing Americans with the highest average GDP per capita in the world. Due to the rapid growth of the US economy in recent years, American consumers have been buying foreign goods of all kinds, including cars, consumer electronics and clothing. At the same time, relatively slow growth in some economies, including the European Union and Japan, has slowed down the demand for products made in the United States. So even though US exports are increasing, the value of imports is rising faster. The trade deficit soared to a record high in 2005 for the fourth year in a row, giving real cause for concern for the US economy. There are other longer-term challenges for the United States, including too little investment in economic infrastructure, the rapidly increasing medical and pension costs of an ageing population, significant budget deficits, and lack of growth of family income in the lower economic groups (CIA, 2006).

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The US logistics market Growth The United States has a relatively mature logistics outsourcing market, although it has historically been focused on road freight, or ‘trucking’ as it is known in the United States. The value of the total logistics market is around US$210 billion with an estimated 18.5 per cent outsourced, representing a third-party provider market of about US$39 billion (Transport Intelligence, 2006). However in recent years US companies have been seeking to outsource more of their logistics and supply-chain activity. The US third-party provider market has been growing steadily over the last few years, and the compound annual growth rate for third-party businesses in the United States is over 14 per cent since 1996 (Armstrong & Associates, 2006c). In particular this growth has been driven by international transportation management, the core component for global supply-chain management. This growth has reflected the large increases in global merchandise imports into the United States, particularly from China. As US companies expand trade with NAFTA neighbours Canada and Mexico, and as security compliancy increases, cross-border services are providing increasing opportunities for innovative third-party providers. Over the last 10 years, US exports to Canada have grown at around 10 per cent annually, while exports and imports with Mexico have more than doubled over the same time period (Victoria University, 2006).

Outsourcing The larger the company in the United States, the more likely it is to outsource its logistics and supply chains. Among Fortune 500® companies surveyed in 2004, 80 per cent reported the use of third-party service providers (Lieb and Bentz, 2004). Armstrong & Associates (2006b) report that 64 per cent of Fortune 500 US domestic companies use 3PLs for logistics and supply-chain functions. Further, the report details that customers such as General Motors, DaimlerChrysler and Wal-Mart each use 30 or more 3PLs, whilst overall customers are utilizing 3PLs for an average of three services. The very large automotive and high-technology industries in the United States have outsourced many of their services. Large CPG manufacturers such as Procter & Gamble, Pepsi-Co, Sara Lee and Colgate Palmolive all outsource significant elements of their logistics services. Finally retailers such as Wal-Mart, Home Depot, Sears Roebuck and Kroger all outsource logistics activities.

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Inbound congestion There is major congestion in US ports, particularly in Southern California, causing shippers to bring their products via the Panama Canal into East Coast ports. This lengthens the supply chain and is having the effect of increasing inventory to compensate. Shippers have realized that they need to address this issue, and a number of companies are redesigning their supply-chain networks. In order to address this challenge, Dell is building a new factory in North Carolina to better serve its East Coast customers, while Wal-Mart is building a 2 million square feet distribution facility alongside the Port of Houston to avoid West Coast delays. Companies are also turning to third-party providers to support this approach. Third-party providers that are focused on lean logistics and demand-led principles are particularly well positioned in the future US logistics market.

Road freight The US road freight industry is under pressure because trucking demand is 10 times greater than supply, due mainly to driver shortages and rising fuel prices. In response shippers are increasingly turning to rail freight, which is growing at around 5 per cent per year. There are also increases in intermodal volumes, showing up to 10 per cent annual growth (Hickey, 2006).

Apparel and textiles The impact of China’s growth in the apparel and textiles industry has had a devastating impact on the US manufacturing industry and a number of large manufacturers have gone bankrupt.

Retail Retail is a very significant industry in the United States, led by the world’s largest retailer, Wal-Mart. Retail sales in the United States were recorded as US$3,435 billion in 2001 (Bizstats, 2006). DIY centres (or home centers, as they are known in the United States), such as Home Depot, have been enjoying strong growth, although some of the increase is as a result of hurricanes Katrina and Rita. Competition among retailers has never been tougher as they compete with new channels to market and competitive pricing. As a result retailers are continually seeking to reduce their supplychain costs to enable them to be more competitive and profitable. This is an opportunity for third-party providers in the United States, especially tiertwo retailers.

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Toys’R’Us case history Toys’R’Us was founded in the United States in 1948, selling baby furniture, but by 1957 the retailer had evolved to become a toy supermarket. The company is now an US$11 billion company with approximately 1,400 stores worldwide. The company imports 90 per cent of its merchandise, and when delays and uncertainties of using West Coast ports started to lead to higher inventory levels Toys’R’Us took the decision to divert containers to East Coast destinations via the Panama Canal, thereby reducing the delay time to at most one day.

Canada Canadian facts and figures Population: 33 million (July 2006 estimated) Area: 9,984,670 sq km Currency (code): Canadian dollar (CAD) GDP: US$1.023 trillion (2005 estimated) GDP real growth rate: 2.9 per cent (2005 estimated) GDP per capita: US$32,900 (2005 estimated) Unemployment rate: 6.8 per cent (2005 estimated) Exports: US$364.8 billion fob (2005 estimated) Imports: US$317.7 billion fob (2005 estimated) Export partners: United States 85.1 per cent, Japan 2.1 per cent, United Kingdom 1.6 per cent (2004) Import partners: United States 58.9 per cent, China 6.8 per cent, Mexico 3.8 per cent (2004) Roadways total: 1,408,900 km, of which 497,342 km are paved (including 16,906 km of expressways) Ports and terminals: Fraser River Port, Goderich, Halifax, Montreal, Port Cartier, Quebec, Saint John’s (Newfoundland), Sept Isles, Vancouver Source: CIA (2006).

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The Canadian economy Like the United States, Canada is an affluent, high-tech industrial society with a market-oriented economic system, enjoying affluent living standards. The 1989 US–Canada Free Trade Agreement (FTA) and the 1994 NAFTA (which also includes Mexico) launched a dramatic increase in trade and economic integration with the United States. Given its great natural resources, skilled labour force and modern capital plant, Canada enjoys good economic prospects. Canada enjoys a substantial trade surplus with the United States, which takes more than 85 per cent of Canadian exports (CIA, 2006).

The Canadian logistics market Trade with the United States Canada has a world-class infrastructure, and since NAFTA went into effect in the mid-1990s has seen some benefits, with Canadian manufacturing companies now making considerably more products for US markets (Terreri, 2006). Terreri’s article goes on to say that according to the Ontario Ministry of Transportation, trade between the United States and Canada represents US$590 billion annually and 87 per cent of Canadian exports are bound for US markets. Indeed, according to Terreri’s report, Canada’s transportation infrastructure currently supports about US$1 billion in trade across the US–Canada border every day by rail, road, sea and air. Canada’s logistics industry strives to ensure border crossings are as seamless as possible, by developing and putting into place innovative technologies, procedures and equipment. This has become particularly important with new security requirements, and the establishment of C-TPAT (Customs Trade Partnership against Terrorism) is one of a number of initiatives that assist in the security of goods across the border (Terreri, 2006). The automotive industry takes advantage of this opportunity with a large amount of movement in the Detroit area, with automotive components passing backwards and forwards between the two countries (Terreri, 2006).

Excellent infrastructure Canada’s logistics industry enjoys an excellent infrastructure for road transportation, together with rail and inter-modal operations. Toronto is a key logistics centre, attracting many large US business players because they can serve around 60 per cent of the North American market population within a 12-hour drive (Terreri, 2006). Toronto Pearson International is Canada’s busiest airport, handling 325,000 metric tons of cargo in 2001, according to Toronto’s Economic Development Office (Terreri, 2006). Air cargo traffic

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through the airport is expected to grow at an average rate of 5 per cent per annum through to 2020. Calgary provides distribution access to markets in the Pacific Northwest and offers more than 100 million square feet of warehousing and distribution centre space (Terreri, 2006). With the number of people employed in Calgary’s transportation industry having grown 120 per cent in the last 10 years, it is now the largest industry in Calgary. The city can supply goods to 40 million people within a 24-hour drive.

Wal-Mart outsourcing case history Third-party provider Tibbet and Britten, since acquired by Exel, which itself was bought by Deutsche Post World Net (see Chapter 4), set up Supply Chain Management Logistics (SCM) exclusively to handle WalMart’s Canadian warehousing and distribution operations. Wal-Mart operates 240 retail stores throughout Canada. SCM employs 1,000 people at its 1 million sq ft warehousing facility in Calgary, and also runs two smaller operations to handle all of Wal-Mart’s Canadian logistics needs. Offshore shipments usually come into the port of Vancouver from where they are shipped inter-modally to the three Canadian distribution centres.

Latin America Mexico Mexico facts and figures Population: 107 million (July 2006 estimated) Area: 1,972,550 sq km Currency (code): Mexican peso (MXN) GDP: US$699.5 billion (2005 estimated) GDP real growth rate: 3 per cent (2005 estimated) GDP per capita: US$10,100 (2005 estimated) Unemployment rate: 3.6 per cent plus underemployment of perhaps 25 per cent (2005 estimated) Exports: US$213.7 billion fob (2005 estimated) Imports: US$223.7 billion fob (2005 estimated)

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Export partners: United States 87.6 per cent, Canada 1.8 per cent, Spain 1.1 per cent (2004) Import partners: United States 55.1 per cent, China 7.1 per cent, Japan 5.3 per cent (2004) Roadways total: 349,038 km, of which 116,928 km are paved (including 6,979 km of expressways) Ports and terminals: Altamira, Manzanillo, Morro Redondo, Salina Cruz, Tampico, Topolobampo, Veracruz Source: CIA (2006).

The Mexican economy Mexico operates a free market economy that has recently entered the trillion-dollar club. It has a mixture of modern and outdated industry, increasingly dominated by the private sector. Per capita income is onefourth that of the United States and income distribution remains highly unequal. Trade with the United States and Canada has tripled since the implementation of NAFTA in 1994. Mexico has 12 free trade agreements with over 40 countries, including Guatemala, Honduras, El Salvador, the European Free Trade Area and Japan, putting more than 90 per cent of its trade under free trade agreements (CIA, 2006).

Brazil Brazil facts and figures Population: 188 million (July 2006 estimated) Area: 8,511,965 sq km Currency (code): real (BRL) GDP: US$619.7 billion (2005 estimated) GDP real growth rate: 2.4 per cent (2005 estimated) GDP per capita: US$8,400 (2005 estimated) Unemployment rate: 9.9 per cent (2005 estimated) Exports: US$115.1 billion fob (2005 estimated) Imports: US$78.02 billion fob (2005 estimated)

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Export partners: United States 20.8 per cent, Argentina 7.5 per cent, Netherlands 6.1 per cent, China 5.6 per cent, Germany 4.1 per cent, Mexico 4 per cent (2004) Import partners: United States 18.3 per cent, Argentina 8.9 per cent, Germany 8.1 per cent, China 5.9 per cent, Nigeria 5.6 per cent, Japan 4.6 per cent (2004) Roadways total: 1,724,929 km, of which 94,871 km are paved Ports and terminals: Gebig, Itaqui, Rio de Janeiro, Rio Grande, San Sebasttiao, Santos, Sepetiba Terminal, Tubarao, Vitoria Source: CIA (2006).

The Brazilian economy Brazil, with its large and well-developed agricultural, mining, manufacturing and service sectors, is leading the way in the developing economies of South America. It is also expanding its presence in world markets and becoming a target for global manufacturers. 2001–03 was a tough period for Brazil, with real wages falling and its economy only growing at 2.2 per cent per year. However it survived this period and in 2004, it enjoyed much improved growth that created increases in employment and real wages. Brazil has started to show a trade surplus reflecting its attraction for Western manufacturers. There are however vulnerabilities, including the increasing domestic and foreign debt which is large in relation to Brazil’s small, albeit growing, export value (CIA, 2006).

Latin American logistics market Growth and investment The rapid growth in many Latin American countries has occurred as they have opened their economies to trade and foreign investment and privatized their state-owned enterprises to encourage economic growth. Brazil and Mexico have been the largest beneficiaries of foreign investment in the region. Forecasters have predicted foreign direct investments in Brazil of over US$18 billion, reflecting its destination as a low-cost centre for manufacturers, especially from the United States (Ribeiro, 2006). Increased public and private partnerships are focusing on road and railway infrastructure, with the establishment of export corridors to the Pacific Ocean. Finally, incredibly, China is itself seeking to invest in Latin America. In 2005 the Chinese president met with South American governments and

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signed agreements with Chile, Argentina, Peru and Venezuela. China has committed to invest up to US$100 billion in the region over the following 10 years, underlining China’s aspiration to trade integration with the region (Lam, 2006).

High technology High-technology manufacturing has grown considerably since the early 1990s, particularly in Argentina, Brazil and Mexico, with Chile, Colombia, Costa Rica and Venezuela also benefiting. Global manufacturers including Compaq, General Electric, Hewlett-Packard, IBM, Intel, Motorola, Philips, Sony and Xerox have all invested significantly in the region. The United States has been the primary recipient and beneficiary of the expansion in Latin America’s high-technology trade.

Pharmaceutical Global pharmaceutical companies including Glaxo Wellcome, Pfizer and Roche have also invested heavily in Latin America, particularly in Argentina, Brazil and Mexico.

Apparel and textiles Brazil is also poised to become a major apparel and textile player, having made a number of major investments in the industry. Argentina is also focusing on the apparel and textile sector and predicts growth of around 10 per cent.

Retailers Retailers have also focused on the Latin American market, with Wal-Mart and France’s Carrefour among others establishing businesses in Mexico, Brazil and Argentina in recent years. Mexico has seen retailers move into this developing market, including companies such as Home Depot and Office Depot.

Automotive and other A number of additional industry sectors have emerged in Mexico, including automotive manufacturers and suppliers, home appliances, medical devices and aerospace. Volkswagen has the only remaining factory in the world producing the original Volkswagen Beetle in Mexico. The plant, which also manufacturers the New Beetle, employs some 16,000 people and produces about 1,500 units per day, which are sold to the United States, Canada and Europe.

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Third-party providers Third-party providers have been following their customers into Latin America, where they have established capabilities in support of their customers. These capabilities are varied, ranging from classic logistics operations like warehousing, through to the planning and execution of manufacturing components for assembly.

Asia Pacific (APAC) The logistics market The Asia Pacific has a total logistics market spend of around US$412 billion, representing 42 per cent of logistics spend globally (Transport Intelligence, 2006). Of that spend it is estimated that only 9 per cent is currently outsourced, providing a third-party provider revenue of around US$38.5 billion (Transport Intelligence, 2006). The outsourced logistics market in the region has a CAGR of 17.5 per cent from 2005 to 2009 (Transport Intelligence, 2006).

Regional diversity Asia Pacific, which makes up more than half of the world’s total population, is an extremely diverse region and ranges from some of the poorest to the richest countries in the world. Cultural and religious diversity, coupled with three of the world’s four most populous countries, makes the region both a dynamic and a demanding area in which to invest. The region has had strong economies in countries like Japan, Taiwan and South Korea, which have established strong industrial bases since the Second World War. Countries like Singapore, Malaysia and Thailand took advantage of the growth of global manufacturers, which had moved to lowcost economies in the 1980s and 1990s. Since 2001, and its inclusion in the WTO, China has become the largest growth economy in Asia Pacific. Other emerging countries include India, Vietnam and Indonesia.

Foreign investment The success of this fast-developing region is reflected by the entry of foreign retailers, including Wal-Mart, Carrefour, Ahold, Metro, Tesco and ItoYokado. In addition, CPG manufacturers have moved into the region, seeing vast numbers of people with greater spending levels as opportunities to market, manufacture and sell their products. These companies include household names such as Procter & Gamble, Unilever, Nestlé, Colgate Palmolive and Coca-Cola.

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The economic growth and investment in Asia Pacific has had a profound impact on the logistics industry. Both local and foreign service providers have seen demand for their basic logistics services increase, but also requirements for more advanced and integrated logistics giving the larger foreign players an edge.

The old guard Japan Japan facts and figures Population: 127.5 million (July 2006 estimated) Area: 377,835 sq km Currency (code): yen (JPY) GDP: US$4.848 trillion (2005 estimated) GDP real growth rate: 2.4 per cent (2005 estimated) GDP per capita: US$30,700 (2005 estimated) Unemployment rate: 4.3 per cent (2005 estimated) Exports: US$550.5 billion fob (2005 estimated) Imports: US$451.1 billion fob (2005 estimated) Export partners: United States 22.7 per cent, China 13.1 per cent, South Korea 7.8 per cent, Taiwan 7.4 per cent, Hong Kong 6.3 per cent (2004) Import partners: China 20.7 per cent, United States 14 per cent, South Korea 4.9 per cent, Australia 4.3 per cent, Indonesia 4.1 per cent, Saudi Arabia 4.1 per cent, UAE 4 per cent (2004) Roadways total: 1,177,278 km, of which 914,745 km are paved (including 6,946 km of expressways) Ports and terminals: Chiba, Kawasaki, Kiire, Kisarazu, Kobe, Mizushima, Nagoya, Osaka, Tokyo, Yokohama Source: CIA (2006).

Japanese economy Japan has developed steadily to become the second most technologically powerful economy in the world after the United States. Japan’s industrial

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sector is heavily dependent on imported raw materials and fuels. From 2000 to 2003, the government focus to revitalize economic growth was frustrated by the slowing of the US, European and Asian economies. In 2004 and 2005, growth improved and concerns about deflation in prices and economic activity reduced. However, Japan’s huge debt, which totals 170 per cent of GDP, and the ageing of the population remain two major long-term concerns, and with its low growth rate it is generally agreed that the country is in recession (CIA, 2006).

Japan’s logistics market Japan’s main export products are cars, electronic devices and computers. Its most important single trade partner is the United States, which accounts for more than 20 per cent of all Japanese exports. Japan’s key industry sectors are electronics and high technology, automotives, construction, distribution, real estate, services and communications. In particular, technological innovation has enabled Japan to establish its position as a leader in the semiconductor and automobile industries. Companies like Fujitsu, Nikon and Kyocera are examples of Japanese high-technology and electronics manufacturers. Of course, the automotive industry includes leading car manufacturers Toyota and Honda. Japan’s grocery retail market includes domestic players like Ito-Yokado (which includes ‘7 eleven’), Aeon and Daiei Inc. However Western retailers have also moved into this attractive consumer market, including Wal-Mart, Carrefour Metro, Tesco and Costco. Japan has seen China as a source of low-cost manufacture, and a number of Japanese businesses have moved their production accordingly. This, together with Japan’s export of components and cars, has driven the freight forwarding market in Japan, as companies have benefited from this additional international transportation. Japan’s outsourced logistics market continues to grow as Japanese companies seek to outsource their logistics as a response to the ongoing economic recession. Some major companies have established thirdparty logistics spin-offs to address this demand. The Japanese logistics outsourcing market is still very nationalistic, with few global players present. However, Western third-party providers are seeking to move into the country and many are eyeing up acquisition targets. Exel, itself since purchased by DPWN (see Chapter 4), acquired Fujitsu’s logistics business in order to establish a base from which to grow its Japanese business. Since the acquisition, it has won a logistics contract with WalMart in Japan.

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Taiwan Taiwan facts and figures Population: 23 million (July 2006 estimated) Area: 35,980 sq km Currency (code): new Taiwan dollar (TWD) GDP: US$326.5 billion (2005 estimated) GDP real growth rate: 3.8 per cent (2005 estimated) GDP per capita: US$26,700 (2005 estimated) Unemployment rate: 4.2 per cent (2005 estimated) Exports: US$189.4 billion fob (2005 estimated) Imports: US$181.6 billion fob (2005 estimated) Export partners: China (including Hong Kong) 37 per cent, United States 15.3 per cent, Japan 7.7 per cent (2005) Import partners: Japan 26 per cent, United States 12 per cent, China (including Hong Kong) 12 per cent, South Korea 7 per cent (2005) Roadways total: 37,299 km, of which 35,621 km are paved (including 1,789 km of expressways) Ports and terminals: Chi-lung (Keelung), Hua-lien, Kao-hsiung, Su-ao, T’ai-chung Source: CIA (2006).

Taiwanese economy Taiwan has a successful and dynamic capitalist economy with reducing government involvement. Exports have provided the momentum for industrialization, and the trade surplus is substantial. Taiwan is a major investor throughout South-East Asia. China has become Taiwan’s largest export market and in 2005 China became Taiwan’s second-largest source of imports after Japan. Taiwan has benefited from increases in world demand to achieve significant growth in its export sector; however, excess inventory, higher oil prices and rising interest rates have reduced consumption in developed markets since 2005 (CIA, 2006).

Taiwan’s logistics market Taiwan’s traditional labour-intensive industries have been slowly replaced by capital and technology-advanced industries such as chemicals

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production, information technology, high technology and electronics equipment. High technology, electronics and information technology have developed into the core of Taiwanese industry, accounting for over 35 per cent of the total. The Taiwanese economic development has been supported by literally thousands of small and medium-sized businesses, and there are relatively few large businesses. However one large conglomerate, Hon Hai Precision Industry, is the Taiwanese manufacturer that makes everything from PCs for Hewlett-Packard to cell phones for Nokia and PlayStation 2 game consoles for Sony. Hon Hai, more commonly known by its trade name, Foxconn, has been closing the gap on other global electronics competitors and is now one of the world’s largest contract electronics manufacturers. The textiles industry has traditionally been an important part of the Taiwanese economy and exports, earning large amounts of foreign exchange. However since the mid-1980s a number of problems, such as labour shortages and increasing costs, have forced textile businesses to move production to South-East Asia and China in order to remain competitive. Those textile companies that stayed in Taiwan however have been transformed into medium-sized or large businesses, with commercial and innovative management introduced to raise quality and productivity. Taiwan does not produce natural fabrics but has developed synthetic fabrics, which have been very successful. Indeed Taiwan is now prominent in the world’s textile industry, which has been a key contributor in maintaining the country’s positive trade balance. Taiwan is seen as an ideal global logistics base for the Asia-Pacific region, given its central location, which provides for fast shipping times at reasonable costs. With its geographical, cultural and language links with China, Taiwan has been establishing itself as a stepping stone into this major market for global investment. Taiwan has an effective and competitive logistics industry that has been supported by its improving infrastructure and its wealth of skilled resource. Taiwan has a well-developed retail market with over 60,000 stores. Foreign grocery retailers have also invested in the country, including Carrefour, Tesco, Auchan, Casino, Ito-Yokado and Costco, although many have established joint ventures with Taiwanese companies. The logistics industry in Taiwan offers practicable solutions for retail companies, especially sophisticated systems that support purchasing, storage, delivery and distribution management. Global third-party providers are seeing the opportunities in Taiwan and have been establishing operations in the country.

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South Korea South Korea facts and figures Population: 48.8 million (July 2006 estimated) Area: 98,480 sq km Currency (code): South Korean won (KRW) GDP: US$801.2 billion (2005 estimated) GDP real growth rate: 3.9 per cent (2005 estimated) GDP per capita: US$20,400 (2005 estimated) Unemployment rate: 3.7 per cent (2005 estimated) Exports: US$288.2 billion fob (2005 estimated) Imports: US$256 billion fob (2005 estimated) Export partners: China 19.6 per cent, United States 17 per cent, Japan 8.6 per cent, Hong Kong 7.1 per cent (2004) Import partners: Japan 20.6 per cent, China 13.2 per cent, United States 12.9 per cent, Saudi Arabia 5.3 per cent (2004) Roadways total: 97,252 km, of which 74,641 km are paved (including 2,778 km of expressways) Ports and terminals: Inch’on, Masan, P’ohang, Pusan, Ulsan Source: CIA (2006).

South Korean economy South Korea has developed a successful high-tech modern world economy over the last 40 years or so. In the 1960s, South Korea’s GDP per capita was comparable with the poorer countries of Africa and Asia, but in 2004 South Korea became a member of the trillion-dollar club of world economies. Since the 1990s the economy has been volatile but since 1999 growth has ranged from 3.3 to 9.5 per cent, with an average of 4 per cent growth between 2003 and 2005. Overall though, South Korea’s economy is supported by moderate inflation, low unemployment, an export surplus and relatively equal distribution of income (CIA, 2006).

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South Korea’s logistics market The South Korean economy relies on high technology and electronics manufacturing, machinery and transport equipment, as well as steel, ships and petrochemicals. Major Korean companies include the high-technology manufacturer Samsung Group, car maker Hyundai Motor Group, energy to pharmaceuticals giant SK Corporation, steel producer POSCO and trading company Doosan Corporation. Retailers have seen opportunities in South Korea, with Wal-Mart, Tesco, Ito-Yokado, Costco and Carrefour all establishing stores in the country, although Carrefour has since withdrawn. South Korea aims to become Asia’s logistics capital and become a key logistics hub in the APAC region. Ports are the core to the Korean economy and the country is now focused on developing them into large container ports to serve the Pacific Rim. South Korea’s location also means that it is ideally situated to service the North American, South-East Asian and European routes. As part of this drive, the government also plans to move investment from roads to railways and ports, aiming to link main arterial railway lines to all the major ports. South Korea’s logistics outsourcing rate stands at around 25 per cent, and in order to encourage logistics activity South Korea has decided to give various tax incentives to logistics businesses (Chi-dong, 2006). Companies that outsource 70 per cent or more of their logistics activity will get the benefit of a three-year tax credit for 2 per cent of the logistics costs paid. In addition foreign workers in the logistics industry will be exempt from income tax.

China China facts and figures Population: 1,313 million (July 2006 estimated) Area: 9,596,960 sq km Currency (code): yuan (CNY); note – also referred to as the renminbi (RMB) GDP: US$1.79 trillion (2005 estimated) GDP real growth rate: 9.3 per cent (2005 estimated) GDP per capita: US$6,300 (2005 estimated) Unemployment rate: 4.2 per cent official registered unemployment in urban areas in 2004; substantial unemployment and underemployment in rural areas; an official Chinese journal estimated overall unemployment (including rural areas) for 2003 at 20 per cent (2004)

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Exports: US$752.2 billion fob (2005 estimated) Imports: US$631.8 billion fob (2005 estimated) Export partners: United States 21.1 per cent, Hong Kong 17 per cent, Japan 12.4 per cent, South Korea 4.7 per cent, Germany 4 per cent (2004) Import partners: Japan 16.8 per cent, Taiwan 11.4 per cent, South Korea 11.1 per cent, United States 8 per cent, Germany 5.4 per cent (2004) Roadways total: 1,809,829 km, of which 1,447,682 km are paved (with at least 29,745 km of expressways) Ports and terminals: Dalian, Guangzhou, Nanjing, Ningbo, Qingdao, Qinhuangdao, Shanghai Source: CIA (2006).

The Chinese economy Over the last 25 years or so, China’s economy has changed from a centrally planned system that was mostly closed to international trade to a more market-oriented economy. China, now the third-largest economy in the world, has become a major global player, and the restructuring of the economy has contributed to a more than 10-fold increase in GDP since 1978. Economic growth has been more rapid in coastal provinces than in the interior, and there are large disparities in per capita income between regions. Foreign investment continues to be a strong element in China’s extraordinary growth in world trade, and has been a key factor in the development of jobs (CIA, 2006).

The Chinese logistics industry China’s logistics industry has enjoyed a period of impressive growth, helped by economic progress and the increased acceptance of outsourcing by Chinese manufacturers and retailers, as well as more sophisticated logistics providers entering the market. The estimated value of China’s logistics spend was N207 billion in 2005, of which just 2 per cent is outsourced to contract logistics providers, representing revenues of N4.9 billion (Transport Intelligence, 2006). The contract logistics outsourcing market is forecast to grow at a CAGR of 30 per cent per annum over the next few years (Transport Intelligence, 2006). However, there are issues. China’s economic growth has been hindered by a weak transport and communications infrastructure, high transport and logistics costs, and a relatively poorly educated and trained workforce. Indeed the cost of moving goods in China is up to double that of developed countries, including those in Europe and North America. To address these

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challenges, China has been investing in the transport industry, including roads, railways, water and air transport infrastructure. Furthermore, logistics education and training have been reinforced and China’s logistics education programmes are increasing quickly. By mid-2005, the China Federation of Logistics and Purchasing had arranged for nearly 20,000 people to attend Certified Professional Logistician qualification training (Xinqian, 2006).

Industry sectors China’s growth has been fuelled by technology and automotive manufacturing, both parts and final assembly. China also has a highly developed apparel and textile industry providing high-quality low-cost production to the developed markets across the world. Until the end of 2004, China’s textile exports were subject to limits. Following the end of these restrictions, China increased its textile exports dramatically, showing an incredible 29 per cent in the first quarter of 2005 (Craig, 2006). China is now the world’s largest exporter of clothing, with a 28 per cent share of the world market (Craig, 2006). Many Western countries are expecting to double their total imports from China in the five years up to 2010. The incredible development of the Chinese high-technology and automotive manufacturing market has major implications for the global logistics industry. As China’s economy grows at up to 10 per cent per annum, cargo volumes have increased significantly. The Chinese growth phenomenon will have huge potential for third-party providers, particularly those that are focused on manufacturing and industrial sectors. Major third-party providers from around the world are determined to enter this market, through acquisitions, start-ups or joint ventures. Also, as the population has become increasingly wealthy, retailers have identified an opportunity for development. Thus, companies such as WalMart, Carrefour, Metro, Auchan and Ito-Yokado (7–eleven) have all invested in China. In order to reduce costs and delivery times, global retailers have started to integrate their Chinese operations into their supply chains and buying networks through the organization of local purchasing departments. Some retailers have set up buying organizations in places such as Shenzhen, Shanghai and Tianjin, which are near to many production facilities.

Logistics service providers The Chinese logistics industry is highly fragmented and characterized by commoditized and low-quality transport and warehousing. This level of service and capability is inadequate to meet the growing supply-chain demands of foreign global manufacturers and retailers. This provides great

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opportunities for foreign companies, and indeed the better-developed domestic players, to increase market share. China’s commitments on its entry into the WTO effectively marked the beginning of China’s transportation and logistics industry. For some years, foreign 3PLs have had to operate in joint ventures with Chinese companies in order to be able to trade within the regulations. However, with the establishment of the many free trade zones around major ports and manufacturing parks, 3PLs are able to operate under their own names and ownership. 3PLs that have set up on their own include UPS Supply Chain Solutions, Kühne + Nagel, DHL Logistics, FedEx, Nippon Express and Kintetsu World Express (Foster and Armstrong, 2006). The ability of foreign 3PLs to operate on their own in China is bringing in more investment. The Foster and Armstrong (2006) report provides examples, including UPS building a 240,000 square feet warehouse in a foreign trade zone near Hong Kong, and APL Logistics building a flow centre there. In 2005, domestic transportation and logistics providers had half of the Chinese market, while joint ventures and foreign companies enjoyed the other 50 per cent of the market. Since the full opening of the Chinese logistics market, international companies have targeted China because of its tremendous opportunities. Some have been setting up new operations while others have formed joint ventures, like China’s Cosco Group and the Netherlands’s TNT Group which have formed a strategic partnership.

India India facts and figures Population: 1,095 million (July 2006 estimated) Area: 3,287,590 sq km Currency (code): Indian rupee (INR) GDP: US$720.3 billion (2005 estimated) GDP real growth rate: 7.6 per cent (2005 estimated) GDP per capita: US$3,400 (2005 estimated) Unemployment rate: 9.9 per cent (2005 estimated) Exports: US$76.23 billion fob (2005 estimated) Imports: US$113.1 billion fob (2005 estimated) Export partners: United States 17 per cent, UAE 8.8 per cent, China 5.5 per cent, Hong Kong 4.7 per cent, United Kingdom 4.5 per cent, Singapore 4.5 per cent (2004)

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Import partners: China 6.1 per cent, United States 6 per cent, Switzerland 5.2 per cent, Belgium 4.4 per cent (2004) Roadways total: 3,851,440 km, of which 2,411,001 km are paved Ports and terminals: Chennai, Haldia, Jawaharal Nehru, Kandla, Kolkata (Calcutta), Mumbai (Bombay), New Mangalore, Vishakhapatnam Source: CIA (2006).

Indian economy India has a diverse economy that ranges from traditional village farming to modern industries and services. Services are the main source of economic growth, producing 50 per cent of India’s output with less than one-quarter of its labour force. Government controls on foreign trade and investment have been reduced in some areas, but high tariffs and restrictions on foreign investment still exist. In 2005 the government liberalized investment in the civil aviation, telecom and construction sectors. The economy showed an average growth rate of more than 7 per cent per annum in the 10 years since 1994, and 7.6 per cent GDP growth in 2005. India has capitalized on the large numbers of well-educated English-speaking people to become a major exporter of software services. Despite strong growth, there are concerns about the combined state and federal budget deficits, running at approximately 9 per cent of GDP. Government borrowing has also kept interest rates high. Further economic deregulation will help to attract more foreign capital and lower interest rates. The huge and growing population, expected to overtake China’s in the next 25 years, is the fundamental social, economic and environmental concern (CIA, 2006).

The Indian logistics industry With a population that is set to grow above China’s within the next 25 years and an increasing number of well-educated English speakers, it is no wonder that India’s growth rate has been around 7 per cent per annum in recent times. However, much of that growth is in services, and much of the manufacturing and retail sector is still subject to restrictions on foreign direct investment. The third-party logistics market in India is still at an emerging stage, but the concept of outsourcing has begun to gather pace as companies in India seek to reduce costs and cope with shorter product lifecycles and pressure on lead times. Traditionally India has suffered from poor logistics and supply chains, driven by a tax regime that encouraged multiple warehouses spread across the country and an infrastructure that lacked a proper highway network and proper warehousing and storage facilities. However the Indian

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government has started to address these issues, and changes in the tax laws should see companies moving to more centralized warehousing and distribution. In addition the government has invested billions of US dollars to upgrade highway road networks. The majority of logistics in India has traditionally been undertaken by road; however the government is also opening up rail freight operations to private companies, and as transportation by rail is both less costly and faster than by road, more freight could well move to the railways. The third-party logistics industry in India is highly fragmented, with thousands of transporters, consolidators and freight forwarders. Organized third-party providers represent only a small proportion of this market. International service providers have generally found the Indian market difficult to navigate, but increasingly they are seeking opportunities for growth in the country. The Indian third-party logistics market, estimated at around US$890 million in 2005, is expected to grow at a CAGR of 21.9 per cent to reach around US$3,556 million in 2012 (Manda, 2006).

Indian apparel and textiles India is less appealing as a centre for apparel and textile manufacturing because of its poor geographic location. Unlike key competitors China (for Japan and the US West Coast), Mexico (for the United States) and Turkey (for Europe), India is remote from all the main markets, resulting in high shipping costs and long supply times. However, although the Indian government has historically kept foreign investment out of textile and apparel manufacturing, it has been slowly removing these restrictions. Consumer brands like Adidas, Benetton, Levi Strauss, Marks & Spencer and Nike have all entered the Indian market by setting up wholly owned sourcing and marketing organizations in the country.

Indian retail The retail industry remains closed to foreign direct investment, and although steadily growing, large-scale retailing is scarce. Germany’s Metro is the only large foreign retailer to have entered the market, selling in a business-to-business format with its Metro Cash and Carry business. However there are signs that the Indian government will relax these restrictions in time. If they are relaxed it is likely that third-party providers will follow their domestic retail customers into India.

Indian automotives Since deregulation in 1993, many high-profile car and component manufacturers have established joint ventures or otherwise invested in India,

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including DaimlerChrysler, Delphi, Ford, General Motors, Honda, Hyundai, Johnson Controls and Visteon. The number of cars produced in India since 2000 has nearly doubled, with just over a million cars being manufactured in 2004–05. The value of automotive component production has more than doubled since 2000 to an estimated US$8,700 billion in 2004–05, of which US$1,400 billion was exported, an increase of 224 per cent in the same period (ACMA, 2005). Principal export items include replacement parts, tractor parts, motorcycle parts and car parts (ACMA, 2005). The automotive industry is the most advanced logistically in India, and as this market has continued to grow it has become an exciting opportunity for third-party logistics providers.

Indian high technology and consumer electronics India has been liberalizing its foreign trade policy for electronics and IT products and this sector is now the fastest-growing industry in the Indian economy in both production and exports. Today, apart from aerospace and defence electronics, the electronics industry is completely deregulated and is attracting substantial interest from international companies. In the five years since 2000, India’s value of consumer electronics exports nearly doubled, while exports of industrial exports trebled (Department of Information Technology, India, 2005). APC, Dell, Intel, LG Electronics and Motorola have all invested in India in recent years. This sector is providing good opportunities for logistics service providers as companies strive to reduce costs, lead times and inventory.

South-East Asia Singapore Singapore facts and figures Population: 4.5 million (July 2006 estimated) Area: 692.7 sq km Currency (code): Singapore dollar (SGD) GDP: US$111.5 billion (2005 estimated) GDP real growth rate: 5.7 per cent (2005 estimated) GDP per capita: US$29,900 (2005 estimated) Unemployment rate: 3.3 per cent (2005 estimated)

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Exports: US$204.8 billion fob (2005 estimated) Imports: US$188.3 billion. (2005 estimated) Export partners: Malaysia 15.2 per cent, United States 13 per cent, Hong Kong 9.8 per cent, China 8.6 per cent, Japan 6.4 per cent, Taiwan 4.6 per cent, Thailand 4.3 per cent, South Korea 4.1 per cent (2004) Import partners: Malaysia 15.3 per cent, United States 12.7 per cent, Japan 11.7 per cent, China 9.9 per cent, Taiwan 5.7 per cent, South Korea 4.3 per cent, Thailand 4.1 per cent (2004) Roadways total: 3,165 km, of which 3,130 km are paved (including 150 km of expressways) (2003) Ports and terminals: Singapore Source: CIA (2006).

Singapore economy Singapore has a well-developed and thriving free market economy and a per capita GDP equal to that of the most successful West European countries. The economy relies heavily on exports, particularly in electronics and high-tech manufacturing. It was hard hit in 2001–03 by the global recession and the government hopes to set up a growth path that will be less susceptible to external economic pressures. Low interest rates, a growth in exports, and internal flexibility led to strong growth in 2004, with real GDP increasing by 8 per cent. This was the economy’s best performance since 2000, but growth slowed to 5.7 per cent in 2005 (CIA, 2006).

Singapore’s logistics market In 2005 the estimated logistics spend in Singapore was SGD427 million (US$272 million), an increase of 5 per cent over the previous year (Transport Intelligence, 2006). Singapore has established itself as a global transport and logistics hub, offering some of the best sea and air connectivity in the world. Over 200 shipping lines call on Singapore annually, connecting it to 600 ports across 123 countries around the world. In 2005 Singapore handled over 23 million 20 foot equivalent units (TEUs). In addition, Singapore is connected to over 181 cities by air and in 2005 was Asia’s fourth-largest cargo airport (Ministry of Foreign Affairs of Denmark, 2006). Singapore has been focusing on establishing itself as a global centre for manufacturing. Specifically, the government is targeting to double manufacturing output to SGD300 billion from 2003 to 2018 and establish 15,000 new jobs each year (Singapore Economic Development Board, 2006).

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Singapore is located at the intersection of major trade routes and in the heart of an increasingly developing Asia. Its strategic location has given Singapore the opportunity to be a strategic distribution hub for global companies to extend to Asian markets. As a result many global companies, in particular high-technology and automotive companies, have based their procurement, marketing and logistics functions there. These companies can rely on well-developed, sophisticated Singapore-based logistics providers to support their supply chains. The logistics industry in Singapore has developed from providing basic transportation and warehousing to offering total integrated logistics solutions. As outsourcing continues to increase, Singapore is well placed to become a centre of excellence for integrated solutions for manufacturers and other services and has its sights set on becoming the leading integrated logistics hub in Asia by 2010. There are over 8,000 logistics businesses in Singapore, including many of the world’s leading third-party logistics providers. As the global logistics players grow larger and become more sophisticated, the local providers must be capable of competing through increasing their capabilities or forming alliances, or risk losing out to their larger rivals.

Malaysia Malaysia facts and figures Population: 24 million (July 2006 estimated) Area: 329,750 sq km Currency (code): ringgit (MYR) GDP: US$121.2 billion (2005 estimated) GDP real growth rate: 5.2 per cent (2005 estimated) GDP per capita: US$10,400 (2005 estimated) Unemployment rate: 3.6 per cent (2005 estimated) Exports: US$147.1 billion fob (2005 estimated) Imports: US$118.7 billion fob (2005 estimated) Export partners: United States 18.8 per cent, Singapore 15 per cent, Japan 10.1 per cent, China 6.7 per cent, Hong Kong 6 per cent, Thailand 4.8 per cent (2004)

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Import partners: Japan 16.1 per cent, United States 14.6 per cent, Singapore 11.2 per cent, China 9.9 per cent, Thailand 5.5 per cent, Taiwan 5.5 per cent, South Korea 5 per cent, Germany 4.5 per cent, Indonesia 4 per cent (2004) Roadways total: 71,814 km, of which 55,943 km are paved Ports and terminals: Bintulu, Johor, Labuan, Lahad Datu, Lumut, Miri, George Town (Penang), Port Kelang, Tanjung Pelepas Source: CIA (2006).

Malaysian economy Malaysia is a middle-income country that between 1971 and the end of the 1990s has transformed itself from a producer of raw materials into an emerging multi-sector economy. Growth was almost solely driven by exports, particularly of electronics. This resulted in Malaysia being hit hard by the global economic slump and the drop in the IT sector in 2001 and 2002. GDP in 2001 grew only 0.5 per cent, but a substantial financial incentive package mitigated the worst of the recession and the economy rebounded in 2002 with a 4.1 per cent increase. The economy grew 4.9 per cent in 2003, moving to a high of 7 per cent in 2004 and settling at 5 per cent in 2005. Strong foreign exchange reserves, low inflation and a small external debt are all strengths that make it unlikely that Malaysia will experience a significant financial crisis in the future. The economy continues to be reliant on sustained growth in the United States, China and Japan, all of which are top export destinations and key sources of foreign investment (CIA, 2006).

The Malaysian logistics market In the 1970s, Malaysia began a transition from being dependent on mining and agriculture to an economy that depends more on manufacturing. Supported by Japanese investment, Malaysia established a successful heavy industry sector that subsequently became the country’s main growth engine. In more recent years, Malaysia has attracted electronic and hightechnology manufacturers, but more latterly has been losing finished goods manufacturing to China. However it is unlikely that Malaysia and its welldeveloped South-East Asian neighbours will lose out altogether, and they are likely to retain manufacturing of components at least. Retailers have entered Malaysia in order to take advantage of the developing economy, and companies such as Carrefour, Tesco and Ito-Yokado have set up operations in the country. The logistics industry in Malaysia is forecast to have strong growth due to the strength of manufacturing in the country, maintaining its compounded annual growth rate of over 12 per cent through to 2007. Among the services

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offered are warehousing and storage facilities, inventory control, packaging and labelling services, consolidation and deconsolidation management, and cross-docking. Although exports are vital to Malaysia, the capability of cargo handling facilities at Kuching International Airport has caused concerns to hi-tech manufacturers and logistics providers alike.

Thailand Thailand facts and figures Population: 64.6 million (July 2006 estimated) Area: 514,000 sq km Currency (code): baht (THB) GDP: US$177.2 billion (2005 estimated) GDP real growth rate: 4.4 per cent (2005 estimated) GDP per capita: US$8,300 (2005 estimated) Unemployment rate: 10.9 per cent (2005 estimated) Exports: US$105.8 billion fob (2005 estimated) Imports: US$107 billion fob (2005 estimated) Export partners: United States 16.1 per cent, Japan 14 per cent, China 7.4 per cent, Singapore 7.3 per cent, Malaysia 5.5 per cent, Hong Kong 5.1 per cent (2004) Import partners: Japan 23.6 per cent, China 8.6 per cent, United States 7.7 per cent, Malaysia 5.8 per cent, Singapore 4.4 per cent, Taiwan 4.1 per cent, UAE 4 per cent (2004) Roadways total: 57,403 km, of which 56,542 km are paved Ports and terminals: Bangkok, Laem Chabang, Prachuap Port, Si Racha Source: CIA (2006).

Thai economy With a well-developed infrastructure, a market-driven economy and positive investment policies, Thailand was one of East Asia’s best performers in 2002–04. Boosted by increased consumption and strong export growth, the Thai economy grew by 6.9 per cent in 2003 and 6.1 per cent in 2004, notwithstanding a lethargic global economy. The country has pursued preferential trade agreements with a number of partners in an

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effort to increase exports and to sustain high growth. In 2004, Thailand and the United States began negotiations on a free trade agreement. Growth slowed to 4.4 per cent in 2005 as a result of high oil prices, weaker demand from Western markets, severe drought in rural regions, the tsunami’s impact on tourism, and lower consumer confidence. More positively, the economy performed well, beginning in the third quarter of 2005 driven by export-oriented manufacturing, including in particular automobile production. In 2006, the economy is forecast to benefit from an influx of investment and revived tourism, although a possible avian flu epidemic could drastically affect economic prospects across the region (CIA, 2006).

Thailand’s logistics market Thailand has built a successful manufacturing industry including electrical appliances, electronic and high-technology components, and motor cars. Companies like Hitachi, which has been manufacturing hard disk drives since 1989, have been attracted into Thailand. Thailand also has a small but growing CPG industry. Most are Thai companies, but global CPG manufacturers like Unilever have also entered this market. Foreign retailers have entered Thailand as well, including Carrefour, Ahold, Tesco, Casino and Ito-Yokado. Many of these companies have engaged foreign logistics providers to provide local services for them. There is a growing logistics industry that includes local and the larger global players. They provide basic logistics services such as trucking, warehousing, customs clearance and consolidation to sea freight and air freight. However there is an increasing demand for integrated solutions in Thailand, coming both from multinational manufacturing companies and larger local companies.

Indonesia Indonesia facts and figures Population: 245.5 million (July 2006 estimated) Area: 1,919,440 sq km Currency (code): Indonesian rupiah (IDR) GDP: US$270 billion (2005 estimated) GDP real growth rate: 5.4 per cent (2005 estimated) GDP per capita: US$3,700 (2005 estimated) Unemployment rate: 13.3 per cent (2005 estimated)

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Exports: US$83.64 billion fob (2005 estimated) Imports: US$62.02 billion fob (2005 estimated) Export partners: Japan 22.3 per cent, United States 12.3 per cent, Singapore 8.4 per cent, South Korea 6.8 per cent, China 6.4 per cent, Malaysia 4.2 per cent (2004) Import partners: Singapore 13.1 per cent, Japan 13.1 per cent, China 8.8 per cent, United States 7 per cent, Thailand 6 per cent, Australia 4.8 per cent, Saudi Arabia 4.2 per cent, South Korea 4.2 per cent (2004) Roadways total: 368,360 km, of which 213,649 km are paved Ports and terminals: Banjarmasin, Belawan, Ciwandan, Krueg Geukueh, Palembang, Panjang, Sungai Pakning, Tanjung Perak, Tanjung Priok Source: CIA (2006).

Indonesian economy Indonesia, with the fourth-largest population in the world, still struggles with high unemployment, a fragile banking sector, inadequate infrastructure, lack of investment and imbalanced resource distribution among regions. Indonesia became a net oil importer in 2004, and the cost of subsidizing domestic fuel combined with an indecisive monetary policy resulted in the government raising the price of fuel by an average 126 per cent in 2005. The resultant inflation and interest rate increases will reduce growth prospects in 2006. The key to future growth remains internal reform, building up the confidence of international and domestic investors, and strong global economic growth. The tsunami that struck in December 2004 took 131,000 lives and caused an estimated US$4.5 billion in damages and losses (CIA, 2006).

The Indonesian logistics market Indonesia’s economy relies on natural resources including crude oil, natural gas, tin, copper and gold. It is the world’s second-largest exporter of natural gas whilst it also produces rice, tea, coffee, spices and rubber. Indonesia’s large consumer population has attracted retailers like Carrefour into the country. The Indonesian transport system has been fashioned over time by the needs and constraints of an archipelago with thousands of islands. All transport modes play a role in the country’s transport system, being complementary rather than competing with one another. Road transport is the major mode, whilst the railway system has four unconnected networks in Java and Sumatra chiefly dedicated to transporting bulk commodities

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and long-distance passenger traffic. Sea transport is enormously important for economic integration and for domestic and foreign trade. Logistics providers in Indonesia include local and global providers who mainly supply bulk logistics and shipping services.

South-East Asia logistics market summary South-East Asia has developed as a successful destination for global manufacturers since the mid-1990s. In particular Singapore, Malaysia and Thailand have established themselves as manufacturers of electronic and high-tech components and finished goods. However, China has been a recent threat as it has attracted increasing numbers of global manufacturers. It is likely that although finished goods and component manufacturing has moved to China, South-East Asia will remain as a key source of electronic components. The relative success of the South-East Asian country economies has attracted the attention of the larger global retailers who have selectively moved into many of the countries. Developing countries such as Vietnam are establishing capabilities in such industries as apparel and fashion manufacturing, but are also seeking to enter the more lucrative high-tech manufacturing industry. Intel has recently sought permission to set up a semiconductor factory in Vietnam. East Asia has a number of local logistics providers but has also attracted many of the global service providers.

Australasia Australia Australia facts and figures Population: 20 million (July 2006 estimated) Area: 7,686,850 sq km Currency (code): Australian dollar (AUD) GDP: US$633.5 billion (2005 estimated) GDP real growth rate: 2.6 per cent (2005 estimated) GDP per capita: US$32,000 (2005 estimated) Unemployment rate: 5.2 per cent (2005 estimated)

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Exports: US$103 billion (2005 estimated) Imports: US$119.6 billion (2005 estimated) Export partners: Japan 18.7 per cent, China 9.2 per cent, United States 8.1 per cent, South Korea 7.7 per cent, New Zealand 7.4 per cent, India 4.6 per cent, United Kingdom 4.2 per cent (2004) Import partners: United States 14.8 per cent, China 12.7 per cent, Japan 11.8 per cent, Germany 5.8 per cent, Singapore 4.4 per cent, United Kingdom 4.1 per cent (2004) Roadways total: 811,601 km, of which 316,524 km are paved Ports and terminals: Brisbane, Dampier, Fremantle, Gladstone, Hay Point, Melbourne, Newcastle, Port Hedland, Port Kembla, Port Walcott, Sydney Source: CIA (2006).

Australian economy Australia has a Western capitalist economy with a per capita GDP on a par with the main West European economies. Growing output in the domestic economy, strong business and consumer confidence, and rising exports of raw materials and agricultural products have fuelled the economy. Australia’s focus on low inflation and growing ties with China are other key reasons behind the economy’s strength. The impact of drought, fragile foreign demand and strong import demand pushed the trade deficit up from US$8 billion in 2002, to nearly US$17 billion in 2005. Conservative fiscal policies have kept Australia’s budget in surplus from 2002 to 2005 (CIA, 2006).

New Zealand New Zealand facts and figures Population: 4 million (July 2006 estimated) Area: 268,680 sq km Currency (code): New Zealand dollar (NZD) GDP: US$97.53 billion (2005 estimated) GDP real growth rate: 2.5 per cent (2005 estimated) GDP per capita: US$24,200 (2005 estimated)

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Unemployment rate: 4 per cent (2005 estimated) Exports: US$22.21 billion (2005 estimated) Imports: US$24.57 billion (2005 estimated) Export partners: Australia 20.9 per cent, United States 14.4 per cent, Japan 11.2 per cent, China 5.7 per cent, United Kingdom 4.7 per cent (2004) Import partners: Australia 22.4 per cent, United States 11.3 per cent, Japan 11.2 per cent, China 9.7 per cent, Germany 5.2 per cent (2004) Roadways total: 92,662 km, of which 59,109 km are paved (including 169 km of expressways) Ports and terminals: Auckland, Lyttelton, Tauranga, Wellington, Whangarei Source: CIA (2006).

The New Zealand economy New Zealand has transformed its economy into an industrialized, free market, globally competitive economy. The dynamic growth has boosted real incomes, broadened and deepened the technological capabilities of the industrial sector, and controlled inflationary pressures. Per capita income has increased for six consecutive years and was more than US$24,000 in 2005 in purchasing power parity terms. New Zealand is heavily dependent on trade, especially in agricultural products, in order to drive growth. Exports equate to about 22 per cent of GDP (CIA, 2006).

The Australian and New Zealand logistics markets The logistics industry in both Australia and New Zealand is relatively mature in support of the strong economies of both countries. The logistics market in the two countries is estimated in excess of AUD66 billion (US$49 billion) per annum (Toll, 2006). The industry is made up of both strong local service providers and global providers, which both support domestic logistics activities and freight imports and exports. It is estimated that half of the logistics market is outsourced (Toll, 2006). Over 1,900 million tonnes of freight are estimated to be transported around Australia each year, just under 500 million tonnes of freight exported and approximately 55 million tonnes imported into Australia each year. The Australian logistics industry is highly competitive and has rapidly evolved as it has taken on the challenges of globalization, new production and supply-chain processes and technological advances. It is forecast that the size of the freight market in Australia will double over the next 15 years (Toll,

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2006). Imports from China and other Asian countries are expected to grow, necessitating the use of integrated logistics solutions. Australia has recognized the importance of the logistics industry for the country’s economic performance and global competitiveness. In support of the logistics industry, the Australian government initiated the Freight Transport Logistics Industry Action Agenda in 2000 and established the Australian Logistics Council (ALC) to drive the implementation of the strategy. The ALC, a partnership between Australian governments and senior leaders in logistics, exists to lead the advancement of logistics in Australia and to create competitive advantage for Australian companies and the economy.

Summary In Europe there are well-established logistics markets in the Western countries, while the emerging Eastern countries provide significant opportunities for future outsourcing as manufacturers and retailers migrate to low-cost, albeit developing, economies. The Americas is clearly split into North America and the less-developed Central and South American markets. The United States, the largest consumer market in the world, has a mix of well-developed logistics and supply-chain providers and ‘truckers’ that have developed into extremely large road freight businesses. Similar to the markets of Eastern Europe, the countries of Central and South America provide opportunities for outsourcing as North American-based manufacturers and retailers migrate south. The Asian boom is led by China, already the third-largest economy in the world and growing at around 10 per cent per year. India, with an economy growing by around 7.5 per cent per year, is becoming increasingly important for logistics providers. Mature countries, including Japan and South Korea, are attracting foreign 3PLs, whilst emerging markets like Thailand, Indonesia and Malaysia represent significant outsourcing opportunities.

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Outsourcing operations and services Introduction This chapter considers and describes the various outsourcing operations and services that are offered by third-party logistics (3PL) service providers. Third-party companies have continued to expand the many operations and services that they offer in order to succeed and progress within a very competitive marketplace. The chapter first outlines the breadth of outsourcing opportunities, from very limited participation to total asset management, including all of the many other opportunities between these extremes. The concept of the outsourcing continuum is discussed, emphasizing the need for potential users to be absolutely clear where different responsibilities lie and where the boundaries between these responsibilities occur. Various standard types of operation are introduced and described, and then the question of whether to adopt a dedicated or a multi-user approach is reviewed. Following this, there is a broad breakdown of the different services available from the viewpoint of the main logistics components of warehousing and transport. Some alternative opportunities for occasional outsourcing are also considered. Many companies now realize the advantage of taking a complete supply-chain perspective when planning their logistics and supply strategy because there are significant cost and service benefits to be gained. This concept is reviewed with respect to how it might be applied to the outsourcing of logistics operations. Finally, the many additional services offered by 3PL providers, often known as ‘value-added’ services are discussed. They represent opportunities for 3PLs to develop services that are more profitable than the more standard storage, picking and transport of goods.

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Outsourcing operations As a result of the fast growth in the use of outsourcing and the robust competition between the various third-party companies, there are now many different distribution and distribution-related services on offer. It is useful to be aware of the breadth of services that are available and to be able to select those that are most appropriate for a user company. As well as the standard types of operations involved in the warehousing and the transport of goods, such as storage, picking and final delivery, there are also many other operations that can be outsourced, such as the repacking of goods or a returns operation. One very important decision that must be made by any company that is contemplating outsourcing as an option is whether to outsource a part of the operation or the complete operation as a whole. This is the decision whether to use a multi-user style of operation or a dedicated operation, and these alternatives will be discussed in this section of the chapter.

Breadth of outsourcing As already indicated, there is a vast choice of different operations and services that can be outsourced. A good way to understand the opportunities available is to consider a typical logistics structure as shown in Figure 3.1. This represents the theoretical physical flow, storage and manufacture of a product all the way through from the supplier of a raw material to the delivery of finished goods to the final customer. Many companies do not actually fulfil all of the many physical logistics functions that are represented in the diagram, but some fast-moving consumer goods (FMCG) manufacturers fit this model. The key point to appreciate is that any of these functions could be outsourced to a third-party contractor. This includes the more traditional areas for outsourcing, such as storage and transport, but also those services that are perhaps thought to be more specialist, such as the manufacturing and assembly of products. But of course this is not the whole story. In addition to the physical logistics functions that are shown in Figure 3.1, there are also many supporting processes for these functions which could also be outsourced, not forgetting any opportunities to outsource reverse-logistics flows of product. Thus, decisions to outsource should cover the three main broad alternatives: ឣ ឣ ឣ

physical logistics/delivery operations; logistics processes; reverse-logistics flows.

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bulk delivery

raw materials store packaging store component store internal transfer

supplier

Primary production

transport customers

assembly

local delivery transport

transport

Regional distribution depot

finished goods warehouse Primary transport

Primary transport National distribution depot

Figure 3.1 A typical physical logistics structure showing the many different functions that can be outsourced

These three aspects are summarized in Figure 3.2, where another typical logistics configuration is shown in association with the three different areas for outsourcing. One set of arrows distinguishes the traditional physical flow of products that are physically distributed to a company’s key customers. A second set shows the reverse-logistics flows of goods and packaging that have to come back through the existing distribution operation. A third set of arrows alludes to the various process and information support mechanisms that serve to allow the physical operations to take place. These broad aspects will be broken down further and discussed in the remainder of this chapter. One example, however, is the process of customers or end users ordering goods. This might include the following elements, some or all of which might be outsourced: ឣ ឣ ឣ ឣ

order receipt; telesales; credit control; customer enquiries;

supply chain

raw material components packaging items product sourcing Imported materials

packaging

finished goods inventory

depots

unitization

warehouse

distribution centres

subassembly work-inprogress

end users

production

bought-in parts

suppliers

logistics

upstream

customers downstream

key

Physical outbound Process & information Physical inbound/ reverse

Figure 3.2 A logistics configuration of an FMCG company showing that there are different physical flows and processes 107

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stock availability; stock allocation.

Thus, for a user company, it is important be aware of these three different aspects that can be outsourced: outward and inward physical flows, and supporting processes. It is also important to understand that in distribution and logistics probably every different function can be outsourced. The ultimate option is to outsource the whole operation, keeping in-house only those non-logistics functions that are deemed to be the core business of the company. For example, some high-tech companies, such as 3M, are more concerned with the research and development that goes into the planning and production of new products rather than the sales and logistical operations that support the bringing of these products to market. However, many users do not wish to outsource everything, but they are keen to concentrate their resources on certain aspects of their business and to outsource others. One useful way to understand the breadth of opportunities that are available for outsourcing is to view this as a continuum of services, ranging from total internal logistics management to total external logistics management. This is illustrated in Figure 3.3. The continuum diagram demonstrates some of the different opportunities that are available across the whole scope of outsourcing physical logistics operations. This is by no means an exhaustive collection of possibilities, but should provide a particular perspective of what might be done. At one extreme there is what might be termed total internal asset management. This shows a company that has kept the entire logistics operation in-house and is not outsourcing anything. Thus we see that it has, for example, full ownership of its logistics building facilities and has its own management, systems, internal depot workforce and transport operation. At the other extreme there is total external asset management, where the company has outsourced all of its physical logistics operations. Thus, it has no logistics capital investment, no asset management and no labour management. Within these two extremes there are a multitude of alternatives. One common approach is to outsource the delivery transport operation but to keep the warehouse and storage operation in-house. However, no single solution is the ‘right’ answer. Any of the multitudes of different combinations may suit one particular company, so the implications of all options should be explored. Chapter 5 in the book will outline the main reasons that companies seek to outsource their operations, and these reasons often help to clarify what should be included and what should be excluded from the outsourcing solution. Note, once again, that although Figure 3.2 is representative mainly of the various physical functions of logistics, the many associated logistics

Total internal asset management

Total external asset management

Outsourcing continuum

 Full-building ownership  Own management  Own systems  Own internal workforce  Own transport

 Own building  Own internal workforce  3PL transport  Internal WMS, shipment systems  Own management

 Lease building  Contract warehouse labour  3PL transport  Own management

 Own building  Combined inhouse workforce and contract  3PL transport  Own management

 Lease building  Full outsource of specific functions - storage - postponement - picking - transportation - packaging

 No logistics capital investment  No asset management  No labour management

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Figure 3.3 Continuum of logistics outsourcing: some of the range of physical functions and services that might be outsourced

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processes that support the business and physical operation may also be outsourced in addition to these more traditional physical aspects. For any company that is contemplating outsourcing as an option, there are some important reasons for considering outsourcing opportunities using an approach based on the idea of the outsourcing continuum. Such an approach is helpful during the initial decision-making phase of outsourcing, trying to answer questions like ‘should we outsource at all?’ and ‘what should we outsource?’ These aspects are discussed in more detail in Chapter 7, which considers the outsourcing selection process. It is also useful during the final preparation and agreement of the contract with the service provider because it can help to identify very clearly what is and what is not to be included in the specific contract. So the use of the continuum can help: ឣ

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To identify where the major benefits of outsourcing might be found. The company may be aiming to achieve, amongst other goals, some cost saving or perhaps some type of service improvement. A company needs to be able to identify which of its particular operations and/or processes should be considered for outsourcing to enable it to obtain the main benefits that it is seeking. To make clear exactly what is included and what is excluded as far as the contractor and the associated contract are concerned. This is important to the subsequent running of the operation. It needs to be clear what the 3PL contractor is responsible for, but also what remains as the responsibility of the user company. The service provided by many logistics operations has failed badly when this is not clear from the outset. To make clear where the boundaries of responsibility change. This is similar to the last point but it also needs emphasizing because of the problems that can result if this is not transparent. To identify the expected ‘gains’ or ‘wins’ from a contract, whether these are cost or service related. This will help in the final decision-making process of whether or not to outsource, as well as being important for post-contract evaluation of the extent of success or failure.

Standard types of operation There is a vast range of different operations that are provided by third-party service companies. In fact there are few, if any, operations that some of the larger companies will not consider. As will be discussed in other chapters, however, some companies tend to specialize in certain types and styles of operation, rather than trying to offer all of the many alternatives that are available. The basic types of operation offered can vary in style and degree; for example, delivery transport might cover just the contract hire of a single

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vehicle, the provision of a fleet of vehicles or a fully dedicated operation including vehicles, drivers and complete transport management. A fully dedicated supply chain-oriented package might cover storage and warehousing, primary and secondary transport, management services, order processing and stock control amongst other functions. A summary of the most common services that are offered includes a list of the key functions of most logistics operations. There is nothing original in such a list, so for anyone currently working in a logistics environment these will be well known. For those unfamiliar with all of the different aspects of logistics, some of the main ones are listed below, together with a brief comment on the operation. Note that this is not an exclusive list, but should provide a flavour of the type of operations that can be undertaken. Also note that many more sophisticated operations can be provided, and these are reviewed later in this chapter under the heading of value-added services.

Warehousing and storage Distribution depot operation Typically this includes all of the standard functions to be found in the operation of a distribution depot. Normally the complete set of functions is outsourced, including goods inward, reserve storage, pick, pack and consolidation for delivery. This is because it is difficult to only partially outsource such a physically intensive operation. However, the boundary between outsourcing and own operation may well concern the asset ownership. Thus, as previously indicated, the ownership of the building could be kept in-house while all the other assets (people, equipment and so on) might be outsourced, or vice versa (the ownership of the building outsourced and the operational assets kept in-house). Of course, a variety of alternative ways of making the split between outsourcing and in-house ownership and responsibilities are possible within this continuum.

Excess storage This was probably the original form of outsourcing, where externally owned general warehouses were used to store, in particular, goods that could not be stored in a company’s own warehouse because of a lack of space. It is typically used if large orders are received or if goods must be stockpiled for a particular event such as Christmas or the summer season.

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Cross-docking Cross-docking is often used to enable customer orders to be consolidated from goods that are sourced from a number of different locations. As physical deliveries from these sources occur, orders are immediately assembled, and on completion the final customer deliveries are made. These operations use a lot of physical space and need to be carefully coordinated for both inbound and outbound movements. Some third-party companies have the facilities and expertise to undertake this.

Transhipment This is similar to cross-docking, but transhipment often refers to the sorting and onward delivery of ready-picked orders. Some third-party providers operate satellite depots in rural or geographically peripheral areas that can collect ready-picked small orders from different companies’ distribution depots and then tranship these at their satellite depots to provide consolidated deliveries to local delivery points.

Break bulk Examples of break bulk operations are where containers or full vehicle loads are received from abroad for final delivery in a country. The loads are broken down into individual orders by the operator and then despatched as required to the appropriate delivery points. This might be for inwardbound raw materials for a company’s manufacturing sites, or for finished goods that need to be delivered to retailers or end users.

Stock and inventory Inventory management Linked very closely to the storage operations previously described, this includes the additional responsibility of the management of all of the stock and inventory that is held, covering elements such as stock control, stock replenishment, stock rotation, obsolescence and other related activities.

Specific stock responsibility Many companies like to have full control and vision of their finished goods inventory, but there are occasions when the control and management of certain types of inventory can be outsourced. Good examples are spares inventory, packaging and unit loads.

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Transport Primary transport (trunking, line-haul) The focus on primary transport is often one of cost reduction. It is seldom regarded as an activity that ‘adds value’ to an operation because there is no direct link to the final customer or retail store. Primary transport is all about moving the product at minimum cost, which generally involves using as large a vehicle as possible and making sure that the vehicle is filled to capacity. These movements usually consist of delivery to a single drop point. Other key aspects include: ឣ

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Vehicles are operated for as long as possible, sometimes on a 24-hour, three-shift basis, to maximize vehicle time utilization. Return loads for the vehicle are important so as to fulfil the criteria for maximum utilization. Additional vehicle specification, for example special on-vehicle handling equipment, is less important than for delivery operations.

The lack of return loads or ‘backloads’ and the difficulty of achieving these other key aspects often drive the decision to outsource the activity to general hauliers. This is because they are in a much better position to identify and create suitable opportunities for improved utilization and therefore lower costs.

Secondary transport Secondary transport and delivery usually involves direct contact with the customer or end user (or, as with retail operations, the key end user interface). These are, therefore, what are known as ‘customer-facing’ logistics operations, and they can be an important part of the customer service element of logistics strategy. As such, cost reduction is not the main operational criterion as it is with primary transport (although it is important). Customer service is the major criterion. Many customers have very restricted delivery windows (the time in which a delivery may be made). This makes the accurate scheduling of secondary vehicles very important. Service is usually critical. In particular, inventory reduction in retail stores and the increase of store selling space and elimination of stock rooms make timely delivery essential. This is to ensure that the store does not run out of stock. Specialist vehicles have been developed for secondary delivery, as in the case of grocery multi-temperature compartmentalized trailers. These are used to maximize the opportunity to make frequent and full deliveries of essential stock to the stores.

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Secondary transport operations are thus both service and cost-sensitive, and require particular skills for planning and management, as well as some fairly substantial financial investment. For these reasons, most companies now outsource their secondary transport operations to medium and large third-party service providers.

Collections Normally, distribution operations are planned and designed to provide a one-way flow of physical product that is delivered to customers. Vehicles, unit loads, handling equipment, schedules and the like may be inappropriate for items to be returned or collected via the outbound delivery system. Thus many types of collection operations (damaged product, packaging, unit loads) are often outsourced.

Fleet management Many companies see the day-to-day management of a vehicle fleet as a specialist technical operation – sometimes described as mobile asset management. Thus, although they may schedule and manage the vehicles and drivers to give them control of their delivery operation, they may choose to outsource the management of the fleet (maintenance, legal responsibility and so on) to a third-party company. Securicor Cash Services (SCS), for example, experienced a considerable reduction in maintenance costs when it outsourced this element of its transport management (Distribution, 2002). The vehicle maintenance for all of its 1,800 vehicles was contracted out to Lex Transfleet. ‘The bespoke fleet management solution devised by Lex Transfleet covered all scheduled and non-scheduled maintenance, breakdowns, and met SCS’s “O” licence requirements including vehicle history and storage, and taxation of the vehicles.’

Contract hire A classic opportunity for third-party providers is the provision of vehicles and/or drivers to supplement own-account fleets when they require additional resources. This might be to cover breakdowns, holidays, seasonal demand increases and similar factors.

Packaging and unitization Packaging There are various different opportunities for companies to outsource packaging operations. These are normally where special requirements make it difficult for the packaging to be undertaken in-house. A typical example is

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packaging product for export, which might be undertaken more costeffectively if a specialist export contractor is used.

Labelling and product preparation Many products are delivered to retailers from their suppliers without specific price information as an integral part of each individual item. This information often needs to be added before the goods are displayed in store. Some products may also need to be presented in a special selling unit in the store. Although shop staff can undertake this work, there has been a move to ensure that all products are sales-ready before they enter the store; the idea is to simplify the store operation so that all effort is concentrated on selling items rather than preparation work. Thus, many companies (and this may be the suppliers or the retailer) now outsource these types of operation to a third party.

Unit loads For operations that use a large number of unit loads (pallets, roll-cages and the like), it is important to have close management and control. This is often for reasons of both cost and supply. The cost reasons are to minimize costs by monitoring units and reusing them as often as possible (thus keeping capital costs down by avoiding the need for the regular purchase of new units). Supply reasons are to ensure a constant availability of units at the end of the production process. This is an operation that is sometimes outsourced.

Other standard operations Product inspection All products that are bought in, especially from abroad, are likely to need to be physically inspected to check for quality. This can be heavily labour and space intensive, and so may be an operation that can be outsourced, providing this does not create additional movement of the goods to an unnecessary location. It is possible to have this undertaken at the country of origin prior to the export shipment.

Reverse logistics An important type of outsourcing opportunity, this was discussed previously concerning collections in the section on transport.

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Merchandising Like labelling and product preparation, outlined above, merchandising is another operation that can be outsourced. This involves the preparation of the product for display and sale, and also involves the review of stock levels in the shop as well as the arrangement of the goods on the shelf in the shop.

Telesales and call centres This is another discrete specialist area that can be outsourced. Although not strictly speaking a logistics operation, very often telesales or call centres for catalogue sales simply deal with order-taking into a system which is linked to the warehouse management system, and this service is therefore very much oriented to logistics.

Different types of operation: dedicated or multi-user? What is the difference? One of the first decisions that a potential user company has to make when contemplating outsourcing as an option is whether to go for a multi-user solution or a dedicated solution. Dedicated operations are normally used by large companies, but the basis for any decision can be a trade-off between cost and service. Generally, small to medium-sized companies cannot afford the high costs associated with an operation that is exclusively dedicated to their logistics operations, because of their lack of scale. However there may be occasions when the service they require for their customers requires that an exclusive operation is used. The two alternatives are dedicated and multi-user operations, as described below.

Dedicated (or exclusive) operation This is where a complete logistics or distribution operation is provided by a third-party company for its client company. The third party undertakes to provide the client with all its distribution requirements, exclusively, on an international, national or regional basis. The resources used may include warehouses, distribution centres, transport fleets, managers and other facilities. Thus, the service provider sets up a specific operation to run all of these different elements for the client that is exclusive to the client company’s products – an operation dedicated to that client alone. This type of service is most common in the United Kingdom but is also used in Europe and North America. The opportunities for dedicated operations are usually confined to very large companies because of the scale and cost involved. Most large retailing

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companies have at least some dedicated third-party logistics operations. A typical example from the United Kingdom is Marks & Spencer. It currently uses three different contractors to run various parts of its operations. The key ones are GIST for all the food distribution centres, together with DHL Exel (since the acquisition of Exel by DPWN) and Christian Salvesen for the fashion and non-food operations. All of these operations are dedicated to Marks & Spencer.

Multi-user (or shared-user) distribution operation Multi-user distribution operations are different from dedicated operations because a group of client companies is catered for within the service provider’s operation, rather than just a single client. Ideally, the different companies will have some similar characteristics, so that there are clear advantages gained in linking them. For example, the clients may all be manufacturers or suppliers of similar goods, and their products may all be delivered to the same or similar customers – electrical goods to retailers, food to catering establishments and so on. A very similar type of third-party operation is where a client company has a dedicated operation that is operating at less than full capacity. Here, additional smaller clients may be taken on for storage and picking within the depot or for delivery via the transport operation. Thus, there is one major client together with a few much smaller ones. These are often known as shared-user operations, but in essence they are also multi-user operations that have initially developed from different circumstances. Such an operation may be owned and operated by the third-party company, or may be a joint venture between the third-party operator and the main client company. The major advantage of all of these approaches is that expensive logistics operations and costs are shared between the clients so all parties enjoy the benefits.

Which operation to choose? As with many decisions within logistics, the most appropriate solution is based on achieving a suitable balance between service requirements and operational costs. This is true for the dedicated or multi-user option. As a general rule: a dedicated operation may provide superior opportunities for service but at a high cost; a multi-user operation will provide opportunities for low-cost logistics but could mean a compromise for service requirements. Figure 3.4 summarizes this, showing the key factors in the dedicated or multi-user decision process, and emphasizing the differences in terms of service and cost advantages and disadvantages.

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Disadvantages

Advantages

Dedicated

Multi-user

• Organization and resources focused exclusively on the customer • Specialism and loyalty of staff • Specialism of warehouse, handling equipment and delivery vehicles • Confidentiality of customers’ product specifications/promotional activity

• Scale economies gained by sharing resources between a number of clients • Consolidation of loads enables higher delivery frequency • Opportunity to find clients with different business seasonality to maximize utilization of assets

• Total costs of the operation borne by customer • Seasonal under-utilization of resources

• Conflicting demands of each customer can compromise service • Staff do not gain specialist customer knowledge • Equipment is not specialized and may not exactly meet individual customer requirements

Figure 3.4 The key trade-offs between dedicated and multi-user distribution, emphasizing the different cost and service advantages and disadvantages

From a cost perspective, major savings can result from the economies of scale that are achieved with joint operations when the key resources are shared among a number of clients. Most small and medium-sized companies that have single dedicated operations are unable to maximize the use of a variety of resources such as storage space, warehouse equipment, specialist warehouse labour, delivery vehicles and delivery drivers. Such operational scale economies are gained through the use of a multi-user option, as well as the scale economies arising from spreading the cost of overheads across a much wider range of activities. The consolidation of loads enables higher delivery frequency to be achieved and also leads to better load utilization in vehicles. There is also often the opportunity to find and link clients with different business seasonality, thus creating an opportunity to maximize the utilization of assets throughout the year. From a service perspective, the dedicated operation provides the major advantages. All of the organization and resources within the operation are focused on the single client. In a multi-user operation there may be conflicting demands from different clients that might compromise the service that is provided. An example concerning delivery transport might be that one company requires early morning delivery of its products, but another has restricted delivery windows at lunchtimes that need to be met. It may not be possible to meet both of these requirements within a multiuser delivery operation because of the implications for cost and vehicle utilization. Dedicated operations also allow staff to become more specialized in terms of product familiarization and operational requirements. This can, for

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example, help to maximize the accuracy and speed of picking performance, because order pickers are more often than not dealing with the same products and the same product locations. Staff in a multi-user operation do not get so much opportunity to gain specialist customer knowledge because of the number of different products and clients they deal with. Service is also often enhanced in dedicated operations through the specialization of buildings, depot storage and handling equipment, packaging requirements, unit loads and delivery vehicles. Once again, the existence of a single client means that all of these different distribution elements can be designed specifically for that client in terms of what is most suitable for the demand characteristics of the product and the customer service that is required. Some of these aspects may be crucial: ឣ

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Buildings: are special areas required for inbound quality control or order consolidation? Storage: is racking configuration important in terms of storage slot sizes, number of floor picking locations, location of reserve pallets? Handling equipment: are special equipment or fork lift truck attachments required for the carriage of some products in the depot? Packaging: are there many export orders that require special packaging, which cannot be provided in a multi-user environment? Unit loads: are different unit loads required for some products due to their size or as special requirements for key customers? Delivery transport: does customer delivery need to be made on vehicles that have any special characteristics, such as vehicle size, unloading equipment or even driver knowledge during unloading and delivery?

For multi-user operations, it is often not possible to deal appropriately with all special requirements because the most standard equipment, organization, procedures and processes are used by the operating companies. Some, but certainly not all, exceptions can be made – but where they are feasible, they will be at a cost that must be met solely by the client that requires them. Thus some service demands may be adversely affected because not all individual customer requirements can be met. In summary, large operations can afford the cost of dedicated services, while most small companies are better suited to multi-user operations. It is the medium-sized companies that have to consider their options carefully, in order to make the right choice in balance between service and cost. The choice of a third-party provider is rarely a straightforward one, especially as there are so many different companies available in the marketplace and so many different types of operation. Once it has been determined that outsourcing is a viable solution, the next step is to clarify whether a dedicated or a multi-user solution is the most advantageous.

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Breakdown of broad service types So far in this chapter the extremes of total internal asset management and total external asset management have been reviewed within the context of a continuum of available operations. There has also been a review of the vast range of operations that are offered and provided by third-party service companies. Finally, the difference between dedicated and multi-user operations has been outlined. This section of the chapter takes an associated, but slightly different, consideration of the various services that are available. This is undertaken from the viewpoint of the main logistics components of warehousing and transport, but also considers some alternative opportunities for occasional outsourcing.

Warehousing As already discussed in the previous section of this chapter, the major warehousing alternatives are usually categorized as dedicated or multi-user. There are key differences between the two types of service, and the decision concerning which approach to adopt is an extremely important one. In association with this major categorization, there are also other different approaches that may be considered for warehousing or depot outsourcing. These are not all mutually exclusive. For example, a multi-user operation may also be a regional operation. The various operations are outlined below.

Specialist distribution operations These distribution operations are used for the storage of products that require special facilities or services, and the distribution operation run by the third-party company is especially tailored to suit these needs. There are several examples of both dedicated and multi-user operations, such as frozen food and hanging garment distribution. In addition, in the grocery industry, for example, many of the grocery multiples run a specialist depot for especially low-demand items and for very large items that require specialist storage, handling and picking.

Regional multi-client distribution operation These operations are provided for any number of clients, and for most product types. They are usually provided by a ‘general’ third-party distributor that probably started as a very small operation and has grown into a regional operation concentrated in a specific small geographic area.

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National multi-client distribution operation This category is very similar to the previous one, a service being provided for any number of clients and product types. The main difference relates to the size of the operation. This is country-wide, and probably includes a number of depots linked by a primary transport (trunking, line-haul) operation between these depots. Thus a client company can have its products delivered to anywhere in the country. A client company’s products might be located in just a single depot, a number of depots or in all of the depots in the third-party network structure.

Satellite operations These are operations where the operator is not involved in the storage of any products, but is only providing a break bulk and delivery service. Thus, no unordered stocks are held, although some minor stock-holding may occur for a limited number of product lines. Many manufacturers and suppliers now use satellite depot operations to enable them to minimize their inventory holding requirements (perhaps to a single central depot) while achieving a very large delivery ‘reach’ to a wide geographical area. This is achieved through overnight distribution of picked orders from the central depot, which are trans-shipped at satellite depots for onward local delivery the next day. This type of service is most commonly undertaken by third-party service providers.

Cross-docking As described earlier in this chapter, cross-docking is often used to enable customer orders to be consolidated from goods that are sourced from a number of different locations. As physical deliveries from these sources occur, orders are immediately assembled, and on completion the final customer deliveries are made. These operations use a lot of physical space and need to be carefully coordinated for both inbound and outbound movements. Some third-party companies have the facilities and expertise to undertake this, so it is a commonly outsourced activity. Third-party companies are used for this type of service when manufacturers or suppliers do not have their own depot in a particular geographic area.

Joint venture A limited number of operations have been set up whereby a third-party operator and a client company form a separate distribution company, called

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a joint venture. This may occur where a manufacturer with its own distribution operation has some underutilized resources. It will then link up with a third-party operator and offer the services on a wider basis. This has occurred in the hanging goods and the high-tech sectors.

International distribution operations These may be dedicated but are most likely to be multi-user, enabling a client to achieve international movements between sites and delivery to final customers over a broad international area. It is still very difficult in a European context to find a single third-party operator that can provide such a universal service across the breadth of an ever-expanding Europe.

Composite depots These are really a specific area of specialization in the grocery industry. Over many years, the logistical structure of grocery multiples has varied from depots where only a single product type is stocked and distributed (frozen food, chilled food, fruit and vegetables or ambient) to what is known as a ‘composite depot’, in which all product types are held. A mixture of goods from these different product types are also transported together on what are known as ‘composite delivery vehicles’ for delivery to superstores and hypermarkets. These are all dedicated operations and usually consist of extremely large and sophisticated depots with expensive delivery transport fleets. Once again, it is an area where the biggest logistics service providers are prevalent.

Transport The various types of transport service that are available through outsourcing can be classified in a different way from that used for warehousing. There are, in general, four main attributes that can be used to differentiate these broad service types. These are: ឣ

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Asset dedication: this concerns whether or not the assets are dedicated to the client (either a multi-user or a dedicated operation). Speed of delivery: this is an important service feature. The range starts at same-day delivery and extends as far as ‘as and when’ (though this is a rather unusual and risky alternative to agree to!). Size of consignment: this obviously has a big impact on both service and cost. Size can be represented in weight, cubic volume or number of items/units.

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Contractual basis: the basic difference here is whether the arrangement is a ‘one-off ’ transactional agreement (sometimes called ‘spot hire’) or whether a specific contract is drawn up and signed. The nature and type of contract can also vary quite significantly.

The key question of cost is negotiable according to the services that are required, although, of course, many transport operators have distinct tariffs that they work with. As a general rule costs will be higher, the larger the load and the faster the delivery required. A summary of this very traditional breakdown of broad third-party transport service types is given in Table 3.1. This is a very broad attempt at categorization and there are undoubtedly several elements where some overlap occurs, nevertheless, this classification is useful to help to clarify some of the main attributes of the various options that are available. The main service types are outlined below.

Express Usually this will be a parcels operation where the emphasis is on the speed of delivery. Non-urgent parcels are often sent via the national or international parcel post where both the costs and the speed of service are low. Table 3.1 A breakdown of the broad third-party transport types showing some of the different attributes Broad Service Type

Asset Dedication

Speed of Delivery

Size of Consignment

Express

shared

same/next day small parcel-size

Groupage

shared

slower than express: several days

larger than transaction express: palletsize plus

General haulage

shared (but could be contract)

slower than express: 48 hours plus

any size

Multi-user

shared

slower than as required dedicated: next day or longer

contract

Dedicated

dedicated

as required

contract

as required

Contractual Basis transaction (could be contract for such as mail order)

transaction (‘spot’) or contract

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Express services are normally transactional, but for some large-scale operations such as mail order, contracts are used.

Groupage or consolidation services This is a very traditional style of transport service. The major attraction is the ability to send small orders via a low-cost transport option. Thus, small orders from any number of companies are consolidated into full vehicle loads. The main drawback with groupage is that orders take a long time before the final delivery is made. This is because time is lost as orders are collected together to create a full load. These options are very much shared rather than dedicated.

General haulage This is another very traditional means of outsourcing transport, one that was in existence for a long time before the recent third-party distribution fashion came about. General haulage is now commonly used by manufacturers and suppliers that need to have non-standard products moved – typically those that cannot be easily unitized. General haulage can be shared or dedicated, dependent on the size of the load and the length of time that a relationship is expected to be required between user and contractor. Transactions are typically of two types, as described above: either transactional (known as ‘spot hire’) or contractual. The former is used for small and occasional loads, and the latter if there is a particularly large load or movement required, because a more formal arrangement is preferable.

Multi-user operation This type of service was described earlier in the chapter. It can be used for both transport and warehousing. Asset dedication is, of course, shared as this is the basis of a multi-user environment. Multi-user services are also contract based, consignment size is variable, and speed of delivery is also negotiable but is likely to be slower than that for dedicated operations.

Dedicated operation This type of service was also described earlier in the chapter, and again it can be used for both transport and warehousing. Assets are dedicated, size of consignment is variable and speed of delivery is negotiable.

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Occasional use Many companies use third-party services on an occasional basis or as an aid to support their own-account operations. There are important opportunities available, and these services represent an important input to shared and multi-user operations. There are a number of reasons that a company might need such occasional use: to cover seasonal peaks in demand; to cover weekly demand peaks; for non-standard products that do not fit easily into its own operation (very small or very large products); to deliver to peripheral geographic areas where there is only limited demand for its products; for non-standard operations (such as returns or collections). The main reasons are outlined below.

Seasonal peaks in demand Most own-account operations should only be resourced up to a level that will allow the company to run the business for somewhere between average and peak demand. If a business has resources that allow it to operate at peak levels, then it is likely that many of the resources will be underutilized for much of the year. Thus, for a correctly resourced operation it will be necessary to outsource at seasonal peak periods of demand. This is demonstrated in Figure 3.5, which illustrates that the company should resource its % 14 12 10 8 6 4 2 0 Jan

Feb

Mar actual

Apr

May

Jun

avge plus

Jul

Aug average

Sep

Oct

Nov

maximum

Figure 3.5 Annual demand, showing that the fleet should be resourced between average or average plus 10 to 20 per cent and so some transport should be outsourced at the two peaks

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fleet to the level of either the lower or the middle straight line (at average demand or average plus 10 to 20 per cent). Thus, outsourcing is required before Christmas and in the summer (for the average).

Weekly demand peak Similar to the previous example of annual demand, many own-account operations may only be resourced up to a level that will allow them to run the business for somewhere between average and peak demand during the week. Thus, it may be necessary to outsource for peaks of demand that occur during the week.

Non-standard products Many distribution operations are designed to cater for the standard products that a company manufactures or retails. Those that do not fit easily into its own operation may be outsourced to a third-party operation – often one that specializes in distributing that type of product. Good examples of this include very small or very large products (in the retail grocery industry), or hazardous products.

Peripheral geographic areas The demand for many companies’ products is concentrated in certain geographic areas. For retailers this is likely to be in highly populated areas of the country. In rural areas, for example, where there is only limited demand for their products, it is often uneconomic for them to run their own distribution operation, so they use a regional third-party company to undertake the distribution for them.

Non-standard operations There are often certain non-standard operations that are not easily undertaken within a typical distribution operation. These may be outsourced to third parties that specialize in those elements of logistics. A good example is ice cream. This may be retailed with other confectionery products but cannot be transported with these products in ambient transport vehicles. Thus, a specialist refrigerated multi-user transport operation must be used for the ice cream.

Spot hire There are often occasions when additional resources are needed over and above the normal operating requirements. This may necessitate the hiring

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of extra vehicles and drivers. This may be the result of additional one-off demand (an unexpected or exceptionally large order), an urgent order, or through sickness or vehicle breakdown. Resources are then hired from hauliers or third-party service providers on what is known as a ‘spot’ basis.

Returns or reverse-logistics operations There are also occasions when goods need to be returned to the distribution depot. These are returns or reverse-logistics operations where, perhaps, returnable packaging needs to be brought back through the supply chain for refurbishment, cleaning and reuse (mushroom containers in the fruit and vegetable market) or collections of returned goods that customers do not want. It is often very difficult to organize this effectively on outwardbound delivery vehicles because it may, for example, affect set delivery times to customers. Thus, many companies now use third parties to undertake these movements. For larger companies this has become more than an occasional requirement, and full-scale dedicated operations are now used – again, particularly by the grocery multiples.

Promotions For many businesses, the introduction of special offers or promotions is a means of stimulating additional sales. It is not always possible to forecast the exact impact of such promotional activity. For any really successful promotion it is often the case that the normal distribution operation is unable to cope with the increased demand on its resources. Thus, third parties are called in to provide any additional resource requirements.

Supply-chain management The concept of the supply chain compared with logistics was illustrated in Figure 3.2. It can be seen from this rather simplistic diagram that logistics is an integral part of a broader entity called the supply chain. The total logistics concept advocates the benefits of viewing the various elements of logistics as an integrated whole. Supply-chain management is similar, but also includes the supplier and the end user in the process. There are four distinct differences claimed for supply-chain management over the more classic view of logistics, although some of these elements have also been recognized as key to the successful planning of logistics operations. These four are: ឣ

The supply chain is viewed as a single entity rather than a series of fragmented elements such as procurement, manufacturing and distribution.

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This is also how logistics is viewed in most forward-looking companies. The real change is that both the suppliers and the end users are included in the planning process, thus going outside the boundaries of a single organization in an attempt to plan for the supply chain as a whole. Supply-chain management is very much a strategic planning process, with a particular emphasis on strategic decision making rather than on the operational systems. Supply-chain management provides for a very different approach to dealing with inventory throughout the pipeline process. Traditionally, inventory has been used as a safety-valve between the separate components within the pipeline, leading to large and expensive stocks of products. Supply-chain management aims to alter this perspective so that inventory is used as a last resort to balance the integrated flow of product through the pipeline. Central to the success of effective supply-chain management is the use of integrated information systems that are a part of the whole supply chain rather than merely acting in isolation for each of the separate components. These enable visibility of product demand and stock levels through the full length of the pipeline. This has only become a possibility with the recent advances in information systems technology.

Thus, many companies now realize the advantage of taking a complete supply-chain perspective when planning their logistics and supply strategy, because there are significant cost and service benefits to be gained. This concept can, and possibly should, also apply to the outsourcing of logistics operations. Given that there are significant benefits to be gained from a company taking a single-entity approach to its supply chain, then it should also be the case that if a complete operation is outsourced the third-party service provider should get the opportunity to plan and manage the operation in its entirety. Companies that outsource would then also be able to benefit from the advantages that accrue from effective supply-chain management. This approach has been endorsed by many service providers, and so the concept of fourth-party logistics has been born. Accenture has defined a fourth-party logistics service provider as ‘an integrator that assembles the resources, capabilities, and technology of its own organization and other organizations to design, build and run comprehensive supply chain solutions’. The main impetus is for the overall planning to be outsourced and that the complete supply-chain operation should be included within the remit of the 4PL. Fourth-party logistics (4PL) is examined in detail in Chapter 9. Although the adoption of the fourth-party concept has been relatively limited (as discussed in Chapter 9), it would seem that the outsourcing of

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complete supply-chain strategies and operations is a significant area of interest and opportunity for global organizations that see their core competence in manufacturing or retailing rather than supply-chain management.

An interesting example of such an application was reported by Eyefortransport.com on 11 July 2003. APL Logistics is to lead a new global international logistics service to the Zip Project, a joint venture between the UK’s Marks & Spencer and Northern Ireland’s privately owned Desmonds, which provides all of Marks & Spencer’s children’s wear range, supplied mainly from Sri Lanka, China, Bangladesh, the Philippines and Vietnam. The service involves the coordination and control of thousands of tons of children’s wear from these manufacturing centres to the United Kingdom. APLL’s solution, developed following a thorough analysis of Zip’s supply chain, concentrates on global import logistics, information management and establishing systems and processes that allow the supply chain to respond quickly to changing needs and circumstances. Zip products are to be shipped using multi-modal transportation methods – sea, air and road. Dan Ryan, APL Logistics’ president (Europe), was quoted as saying: Zip demands world-class supply chain solutions, which require a collaborative partnership with their logistics services providers, as well as the application of best practice. This matches APL Logistics’ global business strategy. … Our focus on adding value through people, process and technology means we have built, in partnership with Zip, a fully integrated global supply chain solution, which will ensure Zip’s products have a fast, reliable and cost-effective route to market.

Areas that have received particular attention include purchase order and vendor management at origin, driven by strict operational processes and enabled by APLL’s global operating system, which facilitates real-time, accurate information flow. APLL is also implementing value-added preshipment services for Zip, such as quality control and bar-coding scanning in Asia. Gary Morter, APLL’s MD for UK and Ireland, commented: Our work with Zip has led to a complete supply chain re-design …. Whereas Zip used to move mostly factory packed containers, they are now consolidating a large percentage of their product in Asia, thereby improving container utilisation and significantly reducing cost. Source: Eyefortransport.com, 11 July 2003

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Value-added services There are also many additional services offered by third-party logistics providers. These are often known as ‘value-added’ services because they consist of, in particular, those functions and services that add significant additional value to the product being distributed. As a general rule they also represent opportunities for the 3PL to develop services that are more profitable than the more standard storage, picking and transport of goods. Examples of these are given below.

Specialist or niche services Here the complete operational package is specifically designed for the distribution of particular product type. There are many examples in a number of different market sectors – automotive, electrical/electronic, hanging garments, high-tech and others. The development of hanging garment distribution is typical. Here the entire distribution operation, from production point through finished goods warehouse, primary transport, distribution centre, delivery transport and into the retail store, is all provided on hanging rails. Products are thus stored and moved as ‘sets’ of garments on hangers. Some of the storage operations are very sophisticated automated systems.

Time-definite services These are set up to support the just-in-time operations of major manufacturers. Typical here are the sequencing centres that have been developed in the automotive industry to support line-side production. TNT, Hays and Ryder have provided these for Rover, General Motors and Nissan, supplying line-ready production modules direct to the production line so that the relevant components can be introduced into the manufacturing process at exactly the appropriate time.

Production and assembly Here the final manufacturing or assembly of products takes place outside the manufacturing environment but within the logistics operation. The computer industry offers a number of examples where basic products, such as PC monitors or processing units are initially distributed to the relevant market before being finally made ready for the end customer. This is likely to include the ‘badging’ of the equipment with the appropriate name and the installation of the final language software. This is often undertaken by the third-party distributor.

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Repacking For some product offerings it may be necessary for goods to be repacked before they are ready for selling. A typical example is the need to blisterpack two different items that are derived from separate manufacturers or suppliers but are to go out as a distinct retail product – a torch together with a battery, for example. This is another niche operation favoured by a few specialist distribution companies.

Refurbishment In the light of current environmental legislation many manufacturing companies have endeavoured to re-engineer their products so that parts from some used products can be reused in new products. It is necessary to return these parts through the supply chain – not an easy task as most distribution operations tend to be geared to moving products out to the customer and not back from the customer to the manufacturer. This has provided an opportunity for third-party companies to offer this return-andrefurbishment operation.

Packaging returns Again linked to environmental legislation, ‘producers’ of packaging waste are legally responsible for the collection of packaging and packaging waste for reuse or disposal. Because this type of ‘reverse logistics’ is difficult to perform through traditional outward-looking logistics operations, a number of third-party operators have set up reverse-logistics systems, in particular for the large grocery multiples. Examples include the development of recycling centres for the disposal of waste and the repair and washing of reusable containers.

Product returns Another issue that has arisen due to environmental concern is the recent legislation for the return of consumer products that have reached the end of their working life. In Europe, this is reflected in the Waste Electrical and Electronic Equipment (WEEE) directive. The objective of this EU directive is to reduce the amount of WEEE being produced and to encourage its reuse, recycling and recovery. Organizations that manufacture, supply and use electronic and electrical equipment are all covered by this legislation, and there are significant implications for their operations. As already indicated with previous examples of reverse logistics, this is extremely difficult to

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undertake through existing logistics structures, so it is a prime opportunity for third-party service providers to set up and run reverse operations to fulfil these legislative requirements.

Inbound logistics The provision and movement of goods into a manufacturing company is also seen as an area for additional value-added service. This involves the coordination of the raw material, component and packaging products that a manufacturing company requires. It typically includes not just the collection and transport of all these different products, but also stock control, ordering and order progress chasing. It is a much-neglected area, and offers a good opportunity for cost saving and improved stock and supplier control.

Pre-retailing Here, products are prepared for immediate use in the retailing environment. This may involve de-packaging from outers, labelling and so on. In the clothing industry, particularly for boxed items, additional services will include cleaning and pressing to make the garments shop-ready.

Retailing point-of-sale material Another example of a retailing value-added opportunity is point-of-sale material. Many point-of-sale requirements cannot be easily identified and distributed through standard information and physical systems. Thus, this has become an area of specialization for some third-party operators. For example, TNT operates a system for a major supermarket chain that allows it to identify, for individual stores, exactly what point-of-sale items and printed labels are required. TNT can then print and produce the appropriate material based on store size and profile, and deliver it to the stores.

Home delivery In some sectors (such as white goods and brown goods), home delivery has been common practice for several years. Many third-party contractors have developed home-delivery operations, and there are also traditional parcels operators that specialize in the home delivery of small orders for a variety of different clients, such as mail-order companies. The white and brown goods sector, for example, has seen a rapid change in consumer and legal requirements. Thus, companies have set up home-

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delivery services that offer a ‘cradle to the grave’ approach including delivery, installation, return and repair, and refurbishment or disposal. They typically provide UK nationwide fulfilment for consumer electronic goods for manufacturers, retailers, insurance companies and service providers. Home delivery refers to the physical delivery of the product to the home, as distinct from home shopping, which refers to the different ways of shopping for and ordering products from home. The delivery of goods to the home that have been ordered via the internet is very similar to home delivery, but is more strictly referred to as e-fulfilment.

E-fulfilment The rapid growth in online selling companies, such as Amazon.com, means that internet shopping is now very common, and this has led to a similar growth in the demand for the fulfilment (or e-fulfilment) of these internet orders. Although internet access provides a direct and instantaneous link from the customer to the selling organization, the actual physical fulfilment must still be undertaken by more traditional physical means. Very often this may necessitate the introduction of a new means of physical distribution, because traditional channels are not appropriate for the type of delivery to the home that is required. A number of new companies, such as Business Express, and Beck and Call, were set up specifically as specialist e-fulfilment delivery operations and thus developed a particular expertise for this type of operation. Some e-fulfilment operations require a special approach. Those companies involved in grocery home delivery have, for example, developed specialist small vehicles that have compartments for the different types of grocery products: ambient, fresh, chilled and frozen. A number of different logistics solutions are still used for the storage and picking elements. The option of building specialist home-delivery depots has generally not been successful. Most operations either stock and pick within designated areas of existing distribution centres or pick from large retail hypermarkets. As well as delivery using conventional systems, other solutions that have been considered are the provision of secure boxes outside or attached to the property. Alternative points of delivery such as the place of work or the petrol station have also been tried with varying degrees of success. Picked and packed goods are delivered to await the customer collection. A number of these approaches to e-fulfilment will be successful (and many will fail), but the area as a whole is one that few internet companies will wish to develop, and so there are big opportunities for 3PLs to specialize and to offer value-added services.

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Information management Advances in information technology have enabled a vast amount of detailed logistics and demand data and information to be made available and to be manipulated very easily. This has led some companies to recognize the need to devise suitable processes to ensure that data is collected, collated and used in a positive and organized way. For logistics this means that detailed information can be made available for individual customers, concerning not just their product preferences but also any customer service requirements that are distribution-specific (delivery time preference, order size preference, invoicing requirements and so on). Some of the new software that has been developed to achieve these advances is both expensive to purchase and difficult to maintain and operate. Thus, this has become another area of opportunity for 3PLs and others to specialize and to offer their services to the marketplace.

Online communication systems Some third-party operators have identified the area of logistics communication systems as one where there is an opportunity to provide added value. One typical example is the provision of online information concerning the status of collections and deliveries. This type of development has been led by the major parcel carriers. TNT Express, for example, has developed interactive web-based solutions that allow its customers to have direct visibility on order status direct from their information systems. Also, where inventory is held for storage and distribution purposes, visibility is also available via the web on up-to-date stock levels and locations. This is particularly useful for spare parts operations that need to offer a two or even onehour guarantee of parts availability and supply.

Summary In this chapter the various outsourcing operations and services that are offered by third-party logistics service providers have been described. Initially, the breadth of outsourcing opportunities was outlined, from very limited participation to total asset management and including all of the many other opportunities between these extremes. The concept of the outsourcing continuum was discussed, emphasizing the need for potential users to be absolutely clear where different responsibilities lie and where the boundaries between these responsibilities occur.

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Various standard types of operation were described, then the question of whether to adopt a dedicated or a multi-user approach was reviewed. A broad breakdown of the different services available from the viewpoint of the main logistics components of warehousing and transport was then provided. Some alternative opportunities for occasional outsourcing were also considered. The concept of supply-chain management was reviewed with respect to how it might be applied to the outsourcing of logistics operations. Finally, the many additional value-added services offered by thirdparty logistics providers were discussed.

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4

Major providers Introduction This chapter considers the leading and influential third-party logistics (3PL) providers, reviewing their history and their current operations and activities. The information is presented in four sections: global providers, European providers, American providers and Asia Pacific providers.

The overall 3PL market In a report for Global Logistics & Supply Chain Strategies, Foster and Armstrong (2006) reported that total revenues for outsourced logistics worldwide had reached US$333 billion by 2004. As in many industries there has been a tremendous change in the 3PL industry over the last 10 years or so. The globalization of trade has been a significant driver in the development of 3PLs, combined with the increasing commoditization of services resulting from the tough attitude of manufacturers and retailers. These global customers, often under their own margin pressure, are seeking higher levels of engagement with 3PLs but at reduced costs. They are looking for a wider range of solutions and capabilities from 3PLs to support longer supply chains. The impact of this is being seen as large global companies send out their requests for proposal for logistics and supplychain services. It is often only the top, larger 3PLs that are asked to respond, and the requirements keep getting more complex and demanding. The smaller 3PLs are progressively becoming marginalized, and increasingly they end up providing parts of the logistics contract as subcontractors. The 3PL market is tough. It is highly competitive and very fragmented. In broad terms, the big players are getting bigger and the small providers are increasingly being marginalized and struggling to achieve growth targets.

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There are pressures on margins across the industry. Indeed, in the 2004 study of 3PLs across the Americas, Europe and Asia, entitled ‘Taking stock of third-party logistics’ (Advantage, 2006), 3PL CEOs indicated that their companies have suffered from lower profitability than forecast in recent years, largely driven by ongoing downward pressure on prices. Furthermore, the 2005 Third-Party Logistics study of 1,091 companies found that for the first time ever, the most important aspect in selecting a 3PL was price (Langley and Capgemini, 2005). Renewed business is inevitably accepted at lower margins than allowed for by the previous contract. In response, 3PLs are looking to develop added-value services and solutions that can help to stem the margin erosion. According to a 2004 Armstrong & Associates study, the top 100 3PLs control around one-third of a then estimated US$270 billion spend on outsourced logistics (Foster and Armstrong, 2006). In 2005/06 the top 25 3PLs had combined revenues of US$149 billion, as shown in Table 4.1. There is an elite group of four super-3PLs with revenues in excess of US$10 billion, with DHL Logistics number one with over US$26 billion revenues, followed by fellow German provider Schenker with revenues of US$12 billion. These four super-3PLs, which also include Nippon Express and Kühne + Nagel, have total revenues of US$60 billion, with the top 10 3PLs representing a total revenue of US$96 billion. These super-3PLs are examples of third-party providers that are striving to achieve scale and coverage to become truly global providers, as can been seen from the number of employees in Figure 4.1. They can provide the expertise, reach, reliability and flexibility that global companies require. They have developed end-to-end solutions in response to their customers’ need, including forwarding, transportation, consolidation, and customs brokerage, warehousing, distribution and a range of added-value services. Following the acquisition of Exel, DHL Logistics now leads across all service sectors. It claims to have an 11.6 per cent share of the N22.2 billion air freight market, followed by Nippon Express with only 5.6 per cent. The German number one claims an 8.6 per cent share of the ocean freight market, with Kühne + Nagel snapping at its heels with 8.3 per cent. Further, following the acquisition of the former number one, Exel, DHL Logistics now also leads the contract logistics market with a 5.5 per cent share of an estimated N167 billion market. TNT Logistics sits at number two with just 2.2 per cent, reflecting the very fragmented nature of the market (DHL, 2006).

Growth of the 3PL market In the developed markets like the United Kingdom, Germany and France, many of the leading logistics companies have emerged from nationalized

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Table 4.1 Top 25 logistics service providers by revenue Rank

Company

Head Office

1 2

DHL Logistics Schenker

Germany, Europe Germany, Europe

26,715 12,163

3

Nippon Express

Japan, Asia Pacific

11,838

4

Kühne + Nagel

Switzerland, Europe

10,100

5

Panalpina

Switzerland, Europe

6,551

6

Toll

Australia, Asia Pacific

6,450

7

DSV (incl. Frans Maas)

Denmark, Europe

6,028

8

UPS Supply Chain Solutions

USA, Americas

5,994

9

CH Robinson

USA, Americas

5,700

10

Geodis

France, Europe

4,925

11

TNT Logistics

Netherlands, Europe

4,795

12

Con-Way

USA, Americas

4,200

13

GEFCO

France, Europe

4,110

14

Expeditors

USA, Americas

3,902

15

Dachser

Germany, Europe

3,836

16

Penske

USA, Americas

3,700

17

FedEx Freight & SCS

USA, Americas

3,645

18

Schneider

USA, Americas

3,500

19

ABX

Belgium, Europe

3,425

20

NYK Logistics

Japan, Asia Pacific

3,300

21

Wincanton

UK, Europe

3,288

22

JB Hunt

USA, Americas

3,128

23

EGL

USA, Americas

3,009

24

Kintetsu

Japan, Asia Pacific

2,600

25

Cat Logistics

USA, Americas

2,500

Total revenue

Latest Reported Revenue (US$ billion)

149,402

Note: Revenues converted into US dollars where appropriate. All revenues referenced to source under 3PL entries.

Major providers 160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

DHL Logistics Schenker Nippon Express Kühne + Nagel Panalpina Toll DSV (incl. Frans Maas) UPS SCS CH Robinson Geodis TNT Logistics Con-Way GEFCO Expeditors Dachser Penske FedEx Schneider ABX NYK Logistics Wincanton JB Hunt EGL Kintetsu Cat Logistics Thiel Uti Bax Ryder Norbert Dentressangle

Figures based on latest available All employee figures referenced to source under 3PL entries

Figure 4.1 Top 25 logistics service providers by employees

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industries (examples: Exel from National Freight Corporation (NFC), Schenker from Deutsche Bahn), specialist industries (examples: GEFCO from automotive, Gist from industrial gases, Wincanton from dairies) or shipping companies with a long history (examples: Maersk, Kühne + Nagel, Panalpina). In the United States, prominent third-party providers have come from express parcel companies (FedEx, UPS) or often from trucking or logistics companies formed quite recently by individuals (J B Hunt, C H Robinson, Penske, Ryder), reflecting the ‘mama and papa’ nature of trucking in the States. The Asian providers are led by the large Japanese companies coming from state holdings or large shipping or railway companies (examples: Nippon, NYK, Kintetsu). It is certainly the case that to be considered as a credible provider in the new global trading market, 3PLs need to have a balance of capability between freight forwarding and contract logistics, as shown in Figure 4.3. Freight forwarders like Kühne + Nagel and Maersk have developed their solutions to add contract logistics services, often through acquisition. In turn traditional contract logistics providers have expanded their services to include freight forwarding, typified by the Ocean (MSAS) and NFC (Exel Logistics) merger. However it appears to have been more difficult for legacy contract logistics to expand into freight forwarding, with most developments of combined freight and contract logistics services coming from legacy shippers or forwarders. This is most likely due to the more global nature of their businesses and the existence of a global shipping or freight network. While the likes of DHL and UPS are leading the way in developing global capabilities and services by leveraging on the scale and global reach of their parent companies, operators such as Kühne + Nagel, Panalpina, Schenker and Nippon Express are snapping at their heels as shown in Figure 4.2. There is significant consolidation in the 3PL industry. Recent large acquisitions include Deutsche Post World Net’s (DPWN) 2005 purchase of the largest logistics provider, UK-based Exel, which had itself acquired Tibbet and Britten just a year previously. Kühne + Nagel has acquired ACR (formally Hays Logistics), while Danish company DSV has merged with Dutch firm Frans Maas. P&O Nedlloyd was snapped up by M‘rsk and BAX Global was bought by Schenker (Deutsche Bahn). Toll purchased Australian rival Patrick Corporation and the Singapore provider, SemCorp Logistics in 2006. Equally, more joint ventures and alliances are being formed. ABX announced a strategic alliance with Penske Logistics in 2006, while APL Logistics and Christian Salvesen launched a joint venture company.

Major providers

Schenker Nippon Express Kühne + Nagel Panalpina Toll DSV (incl. Frans Maas) UPS SCS CH Robinson Geodis TNT Logistics Con-Way GEFCO Expeditors Dachser Penske FedEx Schneider ABX NYK Logistics Wincanton JB Hunt EGL Kintetsu Cat Logistics Thiel Uti Bax Ryder Norbert Dentressangle Values converted into millions of US dollars All revenues referenced to source under 3PL entries

Figure 4.2 Top 25 logistics service providers by revenues

30,000

25,000

20,000

15,000

10,000

5,000

DHL Logistics

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141

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Global providers Introduction The key qualifications for becoming a global logistics provider are geographical spread, scale and free cash. Express parcel carriers, which are already established in most countries in the world, are now increasing their services to less-than-container-load and container-load shipments. Further, the larger companies such as DHL, UPS and FedEx have established logistics organizations and are leading the way in global 3PL expansion. To demonstrate the global position of the top 3PL providers, Transport Intelligence produced a 3PL Global Solutions Quadrant, as shown in Figure 4.3. It can clearly be seen that the combined DHL/Exel business is leading the way, with UPS Solutions just behind.

DHL Logistics DHL Logistics facts and figures Head office: Bracknell, UK Parent company: Deutsche Post World Net (DPWN) 3PL revenue: DHL Solutions N7,949 million; DHL Freight circa N4,000 million (2005); Exel N11,456 million (2005) Parent revenue: DPWN N44,594 million (2005), Exel N11,456 million (2005) Global coverage: 220 countries worldwide Employees: DHL Solutions 148,095 including Exel (2006) Key services and products: Air and ocean freight, warehousing, transportation, service parts logistics, other added-value activities Industry focus: Aerospace, automotive, consumer goods, fashion, healthcare/pharmaceutical, high technology, retail Source: DHL (2006).

DHL Logistics background Following the acquisition of UK-based Exel PLC in 2005, Deutsche Post World Net (DPWN) acquired the seventh-largest workforce in the world, with 500,000 employees. DHL Logistics is organized around two business units: DHL Global Forwarding (formerly DHL Danzas Air & Ocean and Exel

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Multiple DHL/Exel

Functionality

UPS

Schenker / Bax NYK Logistics

Fiege Geodis

APL Ryder Salvesen

FedEx TNT Expeditors CAT

EGL

Single Local

Geographic scope

Global

Figure 4.3 3PL Global Solutions Quadrant Source: Transport Intelligence (2006)

global freight) and DHL Exel Supply Chain (formerly DHL Solutions and Exel contract logistics). The purchase of Exel, which valued the company at N5.4 billion, has made DHL Logistics the undisputed global number one in logistics and freight. In air freight, DHL is a clear leader with 11.6 per cent of the estimated N22.2 billion market, twice the size of its nearest rival Nippon Express (5.6 per cent). In sea freight DHL has 8.6 per cent of the market, just ahead of Kühne + Nagel with 8.3 per cent. Exel has increased the size of DHL’s contract logistics business significantly, and the newly formed DHL Exel Supply Chain business is number one globally by some margin. DHL’s contract logistics business has a 5.5 per cent share of the estimated N167 billion market, with TNT in second place with an estimated 2.2 per cent (DHL, 2006). Following the acquisition of Exel, John Allan, former CEO of Exel plc, was appointed CEO of DHL Logistics. Allan, who had been appointed CEO of Ocean Group plc before it merged with NFC to create Exel plc, is very well respected across the logistics industry, winning the Best International Logistics Initiative and appointed a Commander of the British Empire (CBE) in recognition of his services to the freight industry in 2005. The name DHL comes from the first letters of the last names of the original three company founders, Adrian Dalsey, Larry Hillblom and Robert Lynn. The redesigned DHL brand in Deutsche Post yellow was successfully rolled out across all the logistics and express businesses in 2003 (DHL, 2006).

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DHL Logistics history 1969:

DHL is founded by three partners in the United States. The three partners personally ship papers by airplane from San Francisco to Honolulu, initiating the delivery of documents and shipments by airplane and the beginnings of international air express.

1970 to 1987: The DHL Network grows very quickly and the company expands into the Far East and Pacific Rim, then the Middle East, Africa and Europe. 1988:

DHL is present in 170 countries and employs 16,000 people.

2000:

DPWN acquires freight forwarder Danzas.

2001:

DPWN acquires Air Express International (AEI).

2002:

DPWN becomes the major shareholder in DHL, completing a 100 per cent ownership by the end of that year.

2003:

DPWN acquires Securicor Omega, a UK-based third-party provider of express, logistics and container logistics. DPWN consolidates all of its express and logistics activities under the single brand DHL.

2005:

In December, DPWN strengthens the DHL brand further through its acquisition of Exel PLC. Overall, N6.2 billion is spent on acquisitions during the year.

2006:

DPWN announces that DHL Express, with revenues of around N4 billion, is to be brought into the Logistics division as an own subdivision.

Source: DHL (2006).

Exel history Exel plc was formed from the merger of NFC (Exel Logistics) and Ocean (MSAS Global Logistics) in 2000. NFC had previously been the nationalized road freight operation in the United Kingdom, until its privatization through a management and employee buy-out in 1982. Ocean Group plc was a long-established shipping company working routes from Liverpool. It divested itself of its ships and tugs and reinvented itself as a freight management company, becoming especially proficient in air freight. When John Allan joined Ocean as CEO in 1994, he set about making the group a global leader in integrated logistics, through a series of acquisitions and mergers, culminating in Exel’s acquisition of Tibbet and Britten in 2004. At the time that DPWN acquired Exel in December 2005, it had around 111,000 employees across 135 countries, providing an integrated freight and logistics offering to customers (DHL, 2006).

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Danzas and AEI Danzas was founded in 1815, based in Basel, Switzerland. DPWN acquired the business in 2000. By then it had become the world leader in air freight and ranked second in ocean freight. The business also provided overland transport and supply-chain management services (DHL, 2006). Air Express International (AEI), then the largest US air freight provider, was integrated into the Danzas group in 2001 (DHL, 2006).

DHL Logistics operations and activities DHL Global Forwarding DHL Global Forwarding provides air and sea freight across 130 countries worldwide. Other services include compliance and customs consolidation, air freight consolidation, ocean dangerous goods and temperaturecontrolled goods (DHL, 2006).

DHL Exel Supply Chain DHL Exel Supply Chain provides a range of industry tailored logistics solutions, from warehousing and transportation to consulting and supply-chain design. Other services include inbound to manufacturing, order management, service parts logistics, reverse logistics and integrated supplychain management, together with added-value services such as kitting, copacking, packaging and technical distribution (DHL, 2006).

DHL Freight DHL Freight is a road cargo business, offering international and national transport solutions for both part (LTL) and full load (FTL) across Europe. The goods are moved by road, rail and multi-modal systems, and other services, such as customs clearance, are provided (DHL, 2006).

Case history On 19 September 2006, DHL Logistics announced that it had won a contract with the UK government’s Department of Health worth £1.6 billion in revenue over 10 years. The 10-year contract to manage £22 billion (N32 billion) total spend into hospitals and heath trusts involves the operation of the NHS (National Health Service) supply chain. DHL has targeted £1 billion (N1.4 billion) savings to the NHS over 10 years. DHL has also committed to around 1,000 new jobs.

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Klaus Zumwinkel, CEO and Chairman of DPWN, commenting on the win, said the contract demonstrated the success of the group’s strategy: ‘After the take-over of Exel and given DHL’s extensive expertise in the health sector, we were able to make our customer a truly convincing offer. We now reap the benefits of both our internationalization strategy and our broad product range’ (DHL, 2006). Under the contract, DHL will be responsible for delivering all procurement and logistics services across 500,000 products in support of 600 hospitals in England. The operation is aimed at allowing the NHS to dedicate more resources to patient care. John Allan, CEO of DHL Logistics division and management board member of DPWN, commented: ‘This contract is both good for staff and good for the NHS. We are committed to targeting savings on behalf of the Department of Health that can be directed back to patient care by building upon the success of both NHS Logistics and some of the scope of the NHS Purchasing and Supply Agency. The contract will ensure that NHS trusts get access to a wide range of high-quality, innovative products that will be selected by having extensive dialogue and testing procedures with clinicians. We are thrilled to play such a major part in this change to manage and deliver a world-class supply chain for the NHS’ (DHL, 2006). In 2008, DHL plans to open a new 250,000 sq ft distribution centre to act as a stockholding hub for food and other products. It is expected to generate 1,000 extra jobs, with plans to open an additional distribution centre in 2012. Source: DHL (2006).

UPS Supply Chain Solutions (SCS) UPS SCS facts and figures Head office: Atlanta, USA Parent company: UPS 3PL revenue: US$5,994 million (2005) Parent revenue: US$42,581 million (2005) Global coverage: service to 99 per cent of world GDP Employees: 22,000 (2004) (Foster and Armstrong, 2006)

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Facilities and resources: 1,000+ facilities in more than 120 countries; 35 million sq ft; 6,700 tractors; 22,100 trailers; 200+ service centres Key services and products: Logistics and distribution; transportation and freight (air, sea, ground, rail); freight forwarding; international trade management and customs brokerage Industry focus: Automotive, consumer goods, electronics and high technology, healthcare, retail, telecommunications Source: UPS (2006).

UPS background UPS Supply Chain Solutions is part of United Parcel Service Inc (UPS), the world’s largest parcel delivery company, headquartered in Atlanta, Georgia. The company delivers over 14 million packages a day to over 200 countries worldwide, and in 2006 had 407,000 employees (UPS, 2006). UPS is a global brand, well known for its brown trucks. The colour that UPS uses on its vehicles and uniforms is called Pullman brown, after the railroad cars of the same colour, which were created by George Pullman. UPS operates its own airline for international parcel movements. Over the last few years UPS SCS has established itself as the largest North American-based 3PL. It became profitable in 2003 for the first time and has now become an integral part of the total UPS global offering. UPS SCS has worked hard at developing and improving its operations across all areas of the business. UPS’s revenues are about equally divided between the United States and its international operations. Having a financial and operational powerhouse as a parent is a tremendous plus. In order to strengthen its capability outside the United States, it is thought that UPS is likely to make a significant logistics acquisition if it can make the right deal. It has generated over US$2 billion in free cash flow in each of the last two years, and indeed it is rumoured that it looked closely at Exel before Deutche Post snapped it up. UPS SCS has good brand recognition and has significant mid-market strength.

UPS history 1907:

19-year-old James E (‘Jim’) Casey borrows US$100 from a friend and establishes the American Messenger Company in Seattle, Washington.

1913 to 1918: The company focuses on package delivery for retail stores, using motorcycles for some deliveries. The company acquires its first delivery car, a Model T Ford. In 1916, Charlie

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Soderstrom joins the company, bringing with him automobiles, expertise and the colour brown. 1919:

The company expands to Oakland, California, and adopts the name United Parcel Service.

1922:

UPS acquires a company in Los Angeles with a then innovative practice known as ‘common carrier ’ service. This service includes automatic daily pickup calls, and services that would now be provided by home-delivery companies.

1927:

The retail delivery services of UPS have by now expanded to include all the major cities on the US Pacific Coast.

1930:

UPS extends to the East Coast.

1940 to 1945: Despite the Second World War and shortages of fuel and rubber the company continues to grow. 1981 to 1988: The demand for air parcel delivery increases in the 1980s. In response to this, UPS establishes its own jet cargo fleet, receiving authorization from the Federal Aviation Administration (FAA) to operate its own aircraft in 1988. 1991 to 1994: 1993 sees UPS delivering 11.5 million packages and documents a day for more than a million regular customers. 1994 to 1999: In the mid-1990s UPS decides to widen its business, and in 1995 it forms the UPS Logistics Group to provide global supply-chain management solutions and consulting services. 1995:

UPS acquires Sonic Air, giving UPS the ability to offer a sameday, ‘next flight out’ service.

2000 to 2002: UPS Supply Chain Solutions is formed to focus logistics and supply-chain solutions for customers. Source: UPS (2006).

UPS operations and activities UPS SCS provides a wide range of services to customers: ឣ

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Transportation and freight: it has a global freight network and provides road and rail ground transportation across North America. Logistics: it offers a wide range of logistics and supply-chain services, from warehousing through global distribution to post-sales service parts logistics.

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International trade: UPS SCS provides international-trade management, including customs brokerage and compliance consulting and management services. Consulting services: supply-chain strategy supports business strategies.

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Source: UPS (2006).

European providers Introduction Third-party logistics outsourcing is most mature in European countries. In countries like the United Kingdom and Germany, 3PLs came out of the nationalized road freight or railway industries. Overall, European countries have been more reliant on cross-border traffic, driving the need to outsource logistics movements. Across Europe, 25.3 per cent of logistics activity is outsourced (Transport Intelligence, 2006). However, Europe is a diverse continent with different languages, cultures and laws, so most 3PL operations have to be run on an individual country basis to be effective. Countries such as the United Kingdom, Germany, the Netherlands and France have very mature 3PL markets with large 3PLs, as shown in Figure 4.4, whilst countries such as Spain and Italy are still developing, providing good growth potential for 3PLs.

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The European distribution market has developed significantly in recent years, with logistics becoming increasingly important to companies’ strategies as businesses move their manufacturing to lower-cost economies. While in Western Europe the rate of growth of outsourcing has reached a plateau, the opportunities for 3PLs in Central and Eastern Europe are very significant. This has been further aided by the accession of the 10 new EU member states, making it easier for Western 3PLs to move into the region. However there are constraints, including the poor state of the transport infrastructure, the comparative immaturity of the industrial property markets and the lack of experienced workers in some countries. There has been a need to develop European distribution centres (EDCs), for distribution across both Western European markets and the new Central and Eastern European ones. However, as manufacturers move their products east, they are seeking smarter ways to control inventories. As a consequence solutions such as cross-docking and deconsolidation are being deployed, meaning that there are likely to be more smaller but more agile warehouses in the future. In the search for scale and growth, the 3PL industry has seen a large number of acquisitions and mergers. The result is that there are fewer but larger companies that have the capability and coverage to offer panEuropean or global logistics services to customers. This is in response to the opportunities in the enlarged Europe and globally. The listing of European providers below is intended to give an overview of the main 3PLs across the European 3PL market. Across these providers – and including DHL Logistics, listed under global providers – only three have a turnover in excess of US$10 billion. DHL Logistics is the largest of these, followed by Schenker and Kühne + Nagel, as shown in Figure 4.5. Eight 3PLs have turnovers in excess of US$4 billion, with a further four having turnovers over US$2.5 billion. In all, as can be seen in Figure 4.6, only 12 3PLs from Europe have turnovers over US$2.5 billion. This underlines the fragmented state of the market and the reason that even more consolidation is inevitable. Europe has a ‘super-provider ’ in DHL Logistics. With nearly 150,000 employees, as shown in Figure 4.6, it dwarfs its competitors both in Europe and elsewhere in the world. As previously shown in Figure 4.4, Germany and France have the most providers in the top dozen. However, when the revenue of these top 3PLs is considered, Germany is way out in front, followed by Switzerland, as shown in Figure 4.7. This is further underlined by the total numbers of employees for these companies as shown in Figure 4.8. It is clear that Germany is a powerhouse for logistics in Europe and increasingly across the world.

Major providers 30.0

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International logistics and supply chain outsourcing 3,288 3,425

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Figure 4.7 Distribution of Europe’s top logistics providers by revenue

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ABX Logistics GmbH ABX facts and figures Head office: Brussels, Belgium Parent company: 3i (acquired from the Belgian Railways, SNCB Holding, in August 2006) 3PL revenue: N2.5 billion Global coverage: 100 countries worldwide (35 with own subsidiaries) Employees: 10,000 (2006) Facilities and resources: 350 sites with 1.5 million sq m of warehousing Key services and products: Air and sea freight services, road transport network, warehousing and distribution, event logistics Source: ABX (2006).

ABX background and activities ABX traces its roots back to 1800 when Franz Haniel set up a trading, forwarding and inland waterway shipping company in Duisburg, Germany. Following nearly 200 years of growth and mergers, the company became Thyssen Haniel Logistic (THL) which was renamed ABX Logistics in 1999 (ABX, 2006). The company provides air and sea freight services across the world both through its own offices and through agents and partners. It has a European road transport network and is developing its contract logistics business (ABX, 2006). In September 2006 ABX announced a strategic alliance with Penske Logistics to provide integrated global supply-chain solutions for multinational corporations (Penske, 2006).

Aitena Aitena facts and figures Head office: Madrid, Spain Parent company: Fomento de Construcciones y Contratas 3PL revenue: N110 million (2004)

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International logistics and supply chain outsourcing

Parent revenue: N6,286 million (2004) Global coverage: Spain and Portugal Employees: 1,875 Facilities and resources: 24 operating centres; over 350,000 sq m of storage space Key services and products: Warehousing and distribution Industry sector focus: Automotive, consumer goods, healthcare, high technology, personal care Source: Aitena (2006).

Aitena background and activities Aitena is part of Fomento de Construcciones y Contratas, a leading Spanish construction and services company. Following the merger of Loacsa and Aitena, it operates under the name of Aitena for consumer goods and Logística de Navarra for automotive companies. These companies provide dedicated or multi-user warehousing, transportation and cross-docking across a distribution network of 26 operations centres across Iberia. Source: Aitena (2006).

Bibby Distribution Ltd Bibby facts and figures Head office: Liverpool, UK Parent company: Bibby Line Group 3PL revenue: £123 million (N178 million) Parent revenue: £254 million (N368 million) Global coverage: United Kingdom Employees: 2,600 Facilities and resources: 70 operating centres; 1,500 vehicles Key services and products: Warehousing and distribution Industry sector focus: Automotive, chemicals, consumer goods, defence, industrial and pharmaceuticals Source: Bibby Distribution (2006).

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155

Bibby Distribution background and activities Bibby Distribution is a wholly owned subsidiary of the privately owned Bibby Line Group. The group can trace its history back to 1807 and operates through three main divisions: logistics, marine and financial services. Bibby’s customers include Anheuser Busch (Budweiser), Babcock, BAE Systems, Defence Logistics Organization, Honda, Ilford, Kellogg’s, Marley, Nestlé Waters, Nisa Today’s, Railpart, J Sainsbury’s and Thorntons. Source: Bibby Distribution (2006).

Christian Salvesen Christian Salvesen facts and figures Head office: Northampton, UK 3PL revenue: £820.7 million (N1,190 million) (year ending 31 March 2006) Global coverage: eight countries across Europe including United Kingdom, Benelux, France, Ireland, Portugal and Spain Employees: 13,000 (2006) Facilities and resources: 200 sites; 400,000 sq m warehousing space; 5,000 tractor units and 6,000 trailers Key services and products: Warehousing and distribution Industry sector focus: Automotive, consumer goods, electronics, oil and chemicals, retail Source: Christian Salvesen (2006).

Christian Salvesen background and activities Christian Salvesen is a major European logistics service provider listed on the London Stock Exchange. Its strategy is to expand its business in Europe, which is less mature and arguably less competitive than the United Kingdom, through the replication of its tried and tested UK networks and services. The company is also seeking to develop a freight management capability in Asia, other parts of the Far East and the near Eastern European states. To this end, in December 2005, Christian Salvesen’s CEO Stewart Oades announced a joint venture with the global container transportation company APL Logistics. The joint venture was established to unite the strengths of the two businesses in order to provide integrated end-to-end supply-chain services (Christian Salvesen, 2006).

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D Logistics AG D Logistics facts and figures Head office: Germany 3PL revenue: N315 million (2005) Global coverage: Europe and the United States Employees: 3,210 Key services and products: Air cargo, consumer goods packaging, industrial goods packaging, warehouse logistics Industry sector focus: Automotive, chemicals, consumer goods, healthcare and industrial sectors Source: D Logistics (2006).

D Logistics background and activities D Logistics offers logistics and related services to a variety of industry sectors. The company was founded by Detlef W Hübner, chairman of its board, who in 1979 took over Dönne + Hellwig GmbH & Co from his grandfather. He subsequently restructured the company, and in 1998 launched D Logistics AG as a logistics provider. The company provides a wide range of logistics services, including design and production of packaging, warehouse planning and management, distribution logistics, transport management, assembly, spare parts logistics, just-in-time logistics, document management, special services for capital goods manufacturers and other value-added services. Source: D Logistics (2006).

Dachser Dachser facts and figures Head office: Kempten, Germany 3PL revenue: N2.8 billion (2005) Global coverage: Germany, Benelux, Austria, Switzerland, France, Portugal, Romania, Hungary Employees: 13,400

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Facilities and resources: 1,000,000 sq m of warehouse space; 6,800 transport units Key services and products: pan-European network, warehousing and distribution, air and sea transportation, Industry sector focus: Consumer, DIY Source: Dachser (2006).

Dachser background and activities Dachser was founded in 1930 by Thomas Dachser and is still owned by the founding families. It provides logistics across a pan-European network and specializes in transport and warehousing in the non-frozen food and DIY (do-it-yourself) sectors. It also provides intercontinental movements by air and sea through 400 branch offices at over 300 airports. Dachser also provides added-value services such as consulting and supply-chain optimization. Source: Dachser (2006).

DHL Logistics See under global providers.

DSV A/S (DFDS Dan Transport Group A/S and Frans Maas) DSV facts and figures Head office: Brøndby, Denmark 3PL revenue: N4.4 billion (2005) Global coverage: 50 countries globally with agents in another 50 countries Employees: 19,000 (2005) Facilities and resources: 6,500 trucks Key services and products: Road transportation, sea and air freight Source: DSV (2006).

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DSV background and activities DFDS Dan Transport Group A/S was taken over by DSV in 2000. DSV was established in 1976 as a consortium of 10 independent hauliers in Denmark. Its key service is transportation: European road and international sea and air freight. It uses independent hauliers as subcontractors in order to be agile and reactive to the transport market. In 2006 the trading name changed from DFDS to DSV following its acquisition of Frans Maas (DSV, 2006). Frans Maas, established in 1890, is an intercontinental freight forwarder and pan-European contract logistics provider. The business operates through a network across 32 European countries and a handful of offices in North Africa. Frans Maas uses exclusive partnerships with other providers in North America and Asia Pacific. In addition to forwarding, the company operates road freight across Europe offering both shared-user and dedicated warehousing and other value-added services. In areas and geographies where Frans Maas is dominant the company will trade as DSV Frans Maas (Frans Maas, 2006).

Exel See under global providers, DHL Logistics.

FM Logistics FM facts and figures Head office: France 3PL revenue: N342 million (2005) Global coverage: France, Poland, Czech Republic, Russia, Romania, Belgium, Slovakia Employees: 9,500 (2006) Key services and products: Warehousing, transport, co-packing Industry sector focus: Automotive, consumer goods, healthcare, high technology, industrial, personal care products Source: FM Logistics (2006).

FM Logistics background and activities FM Logistics was founded in 1967 by Claude and Edmond Faure and JeanMarie Machet. The company which has expanded outside France into

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Germany and Eastern Europe, is still privately owned. Nearly 60 per cent of its activities are warehousing, while transportation accounts for a quarter and co-packing makes up the rest. Source: FM Logistics (2006).

Frans Maas See under DSV A/S (DFDS Dan Transport Group A/S and Frans Maas).

GEFCO GEFCO facts and figures Head office: Courbevoie, France Parent company: PSA Peugeot Citroën Group 3PL revenue: N3 billion (2005) Parent revenue: N56.3 billion (2005) Global coverage: network across 80 countries worldwide Employees: 9,372 (2005) Facilities and resources: 4,345 dedicated rail cars, 1,900 trucks, 80 EDCs, 40 vehicle preparation centres across Europe, and 140 dedicated platforms in over 80 countries across the world Key services and products: Automotive logistics and vehicle transport, road freight, air and sea freight Industry sector focus: Automotive and industrial Source: GEFCO (2006).

GEFCO background and activities Founded in 1949 by Société des Automobiles Peugeot, GEFCO, or les Groupages Express de Franche Comté, has grown steadily over the last halfcentury to be one of the top 10 logistics players in Europe. Still wholly owned by the PSA Peugeot/Citroën Group, its automotive logistics and vehicle business accounts for a third of its turnover, with the larger proportion of around 50 per cent coming from its European network road transportation business, while freight and other supply-chain activities account for the balance. Source: GEFCO (2006).

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Geodis Geodis facts and figures Head office: Clichy, France 3PL revenue: N3,595 million (2005) Global coverage: 120 countries, across Europe and Asia Employees: 23,800 Facilities and resources: 3 million sq m of warehouse space, 17,000 vehicles Key services and products: Transportation (groupage and express), warehousing and distribution, air and sea freight, reverse logistics Industry sector focus: Automotive, consumer goods, healthcare and cosmetics, high technology, home and leisure, industrial, luxury, retail Source: Geodis (2006).

Geodis background and activities Geodis was created in 1995 when all of the non-rail SCETA subsidiaries were merged and absorbed by Compagnie Générale Calberson, subsequently renamed Geodis. The company has been steadily expanding outside its French base and is now active in the United Kingdom, Germany, Spain, Italy, Slovakia, Hungary, Romania, Poland, the Czech Republic and the CIS, amongst others. In Asia it is active in 10 countries, with partnerships in a further 10. Geodis has been developing its expertise in reverse logistics and has recently been awarded the recycling contract for the European Recycling Platform, a joint venture founded by Braun, Electrolux, HP and Sony, across France, the United Kingdom, Ireland, Spain and Portugal. Source: Geodis (2006).

Gist Gist facts and figures Head office: Basingstoke, UK Parent company: Linde Group, following its merger with BOC Group in 2006

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3PL revenue: £315.9 million (N458 million) (2005) Parent revenue: N3.6 billion (2005) Global coverage: 35 locations across the United Kingdom, Netherlands, Czech Republic and Australia Employees: 5,500 (2006) Facilities and resources: 35 locations with 400,000 sq m of warehouse space; 1,000 vehicles. Key services and products: Warehousing and distribution; added-value services Industry sector focus: Consumer goods, electronics, gas and retail Source: GIST (2006).

Gist background and activities Gist, until recently a subsidiary of the industrial gases and engineering company BOC, has a rich portfolio of retail customers, including Woolworth, Ocado, Marks & Spencer and Budgens. As its roots would suggest, the company also transports gases and other industrial items. The company currently holds the contract to warehouse and distribute all Marks & Spencer food items in the United Kingdom. In 2005 Gist and Marks & Spencer were presented with the Award for Supply Chain Excellence by the UK’s Institute of Grocery Distribution (IGD), in recognition of their use of RFID technology in the food supply chain. Source: GIST (2006).

Kühne + Nagel International AG Kühne + Nagel facts and figures Head office: Schindellegi, Switzerland 3PL revenue: N8,850 million (SFR14,049 million) (2005); ACR estimated revenue: N1,250 million (2005) Global coverage: service to over 85 per cent of World GDP; 100+ countries Employees: 40,000 (2006) Facilities and resources: 700 locations including 400 warehouses – approximately 6 million sq ft

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Key services and products: Air and sea freight forwarding, warehousing and distribution, road transportation, lead logistics solutions and valueadded services Industry sector focus: Automotive, consumer, healthcare, high technology, industrial, retail Source: Kühne + Nagel (2006a).

Kühne + Nagel background Kühne + Nagel is a well-run company that has consistently achieved solid financial results. Until DPWN’s acquisition of Exel, it was the world’s largest ocean freight forwarder, shipping over 900,000 TEUs per year. In addition the company is estimated to be the third-largest airfreight freight business in the world. Kühne + Nagel takes quality very seriously and has ISO 9001 certification for all of its operations. It has made a number of acquisitions in order to expand its contract logistics capabilities across North American and Asia, and most notably, its acquisition of ACR Logistics (formerly Hays Logistics) to extend its business in Europe, especially in the UK (Kühne + Nagel, 2006a).

Kühne + Nagel history August Kühne and Friedrich Nagel founded Kühne + Nagel, when they established their forwarding and commissioning business in Bremen, northern Germany, in 1890. The company, which concentrated on cotton and consolidated freight, has gone on to become one of the largest logistics businesses in the world. In 2001 Kühne + Nagel acquired USCO, a leading US-based provider of integrated logistics solutions. In 2006, the company announced its largest acquisition with the purchase of UK-based ACR Logistics, formally Hays Logistics. This acquisition expanded Kühne + Nagel’s global network further into Eastern Europe and Asia. Source: Kühne + Nagel (2006a).

Kühne + Nagel operations and activities Kühne + Nagel’s key activities are freight forwarding and contract logistics. It is particularly strong in sea freight, which provides nearly 50 per cent of its revenues; a quarter of its sales come from air freight and the balance from contract logistics, and in particular transportation. Its N440 million acqui-

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163

sition of ACR Logistics has helped in further expanding its global capability, especially into Eastern Europe and Asia. ACR was especially strong in contract logistics in the UK, Benelux, France and Italy.

Maersk Logistics Maersk Logistics facts and figures Head office: Copenhagen, Denmark Parent company: A P Moller–Maersk Group 3PL revenue: not available Parent revenue: DKR208,702 million (US$ 34,350 million) (2005) (Maersk, 2006) Global coverage: 90 countries across Europe, North America and Asia Employees: 60,000 (2004) (Foster and Armstrong, 2006) Facilities and resources: 200 offices Key services and products: Ocean and air freight forwarding, warehousing and distribution, supply-chain management Industry sector focus: Apparel and fashion, consumer and personal care, electronics, retail Source: Maersk Logistics (2006). Note: this entry does not include P&O Nedlloyd – see ‘recent acquisition’ below.

Maersk background Maersk Logistics is part of Maersk Line, one of the leading liner shipping companies in the world. Maersk Line is a division of the highly successful A P Moller–Maersk Group, a global organization with over 100,000 employees across 125 countries. The company is still owned by the MaerskMoller family and third-generation Maersk McKinney Møller, born in 1913, is still the managing owner. Maersk Logistics has been in a strong position to take advantage of the sourcing of goods from Asia into America and Europe. It is estimated that nearly 60 per cent of revenues are between Asia and North America, around a third from Asia to Europe and the balance between Europe and North America. Maersk’s recent purchase of rival shipping company P&O Nedlloyd is thought to be motivated by capacity shortages in the world container market as a result of increasing world trade.

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Maersk Logistics history 1904:

Shipping company D/S Svendborg is founded by Captain Peter Maersk-Møller and his son Arnold Peter Møller.

1928:

First liner service under the name Maersk Line on the transPacific route from the Far East to the United States.

1939:

At the beginning of the Second World War, A P Møller is the second-largest shipping company in Denmark, with a total of 46 ships.

1940:

After Denmark surrenders to the German invasion, Maersk McKinney Møller is made a partner and flees to the United States to manage the fleet from the New York office.

1941–45

The United States takes control of all foreign ships, including the Maersk fleet, of which more than half is lost during the war.

1945 to 1965: Reconstruction following the Second World War; the Maersk fleet is reduced to 21 ships. 1965:

Maersk McKinney Møller takes over the running of the business.

1988:

Maersk begins a trans-Atlantic container service.

1991:

Maersk and P&O begin a joined global container service.

1993:

Maersk Line acquires the Ben-EAC container line and becomes the largest container line in the world.

1996:

Cooperation with P&O is ended and a new container service with Sealand Corporation commences.

1999:

Maersk purchases container shipper Sea-Land Corporation and names the combined company Maersk Sealand.

2005:

Completes acquisition of Royal P&O Nedlloyd NV which will be merged with Maersk Sealand to become the largest shipping and container line in the world with in excess of 550 vessels.

2006:

Following the acquisition of P&O Nedlloyd for N2.3 billion, the new merged company is named Maersk Line. P&O Nedlloyd Logistics and Maersk Logistics are merged under the name Maersk Logistics.

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Maersk operations and activities Maersk Logistics obtains an estimated 50 per cent of its turnover from warehousing and distribution, around 25 per cent from sea freight forwarding and freight consolidation, with the balance from air freight and customs brokerage.

Maersk Logistics acquisition Royal P&O Nedlloyd NV Head office: Rotterdam, Netherlands (Wikipedia, P&O, 2006) 3PL revenue: N5,234 million (2005) (Yahoo Finance, 2006) Global coverage: 120 countries across Europe, Asia, United States (Wikipedia, P&O, 2006) Employees: 10,000 (2004) (Foster and Armstrong, 2006) Facilities and resources: 166 vessels, 1,000 containers, 2,000 trucks and 6,700 trailers (2004) (Foster and Armstrong, 2006) Key services and products: Warehousing and distribution, sea freight shipping, port services (Foster and Armstrong, 2006) Industry sector focus: Chemicals, consumer goods, industrial, retail (Foster and Armstrong, 2006)

P&O Nedlloyd has significant transportation and logistics operations across Europe, and was formed in 1997 by the merger of the Dutch transportation company Royal Nedlloyd (Nedlloyd Line) and the British shipping giant, P&O Group (P&O Containers). Its logistics operations are mainly an addition to its container business. Its US business is mainly focused on retail consolidation and deconsolidation, especially hanging garments (Wikipedia, P&O, 2006).

Groupe Norbert Dentressangle Norbert Dentressangle facts and figures Head office: Saint-Vallier, France 3PL revenue: N1,399 million (2005) Global coverage: 12 European countries

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Employees: 12,200 people (2005) Facilities and resources: 2.1 million sq m of warehousing, 4,500 tractor units Key services and products: Haulage and contract distribution, warehousing and transport Industry sector focus: Apparel and fashion, automotive, personal care, drinks Source: Norbert Dentressangle (2006).

Norbert Dentressangle background and activities Norbert Dentressangle was established in 1979. After a steady growth, including a number of acquisitions across Europe, the company floated on the French stock exchange in 1994. The company operates haulage and contract distribution for packed, bulk and temperature-controlled goods, warehousing and distribution for manufacturers and distributors, and integrated logistics solutions combining transport with logistics services. In 2005 Norbert Dentressangle purchased the majority of TNT NV’s contract logistics and part of its transportation activities in France. Norbert Dentressangle claimed fame by providing the first truck to use the Channel tunnel between France and England. Source: Norbert Dentressangle (2006).

P&O Nedlloyd See under Maersk Logistics.

Panalpina World Transport (Holding) Ltd Panalpina facts and figures Head office: Basel, Switzerland 3PL revenue: N5,224 million (SFR8,293 million) (2005) Global coverage: 140 countries across Europe, Asia, Americas, Africa Employees: 14,000 (2006) Facilities and resources: 500 branches; 300 warehouses, approximately 1.2 million sq m (2006)

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Key services and products: Air and sea freight forwarding, transportation management, warehousing and distribution, oil and gas services Industry sector focus: Apparel and fashion, automotive, consumer goods, electronics and high technology, healthcare, oil and gas, retail, special projects logistics Source: Panalpina (2006).

Panalpina background and activities Panalpina is a leading forwarding and logistics service provider that specializes in intercontinental air and ocean freight and associated logistics services, in order to provide globally integrated supply-chain solutions. The name Panalpina was chosen to represent the ability of haulage services to conquer the Alps, thereby linking northern and southern Europe. Panalpina was wholly owned by the Ernst Göhner Foundation until its flotation on the SWX Swiss Exchange in September 2005, making it more attractive to acquisition. Source: Panalpina (2006).

Panalpina history 1935:

Panalpina’s parent company moves its business into forwarding.

1954:

The company establishes its independence under the ‘Panalpina’ name.

1969:

40 per cent of Panalpina’s share capital is acquired by the Ernst Göhner Foundation, set up by a leading Swiss entrepreneur.

1980 to 1999: Ernst Goehner Foundation becomes the company’s sole shareholder; launches combined air freight and ocean freight operations between the Far East and Europe, Africa, Oceania and India. 2004:

‘A’ licence is approved by China, allowing Panalpina to develop its own service organization in this developing market.

2005:

Panalpina further strengthens its lead in the oil and gas industry through the acquisition of the Singaporean logistics provider Janco Oilfield Services and the Norwegian Overseas Shipping Group.

September 2005: Panalpina becomes listed on the SWX Swiss Exchange. Source: Panalpina (2006).

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Schenker Logistics Schenker facts and figures Head office: Essen, Germany Parent company: Deutsche Bahn AG 3PL revenue: N8,878 million (2005) Parent revenue: N25.1 billion (2005) (Deutsche Bahn, 2006) Global coverage: 80 countries across Europe, Asia, North America, Latin and South America, Africa Employees: 38,237 (2005) Facilities and resources: 1,100 offices, 405 warehouses Key services and products: Air and sea freight forwarding, warehousing and distribution, transportation management Industry sector focus: Automotive, consumer goods, electronics and high technology, healthcare Source: Schenker (2006). Note: this entry does not include Bax Global – see US providers.

Schenker background Schenker is a part of the Transportation and Logistics Division of Deutsche Bahn AG. Schenker, which has a long history, is a major transportation and distribution company in Europe, is emerging in Asia but has limited operations in the United States. This may well have been the attraction for the acquisition of BAX Global, Inc, headquartered in California, by Deutsche Bahn in 2006. BAX, whose sales are in the region of US$3 billion, is predominantly a cargo air freight provider that has been developing its capability in logistics, operating across a global network of nearly 500 offices in 133 countries. Schenker is known for being the official logistics partner for numerous Olympic Games, including Beijing in 2008.

Schenker history 1872:

Founder Gottfried Schenker forms Schenker & Co in Vienna, Austria.

1873 to 1917: Develops rail networks across Europe and establishes ocean shipping company.

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1918:

Following the First World War, Schenker focuses on express delivery and freight forwarding movements, removals and trade-fair services.

1922:

Flies the first air freight shipment across Germany.

1928:

Schenker headquarters is moved to Berlin.

1931:

Schenker is acquired by the German Railways; launches first sea freight shipments.

1945:

Business rebuilds after the Second World War.

1991:

Stinnes AG acquires the majority of shares in Schenker from the German railroad company Deutsche Bundesbahn.

1997:

Schenker AG is reorganized into three business areas: Schenker Logistics, Schenker International and Schenker Eurocargo.

2002:

Schenker celebrates its 130th birthday; Deutsche Bahn acquires majority shareholding of Stinnes.

2006:

Acquisition of BAX Global.

Source: Schenker (2006).

Schenker operations and activities Schenker specializes in road and rail transportation across Europe, with its network of scheduled routes connecting over 30 countries. It also provides air and sea freight. Its specialist logistics services include assembly parts consolidation and deconsolidation centres, component sequencing, integrated logistics and spare parts logistics.

TDG plc TDG facts and figures Head office: London, UK 3PL revenue: £510.5 million (N740 million) (2005) Global coverage: Seven countries across Europe (United Kingdom, Ireland, Spain, Netherlands, Germany, Poland and Belgium) Employees: 7,000 (2006) Facilities and resources: 125 sites: over 12,600,000 sq ft warehousing; 1,600 vehicles

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Key services and products: Warehousing, transportation, freight forwarding, reverse logistics, inbound logistics, added-value services Industry sector focus: Chemical, consumer goods, industrial and retail Source: TDG (2006).

TDG background and activities TDG has its origins in the General Lighterage Co Ltd, which was formed in 1922 from the lighterage department of the London Cologne Steam Ship Co. The company moved into warehousing and road transport and in 1957 changed its name to Transport Development Group. This was later abbreviated to TDG. The company primarily provides contract logistics activities. Source: TDG (2006).

Thiel Logistics AG Thiel facts and figures Head office: Grevenmacher, Luxembourg 3PL revenue: N1.8 billion Global coverage: 41 countries mostly in Europe Employees: 8,000 Facilities and resources: 400 locations Key services and products: Air and ocean freight; haulage; warehousing and distribution Industry sector focus: Fashion, furniture, media Source: Thiel (2006).

Thiel background and activities Founded in Luxembourg in 1985, Thiel Logistics has steadily expanded and now has operations in Germany, Benelux, Switzerland, Austria and several countries in Central and Eastern Europe. Thiel Logistik AG has Delton AG, a German investment company, as a major shareholder, with an equity stake of 50.26 per cent. Source: Thiel (2006).

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TNT Logistics TNT Logistics facts and figures Head office: Netherlands Parent company: TNT NV (until August 2006 – see below) 3PL revenue: N3.5 billion (2005) Parent revenue: N10.1 billion (2005) Global coverage: 28 countries across Europe, Americas, Asia (2006) Employees: 36,000 (2006) Facilities and resources: 360 warehouses, approximately 7 million sq m (2005) Key services and products: Warehousing and distribution, inbound logistics, manufacturing support, services for spare parts and returns Industry sector focus: Automotive, consumer goods, electronics, industrial, publishing and media, tyres Source: TNT (2006).

TNT background TNT Logistics is the second-largest contract logistics company in the world, with approximately 2.2 per cent of the market (DHL, 2006). In December 2005, its then parent company TNT NV surprised the industry when CEO Peter Bakker announced it was putting TNT Logistics up for sale in order to focus on its network businesses (TNT, 2006). This decision was also no doubt prompted by the increasing competitiveness caused by ongoing consolidation in the marketplace. TNT Logistics was sold to the private equity company Apollo Investment Fund in August 2006. TNT Logistics evolved from the Australian company TNT (Thomas Nationwide Transport). Initially, TNT operated express delivery services only, but moved into logistics in the 1980s. It made national news in the United Kingdom in the 1980s when it helped Rupert Murdoch’s News International overcome a strike over the move from Fleet Street to the newly built London Docklands printing facility. News International continues as a key customer for TNT. TNT Logistics has developed sound contract logistics services and is particularly strong in the automotive sector.

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TNT Logistics history 1946:

Thomas Nationwide Transport (TNT) is founded in Australia by Ken Thomas. 1961: TNT expands into Europe. 1996: KPN acquires TNT (Thomas Nationwide Transport). 1998: TNT Post Group NV (express, logistics and mail services) is separated from KPN. 1999: TNT acquires Tecnologistica (Italy). 2000: TNT Logistics and the Koç Group in Turkey enter into a joint venture called TNT Lojistik. 2000: TNT Logistics acquires Mendy (France), Convoi Logistics Exhibition Services (Netherlands), Schrader Gruppe (Germany), Barlatier (France), CTI Logistx (USA) and Taylor Barnard (UK). 2000: TNT Logistics becomes a separate division within TPG. TNT Logistics is awarded a £100 million five-year contract with Volkswagen in the United Kingdom to operate its national parts logistics service and distribution. 2001: TNT Logistics acquires ALS/Advanced Logistics (Italy) and CargoTech (Turkey). 2002: TNT Logistics and DSV enter into a joint venture called DFDS Transport Logistics, with coverage across the Nordic countries. 2002: TNT Logistics enters into a joint venture with the Shanghai Automotive Industry Group, named ANJI TNT Automotive Logistics. 2002: TNT Logistics acquires Transports Nicolas (France). 2004: TNT Logistics’ parent TPG sells stake in TNT DFDS Transport Group A/S. 2004: TNT Logistics buys out Turkish Joint Venture partner Koç Group. 2004: TPG NV acquires the Swedish-based global freight forwarding company Wilson Logistics Group. April 2005: Holding company name is changed from TPG NV to TNT NV. December 2005: Announces intention to exit logistics business and sell TNT Logistics. December 2005: Majority of French contract logistics activities and some transportation activities are sold to Norbert Dentressangle. August 2006: TNT NV announces the sale of TNT Logistics to Apollo Management. Source: TNT (2006).

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TNT operations and activities TNT Logistics offers a full range of logistics services, with particular expertise in automotive and manufacturing support logistics. In addition to the more usual dedicated and shared-user warehousing and distribution activities, it also provides after-market spare parts operations and other specialized services, including inbound logistics and lead logistics provider solutions. TNT has some international sea and air freight management capabilities through its freight forwarding business unit (TNT, 2006).

Unipart Logistics Unipart facts and figures Head office: Oxford, UK Parent company: Unipart Group 3PL revenue: not available Parent revenue: £1.1 billion (2004) (Unipart, 2006) Global coverage: 17 locations worldwide Employees: 3,000 (2006) Facilities and resources: 20 warehouse locations: 4 million sq ft of warehouse space Key services and products: Warehousing and distribution, transportation and shipping, inventory management, service and repair management Industry sector focus: Aerospace, automotive, defence, high technology, industrial, rail, retail and telecommunications Source: Unipart Logistics (2006).

Unipart Logistics background and activities Unipart Logistics is part of the Unipart Group, one of Europe’s leading suppliers of independent automotive logistics, parts and accessories. The group was established following a management and employee buyout from the Rover group, in 1987. Unipart Logistics’ heritage in automotive manufacturing has been transferred to other industry sectors where its expertise in ‘pull’ demand chains has been adapted to suit.

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Wincanton Wincanton facts and figures Head office: Chippenham Wiltshire, UK 3PL revenue: £1.7 billion (N2.4 billion) (2005) Global coverage: European coverage in 15 countries (2006) Employees: 28,000 (2006) Facilities and resources: 360 locations, 1.9 million sq m of warehousing space (2005) Key services and products: Warehousing and distribution, road freight services and specialist supply-chain services Industry sector focus: Automotive, consumer goods, industrial, oil, retail Source: Wincanton (2006).

Wincanton background and activities Wincanton is a highly successful European provider, which has grown its business to be in the top three European contract logistics providers and number two in the United Kingdom. Wincanton has developed its offerings over recent years from standard shared-user and dedicated warehousing and distribution to more sophisticated solutions, including integrated freight management solutions, fully automated storage and distribution, reverse logistics and 4PL.

Wincanton history 1925:

Wincanton Transport & Engineering Ltd (WT&E) is founded, mostly focused on the maintenance of dairy equipment and farm collection of milk for West Surrey Dairy.

1950 to 1969: WT&E moves into milk transportation, primarily for the Milk Marketing Board. 1970 to 1979: Develops temperature-controlled distribution service for manufacturers; WT&E splits into two separate companies: Wincanton Transport Ltd to focus on petrochemicals and milk distribution, Wincanton Chilled Distribution to connect manufacturers to St Ivel’s regional distribution centres.

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1980 to 1989: Grows range of logistics services. 1993:

Acquires Glass Glover plc, in order to strengthen its position in the retail logistics sector.

1994:

First automated warehouse is opened.

2001:

Wincanton demerges from its parent company Uniq (formerly Unigate) and becomes an independent company, quoted on the London Stock Exchange.

2002:

Wincanton acquires P&O Trans European for £152.5 million, thereby expanding its range of services, especially in road freight, and extending its geographic coverage.

2004:

Acquires midiData, a key player in specialist logistics services for the high-technology sector.

Source: Wincanton (2006).

US providers Introduction According to Armstrong & Associates (2006a), 3PL revenues in the United States were over US$100 billion for the first time in 2005, representing an amazing 16 per cent increase over the previous year. Leading the way was domestic transportation management with an 18.3 per cent gain in revenues. International transportation management revenues showed an increase of 13.6 per cent, to £38 billion, reflecting the growth in global economic activity. Dedicated contract carriage also had a good year with a growth of 10.2 per cent in asset-based domestic transportation management due to tight trucking industry capacity. Finally, the report showed that value-added warehousing and distribution had grown by 9.5 per cent. As is shown in Figure 4.9, the largest US-based third-party provider (3PL) is UPS Supply Chain Solutions (see Global providers) with a turnover of just under US$6 billion. Road freight company C H Robinson is second largest with US$5.7 billion revenue. There are eight providers with revenues in the range of US$2.5 to US$5 billion, including FedEx. Interestingly, unlike in Europe there is no ‘super-sized’ 3PL, with the largest 3PL in the region employing 27,000 staff, as shown in Figure 4.10. An overview of key American providers is given below.

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6,000 5,000

4,200 3,902

4,000

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3,645

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Figure 4.9 Largest (by revenue) US third-party providers

30,000 27,000

25,000 22,000 20,000 20,000 20,000

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Figure 4.10 Largest (by revenue) US third-party providers, showing number of employees

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Bax Bax facts and figures Head office: Irvine, California Parent company: Deutsche Bahn AG 3PL revenue: N2.3 billion (2005) Parent revenue: N25.1 billion (2005) (Deutsche Bahn, 2006) Global coverage: 133 countries worldwide Employees: 11,800 (2005) Facilities and resources: Global network of nearly 500 offices, 48 warehouses, 20 aircraft Key services and products: Air freight forwarding, transportation management, warehousing and distribution, added-value activities Industry sector focus: Aerospace, automotive, healthcare, high technology, retail Source: Schenker (2006).

Bax background and activities Established in 1972, BAX is primarily a time-definite, heavy air freight provider that has been increasingly focusing on logistics. In 2006 BAX Global, Inc was acquired by the German railway company Deutsche Bahn AG to add to its existing Schenker business (see Schenker entry in European providers section). In addition to its air freight and logistics activities, Bax also offer a range of added-value activities, including manufacturing material provisioning; fulfilment services such as final stage assembly, postponement activities and retail labelling compliance; reverse logistics; and consulting services. Source: Bax (2006).

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Caterpillar Logistics Services Caterpillar Logistics Services facts and figures Head office: Morton, Illinois Parent company: Caterpillar, Inc 3PL revenue: Not available Parent revenue: US$36.34 billion (2005) Global coverage: 25 countries across Americas, Europe and Asia Employees: 7,200 (2004) (Foster and Armstrong, 2006) Facilities and resources: 95 facilities and operations Key services and products: Warehousing and distribution Industry sector focus: Aerospace, automotive, consumer goods, high technology and industrial Source: Cat Logistics (2006).

Caterpillar Logistics Services background and activities Caterpillar Logistics Services is a wholly owned subsidiary of Caterpillar Inc, the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Caterpillar Inc, employs more than 85,000 people worldwide. Caterpillar Logistics Services Inc was formed in 1987 in order to provide world-class logistics for external companies. The logistics provider now serves more than 60 customers worldwide, providing services such as inbound, service parts and finished goods logistics. Source: Cat Logistics (2006).

Con-way (formerly CNF) incorporating Menlo Worldwide Con-way facts and figures Head office: San Mateo, California 3PL revenue: US$4.2 billion (2005) Global coverage: North America, Europe, Asia/Pacific and Latin America

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Employees: 20,000 Facilities and resources: 400 service locations; 1.1 million sq m of warehouse space; 7,786 tractors; 30,449 trailers Key services and products: Air freight, road freight; warehousing and distribution Industry sector focus: Consumer, high technology, industrial, retail and wholesale Source: Con-way (2006).

Con-way background and activities Con-way Inc, with a history that goes back to 1929, is a leading logistics and supply-chain management services provider. Con-way, made up of Conway Transportation Services, Menlo Worldwide and Road Systems, has been on the Dow Jones Transportation Average for more than a quarter of a century. In 1989, the company signalled its intentions as a global transportation business with the acquisition of Emery Air Freight Corp. The company formed contract logistics provider Menlo Logistics in 1990, in response to its customers’ needs for services beyond traditional trucking and air freight. In 1996, the parent company, known then as Consolidated Freightways Inc, was renamed CNF Transportation Inc. Menlo Worldwide was created in 2001, when Con-way Inc, merged three of its subsidiaries, Menlo Logistics, Vector SCM and Emery Worldwide, in order to focus on providing global logistics services. The company officially changed its name from CNF to Con-way in 2006. In 2000, the company partnered with General Motors (GM) to create a new supply-chain management company for the automotive industry, Vector SCM. This joint venture has since been known as a leading example of a fourth-party logistics (4PL) model (see Chapter 9). Key customers for Con-way include Cisco, Dow Chemical, HP, IBM, Nike, Ricoh and Sears. Menlo Worldwide provides services across the whole supply chain, from raw materials through product manufacturing to finished goods distribution, including supply-chain management, order management, logistics management, optimization and visibility. Added-value activities include: ឣ ឣ ឣ ឣ ឣ

packaging; kitting; postponement; reverse logistics; supply-chain consulting;

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supply-chain network analysis and design; vendor-managed inventory.

Source: Con-way (2006).

EGL Eagle Global Logistics EGL facts and figures Head office: Houston, Texas 3PL revenue: US$3.09 billion (2005) Global coverage: Over 100 countries worldwide Employees: 10,000 (2006) Facilities and resources: Over 400 service centres Key services and products: Air, ocean and ground freight forwarding, domestic transportation, import and export services Source: EGL (2006).

EGL background and activities EGL, a leading domestic and international freight company, was formed in 1984 by Jim Crane, chairman and CEO. It has grown steadily over the last 20 years, to over US$3 billion turnover. In 2000, EGL signalled its intentions to become a global forwarding organization when it purchased Circle International Group, creating a worldwide network. The company is focused on domestic and international freight transportation, customs brokerage, global logistics and supply-chain management services for a wide range of customers. Source: EGL (2006).

Expeditors International Expeditors facts and figures Head office: Seattle, Washington 3PL revenue: US$3,902 million (2005) Global coverage: 58 countries across North America, Europe, Asia, Africa, Latin America, Middle East, South Pacific Employees: 10,000 (2005)

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Facilities and resources: 226 locations Key services and products: Air and ocean freight forwarding, freight consolidation, customs brokerage and other added-value services Industry sector focus: Aerospace, automotive, chemicals, engineering/ construction, healthcare, high technology, retail Source: Expeditors (2006).

Expeditors background and activities Expeditors is a well-run, non-asset-based global logistics company whose services include vendor consolidation, air and ocean freight forwarding, customs brokerage, insurance, ocean consolidation, distribution and valueadded services (Expeditors, 2006). Its non-asset approach allows it to invest in the quality and development of its people and systems. The company seeks to grow organically, with very few acquisitions made since its inception in 1979. Expeditors is renowned in the financial services circles for its unconventional and entertaining Securities and Exchange Committee filings, which it is rumoured, are written by Peter Rose, the CEO (Wikipedia, Expeditors, 2006).

Expeditors history 1979: 1981:

1984: 1984: 1986: 1987: 1988: 1988: 1990: 1992:

Expeditors International of Washington, Inc, registers as a singleoffice ocean forwarder in Seattle, Washington. Expeditors embarks on its journey to becoming a global logistics company, when Peter J Rose, James L K Wang and Glenn M Alger join the company and open seven offices around the world, including Taiwan, Singapore and Hong Kong. Expeditors becomes a public corporation with stock traded on the NASDAQ. Toronto office is opened. Acquires a small export company in London and enters the European market. Opens first office in Malaysia. Plans expansion in the Far East, Europe and Australia. Peter J Rose, one of the founders, assumes the title of president and CEO. Brussels office is opened to become its first in continental Europe. Also opens offices in Kuala Lumpur and Jakarta. Opens five offices in Germany and first Middle East office in Saudi Arabia, bringing the number of offices worldwide to 48.

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1993:

Opens first office in China and is granted a rare class ‘A’ licence.

1994:

Opens distribution centres in Seattle, Chicago, Los Angeles, Miami, Newark, London, Rotterdam, Brussels, Hong Kong, Taipei and Singapore.

1995:

Enters Central and South America and expands in the Middle East.

1996:

Opens first offices in India, Pakistan and Bangladesh.

1997:

Opens offices in France.

1998:

ISO 9002 certification is achieved in 38 offices across the United States, Canada and Mexico, bringing the total number of Expeditors offices certified to this standard to 65 across 17 countries.

2004:

Peter J Rose, CEO, is named Executive of the Year.

2005:

Expeditors is named by Forbes as the Best Managed Transportation Company.

Source: Expeditors (2006).

FedEx Freight & Global Supply Chain Services FedEx facts and figures Head office: Memphis, Tennessee Parent company: FedEx Corporation 3PL revenue: US$3,645 million (Freight 2006) Parent revenue: US$32 billion (2006) Global coverage: North America, Mexico, Puerto Rico, Central and South America, the Caribbean, Europe and Asia Employees: Freight 27,000 employees; Supply Chain Services 600 employees Facilities and resources: Supply Chain Services – 40 warehouses with over 4 million sq ft; 750 vehicles; Freight – 324 service centres; 10,000 tractors Key services and products: Freight forwarding, domestic and international transportation management services, warehousing and distribution services, added-value services, including integrated fulfilment services and supply-chain consulting Industry sector focus: Apparel, automotive, computers and electronics, healthcare, industrial, retail Source: FedEx (2006).

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FedEx background FedEx Freight and FedEx Supply Chain Services are wholly owned subsidiaries of FedEx Corporation, mostly known for its parcels and packages services, using a large fleet of aircraft and local delivery vehicles. FedEx is a world-renowned brand and the FedEx logo has won awards. More recently the brand was featured in the film Castaway starring Tom Hanks, who played a FedEx executive who survived Robinson Crusoe style after his plane crashed. FedEx Supply Chain Services provides logistics services and has been formed from acquisitions including Roadway Logistics System and Caliber Logistics.

FedEx history FedEx was founded as Federal Express in 1971 by former US Marine Frederick W Smith in Little Rock, Arkansas. Two years later the business moved to Memphis, Tennessee, after a disagreement with Little Rock airport over facilities for the then embryonic business. The name FedEx was selected to represent a national market and assist in winning government contracts. The company started operations using 14 planes connecting 25 US cities, but went on to develop a hub and spoke distribution pattern, previously used by UPS in ground transportation. This later became the standard for air parcel distribution and enabled FedEx to become the leader in its industry. Additionally FedEx was the first cargo business to use jet planes for its services, allowing the company to grow significantly following the deregulation of the airline cargo sector. 1971:

Federal Express is founded in Little Rock.

1973:

Federal Express moves to Memphis.

1989:

Acquisition of Flying Tigers, an international cargo airline.

1994:

FedEx chosen as primary brand.

1998:

Acquisition of Caliber System Inc, which owns RPS, Roberts Express, Viking Freight and Caliber Logistics. Creates FDX Corporation, a global provider of transportation, e-commerce and supply-chain management services.

2000:

FDX Corporation name is changed to FedEx Corporation.

2001:

Acquisition of American Freightways, a less-than-truckload carrier in the United States, whose operations are integrated with Viking Freight to create FedEx Freight.

Source: FedEx (2006).

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FedEx operations and activities FedEx Freight is the US leader in next- and second-day regional LTL freight services, founded largely through the acquisitions of Caliber, American Freightways and Caribbean Transportation Services. FedEx Supply Chain Services has positioned itself as a strategic partner to customers wishing to outsource their supply chains, leaving them to concentrate on core activities. Like its parent company FedEx, it focuses on transportation and supply-chain solutions. As expected, other FedEx companies are given preference for transportation services. FedEx Supply Chain Services provides a full range of services, including freight management, transportation management and order fulfilment, supplemented by additional specialized and customized services, such as integrated fulfilment and returns management. These services are more fully defined below: ឣ

ឣ

ឣ ឣ

Freight management: FedEx manages freight forwarding and customs clearance and brokerage. Transportation management services: these include optimization and management of domestic and international shipments for all transportation modes. Order fulfilment: this comprises warehousing and distribution services. Specialist services: these include integrated fulfilment of inbound and outbound logistics, returns management and reverse logistics, and synchronized just-in-time delivery management to customers’ requirements.

Source: FedEx (2006).

J B Hunt JB Hunt facts and figures Head office: Lowell, Arkansas 3PL revenue: US$3,128 million (2005) Global coverage: United States, Canada and Mexico Employees: 16,370 (2005) Facilities and resources: Locations in more than 95 cities across the United States, over 10,000 vehicles and over 49,000 trailers or containers Key services and products: Trucking (road transportation) Source: Hunt (2006).

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J B Hunt background and operations Founded by Johnnie Bryan Hunt, J B Hunt Transport Services Inc, has grown to be one of the largest truckload carriers in the United States. Operating throughout the United States, Canada and Mexico, the company provides transportation services through its large numbers of trucks and trailers. Source: Hunt (2006).

J B Hunt history Following a variety of jobs from the age of 12 and a spell in the army, J B Hunt took a job selling and hauling lumber for his uncle. The following year, he started his first business, purchasing a livestock facility together with his cousin. Here J B met his future wife Johnelle DeBusk and five years later they married, after which he spent the next nine years in a driving job. In 1961, J B and Johnelle mortgaged their house and started a poultry litter business using rice hulls that were usually disposed of by farmers. Eight years later in 1969, J B Hunt Transport was established with five trucks and seven trailers. In 1983, the family sold the rice hull business to focus on transportation and in the same year J B Hunt Transport Services went public. J B retired as chairman of J B Hunt Transport Services in May 1995, and accepted the newly created position of senior chairman. Source: Hunt (2006).

Penske Logistics Penske facts and figures Head office: Reading, Pennsylvania 3PL revenue: US$3.7 billion, Penske Truck Leasing Company (2005) Global coverage: 300 logistics centres across North America, South America and Europe Employees: 20,000 (2005) Facilities and resources: 12,000 vehicles, 10 million sq ft of warehousing and cross-docking space Key services and products: Transportation, warehousing, inbound/ outbound and supply-chain management solutions Industry sectors: Aerospace, automotive, consumer packaged goods, healthcare, manufacturing and retail Source: Penske (2006).

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Penske Logistics background and activities Penske Logistics is a wholly owned subsidiary of Penske Truck Leasing. In 1988, General Electric became a partner in Penske Truck Leasing with Penske Corporation, with 79 per cent of Penske Truck Leasing owned by GE Capital (Foster and Armstrong, 2006). Penske Logistics is particularly strong in the automotive industry and also has a number of lead logistics provider (LLP) roles with customers (Foster and Armstrong, 2006). With its close ties to GEC, Penske applies engineering know-how and the latest technology to address complex logistics challenges, through combining Six Sigma quality processes and a clear focus on customer fulfilment (Penske, 2006). Its customers include some of the United States’s foremost corporations, including Ford, General Motors, Pepsi and Whirlpool (Penske, 2006). In September 2006, Penske announced a strategic alliance with ABX Logistics to provide integrated global supply-chain solutions for multinational corporations (Penske, 2006).

Penske history 1969:

Motor racing legend Roger Penske purchases MM Waterboro Inc, based in Reading, Pennsylvania and begins truck leasing business, Penske Truck Leasing. 1982: Forms joint venture with Hertz. 1986: Acquires Leaseway Truck Leasing. 1988: Forms partnership with GE Capital. 1995: Purchases Leaseway Logistics, forming Penske Logistics as a division of Penske Truck Leasing. 1997: Commences Europe operations. 1998: Forms joint venture with Cotia Trading in South America. 1998: Acquires Transportgroep van der Graaf in Europe. Source: Penske (2006).

C H Robinson Worldwide, Inc C H Robinson facts and figures Head office: Eden Prairie, Minnesota 3PL revenue: US$5.7 billion (2005) Global coverage: North America, Europe, Central and South America, Asia Employees: 5,700 (2006)

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Facilities and resources: 100 warehouses and cross-dock facilities Key services and products: Air and ocean freight forwarding, transportation management, warehousing and print logistics Industry sector focus: Agriculture, consumer goods, paper and printed materials retail, technology Source: Robinson (2006).

C H Robinson background C H Robinson Worldwide Inc is one of the United State’s leading non-assetbased third-party providers. The company, ranked second in the Transportation and Logistics Category of Fortune America’s Most Admired Companies in 2006, is a member of the Nasdaq-100. The company has a long history of being very profitable. Source: Robinson (2006).

C H Robinson history C H Robinson Company started in 1905, providing produce and general merchandise brokerage. As it expanded and its products moved further afield, it moved into transportation in order to ensure that perishable goods reached the market in good condition. The company entered the regulated trucking business in 1968 and later created ROBCO Transportation as an irregular route carrier. In 1976, Robinson became wholly owned by its employees and two years later The Fresh1® brand was introduced for its produce brokerage business. Following the 1980 deregulation of transportation in the United States the company was able to become a freight broker for all products. In 1986 C H Robinson became a totally non-asset-based logistics provider and 11 years later went public as C H Robinson Worldwide. Source: Robinson (2006).

C H Robinson operations and activities As a leading 3PL and freight broker, most of C H Robinson’s revenues come from road, rail, ocean and air transportation across the world, although its core business is in providing North American trucking and inter-modal services. With nearly 60 per cent of its revenues from food and beverage customers, C H Robinson has designed leading efficient consumer response and supply-chain management processes. The company also provides an LTL

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transportation website marketplace which allows for consolidation and cost reductions, through which around 12,000 shipments per day are executed. In line with its asset-free strategy, the majority of C H Robinson’s warehouse space is either leased or obtained from subcontractors.

Ryder Ryder facts and figures Head office: Miami, Florida Parent company: Ryder System Inc 3PL revenue: US$2,180 million (Supply Chain Solutions and Dedicated Contract Carriage) (2005) Parent revenue: US$4,741 million (2005) Global coverage: North America, Europe and Asia Employees: 16,500 Facilities and resources: 184 warehouses, 48,800 vehicles and 44,800 trailers Key services and products: Warehousing and distribution, transportation management, dedicated contract management, air and ocean freight forwarding, supply-chain consulting, added-value activities including equipment leasing, returns management and freight payment Industry sector focus: Aerospace, automotive, building materials, fastmoving consumer goods, healthcare, industrial, high technology, newspaper distribution, retail, utilities Source: Ryder (2006).

Ryder background and activities With one of the most recognizable brands in North American logistics, Ryder has been a leading provider of services for over 20 years. Following many years of providing dedicated contract management, Ryder’s product offerings include fleet-management solutions, including leasing, rental and programmed maintenance of trucks, tractors and trailers to commercial customers; supply-chain solutions, managing the logistics across the supply chain; and dedicated contract carriage (DCC), providing turn-key transportation services, including vehicles, drivers, routing and scheduling (Ryder, 2006). Ryder has expanded its logistics and supply-chain management capabilities in recent years through the Supply Chain Solutions business. Following a difficult financial period where the business posted losses, a new management team led by Greg Swienton brought

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Ryder into profit. This was partly achieved by focusing on profitable operations and countries and closing down loss-making operations.

Ryder history 1933:

James A Ryder starts company in Miami, Florida, with a black 1931 Model ‘A’ Ford as the first truck.

1939:

The fleet has expanded to 50 trucks.

1945:

Starts dedicated contract carriage for the Miami Herald.

1955:

Ryder Systems Inc becomes a publicly traded company.

1977:

Enters the Netherlands market, offering truck leasing.

1978:

James A Ryder, founder and chairman, retires.

1988 to 2000: Expands operations to Germany, Canada, the United Kingdom, Poland, Mexico, Argentina and Brazil. 1994:

Begins logistics management with acquisition of LogiCorp.

2001:

Acquires Singapore-based Ascent Logistics Pte Ltd.

2005:

Ryder opens the company’s smaller and more efficient new global headquarters in Miami, Florida.

Source: Ryder (2006).

Schneider National Inc Schneider facts and figures Head office: Green bay, Wisconsin 3PL revenue: US$3.5 billion (2005) (Datamonitor Computerwire, 2006) Global coverage: North America and Europe Employees: 20,000 (2006) Facilities and resources: Logistics operation across 36 locations in Canada, United States and Mexico, 14,000 vehicles, 40,000 trailers Key services and products: Transportation management, dedicated contract carriage, added-value activities Industry sector focus: Automotive, chemicals, consumer, healthcare, high technology, industrial, paper, retail Source: Schneider (2006).

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Schneider background Founded in 1935, Schneider National has become one of the United States’s leading transportation and logistics service providers. The privately owned company provides services to more than 75 per cent of the Fortune 500® companies and has partnerships with over 6,000 carriers. Its wholly owned subsidiary, Schneider Logistics, has built its reputation on its excellent automotive logistics and transportation capabilities, including the development of a multi-client network for automotive parts distribution. Schneider prides itself on its technological advances and since the 1970s has been a leading service provider in systems and technology. Source: Schneider (2006).

Schneider history 1938:

Al Schneider buys Bins Transfer & Storage and changes the name to Schneider Transport & Storage. 1958: Schneider is granted its first interstate authority and provides its first shipment for Procter & Gamble. 1961: Don Schneider, Al’s oldest son, joins the company. 1962: Schneider Transport logo is adopted. 1969: Purchases Kampo Transit, a regional milk and fuel oil hauler with 50 trucks. 1976: Schneider National Inc is formed as a holding company. 1981: Schneider granted 49-state authority allowing all commodities, except explosives and bulk, to be carried. 1983: Al Schneider dies. 1985: Schneider National Carriers is created from various businesses purchased in the 1970s and 1980s. 1986: Two-way satellite communication systems are installed in all 6,000 vehicles. 1993: Schneider Logistics Inc is created. 1994: Schneider Logistics is awarded the General Motors Service Parts Operation contract, the largest logistics contract of its time. 2005: Acquires American Port Services. Source: Schneider (2006).

Schneider operations and activities Schneider National, Inc, the leading provider of premium truckload and inter-modal services is North America’s largest private truckload carrier. It

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has a large fleet supplemented through the use of over 1,000 partner carriers. Its services include: ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ

one-way transportation; inter-modal road and rail; dedicated transportation; bulk haulage; specialized transportation; transportation management; trans-loading services; international services; payment services.

Schneider provides a range of logistics services, including managing transportation onsite or offsite. Their international logistics services include trans-loading, customs brokerage and import/export services. Source: Schneider (2006).

UTi Worldwide UTi facts and figures Head office: Rancho Dominguez, California 3PL revenue: US$2.3 billion (2005) Global coverage: 58 countries across the Americas, Europe and Asia, plus 75 additional countries through independent agents Employees: 15,000 (2005) Facilities and resources: 120 logistics centres Key services and products: Air and ocean freight forwarding, contract logistics, distribution, customs brokerage and other supply-chain management services Industry sector focus: Apparel, automotive, chemical, high technology and pharmaceutical Source: UTi (2006).

UTi background and activities UTi Worldwide is a well-run, thrusting forwarder, founded by three South Africans in 1995 (Foster and Armstrong, 2006). The company is an international, non-asset-based global integrated logistics company providing forwarding and other supply-chain management solutions, including consulting, management of purchase orders and customized management services (UTi, 2006).

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Asia Pacific providers Introduction Reflecting the emerging nature of Asia’s economy, only four of the 3PLs on the top 25 list are based in Asia. As shown in Figure 4.11, leading providers such as Nippon Express, NYK and Kintetsu are leading the pack in Japan. However Japanese 3PLs have been slow to expand significantly into Western markets, with NYK’s approach being a notable exception buoyed by large patriotic Japanese companies, like Sony, which regularly use their fellow country provider rather than local alternatives. Japanese companies are however focusing their efforts in China. With the purchases of SembCorp and the Patrick Corporation by Toll, the Australian service provider has been propelled into a position as one of the leading Asian 3PLs. With a staff of around 30,000 employees, as shown in Figure 4.12, Toll is positioned to establish itself as a leading third-party provider across the region. Of course, Asian-based 3PLs face significant competition from European and US 3PLs who have been expanding into the region since the 1990s.

APL Logistics APL Logistics facts and figures Head office: Offices in Singapore and Oakland, California Parent company: NOL Group 3PL revenue: US$1.29 billion (2005) (NOL, 2006) Parent revenue: US$7.27 billion (2005) (NOL, 2006) Global coverage: 100 countries across Asia, Europe and the Americas Employees: 4,949 (2005) Facilities and resources: 300 offices Key services and products: Ocean and air freight forwarding, shipment consolidation and deconsolidation, customs management, regional warehousing and distribution networks Industry sector focus: Automotive, consumer durables and consumer packaged goods, consumer electronics and retail Source: APL Logistics (2006).

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14,000 11,838 12,000 10,000

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Figure 4.11 Top five 3PLs by revenue in Asia Pacific

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Toll

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Logistics All employee figures referenced to source under 3PL entries

Figure 4.12 Top five 3PLs by employees in Asia Pacific

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APL background and activities In 1997 NOL, Singapore’s national shipping line, bought America’s oldest shipping company, American President Lines (APL). APL was nearly double the size of NOL and nearly 150 years old, having been formed around the time of the Californian gold rush. The NOL Group now trades through two core businesses, APL, a container transportation company and APL Logistics, an international supply-chain business. NOL, an abbreviation for Neptune Orient Lines, was wholly owned by the Singapore government until it was publicly listed on the Singapore Exchange in 1981. Temasek Holdings, the Singapore government’s investment organization, is the biggest shareholder with 69 per cent (NOL, 2006). In addition to supplying conventional freight services, APL provides origin consolidation and vendor services, working closely with suppliers and providing local consolidation centres. They also provide manufacturing support from specialized facilities, supplying quality controlled parts and components to manufacturers on a just-in-time basis (APL Logistics, 2006). In December 2005, APL Logistics announced a joint venture with the UK contract logistics provider Christian Salvesen, aimed at providing integrated end-to-end supply-chain services (Christian Salvesen, 2006).

Kintetsu World Express Kintetsu facts and figures Head office: Tokyo, Japan 3PL revenue: Approximately US$2.6 billion (268,796 million yen) (2006) Global coverage: 33 countries across Asia, Europe and the Americas Employees: 6,625 (2006) Facilities and resources: 318 offices and operations Key services and products: Air freight forwarding, domestic and foreign trucking company agent, warehousing and transportation, customs agent Industry sector focus: Automotive, consumer goods, consumer electronics, high technology and pharmaceutical Source: Kintetsu World Express (2006).

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Kintetsu background and activities Kintetsu World Express Inc was formed in 1948 when the Operation Bureau of Kinki Nippon Railway Co Ltd began handling international air shipments, later becoming an approved IATA (International Air Transport Association) agency. In 1970 the Airfreight Operation Department was demerged from Kinki Nippon Tourist Co Ltd and was named Kintetsu World Express Inc, specializing in air freight. The company is essentially a freight forwarder that is slowly moving towards providing contract logistics activities such as warehousing, distribution and packing services. It has been expanding its ocean freight business since the mid-1990s and is now one of the leading NVOCC (nonvessel-operating common carrier) businesses in Japan. Source: Kintetsu World Express (2006).

Nippon Express Nippon Express facts and figures Head office: Tokyo, Japan 3PL revenue: US$11,838 million (excluding rail, heavy haulage and construction and other: US$4,487 million) (2005) Global coverage: 37 countries across Asia Pacific, Europe and the Americas Employees: 38,324 (2005) Facilities and resources: 1,100 service centres across Japan and 301 service centres worldwide Key services and products: Air and ocean freight forwarding, road freight transportation; warehousing and distribution; and removals transport for personal and commercial goods Source: Nippon Express (2006).

Nippon Express background and activities As one of the largest third-party providers in the world, the Nippon Express Group can trace its roots back to 1872, when it was founded under the name Riku-un Moto Kaisha (the Land Transport Company). Following its relaunch as a semi-government transportation enterprise in 1937, the

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business went through yet another transformation in 1950, with the passing of the Express Business Act, when the company was recognized as a legal corporation. In 2002 Nippon Express was responsible for all transportation work related to the hosting of the FIFA World Cup soccer tournament. In addition to the key logistics and supply-chain management services and products, Nippon Express provides added-value activities, including: ឣ ឣ ឣ ឣ ឣ

consultancy; kitting; bundling; customization; technical configuration.

Source: Nippon Express (2006).

NYK Logistics (including Yusen Air and Sea) NYK Logistics facts and figures Head office: Toyko, Japan Parent company: NYK Group 3PL revenue: US$3.3 billion (2005) Parent revenue: US$10 billion (20005) Global coverage: 34 countries across Asia, Europe and the Americas Employees: 17,000 (2005) Facilities and resources: 330 warehouse and office locations Key services and products: Air and sea freight forwarding warehousing and distribution Industry sector focus: Automotive, chemicals, consumer goods, consumer electronics, healthcare, industrial and retail Source: NYK Logistics (2006).

NYK background and activities NYK Logistics is a wholly owned subsidiary of NYK Group, which was founded in 1885. The logistics business includes NYK Logistics’ sister company Yusen Air & Sea Service. NYK is an acronym for Nippon Yusen Kabushiki Kaisha. NYK delivers seamless global logistics services supported by advanced logistics management and information technologies.

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NYK seeks to deliver full supply-chain management solutions, combining sea, air and land transport solutions with warehousing and distribution, working with customers like Casio, Isuzu, Hitachi, Sony and Yamaha. Recent acquisitions, including contract logistics providers New Wave (consumer and retail) and UCI (manufacturing and retail), have strengthened the business’s contract logistics capability. Source: NYK Logistics (2006).

Toll Toll facts and figures Head office: Melbourne, Australia 3PL revenue: US$6.45 billion (AUD8.6 billion) (2007 estimated including Semcorp) Global coverage: 17 countries across Asia Employees: 30,000 (2006) Facilities and resources: 670 sites throughout Asia, including 3 million sq m of warehousing Key services and products: Road, rail, air and sea transportation, warehousing and distribution, ports management and stevedoring Industry sector focus: Automotive, consumer goods, raw materials, oil and mining Source: Toll (2006).

Toll background and activities The Toll business, founded in 1888 by Albert Toll, has developed over the years to become one of Asia’s leading logistics service providers. In 1986, a management buyout team led by current managing director Paul Little and former chairman Peter Rowsthorn purchased Toll. Seven years later the company was listed on the ASX stock exchange. Since then, Toll has progressively developed its logistics business, and has made nearly 50 acquisitions since 1989. 2006 saw two significant acquisitions for Toll: Patrick Corporation, a container and stevedoring business with revenues of AUD3.7 billion, and SembCorp Logistics (SembLog), one of Asia’s leading logistics companies. Having borrowed money to complete the acquisitions, Toll is looking to sell some of its non-core businesses.

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Toll is now positioned as one of Asia’s leading providers of integrated logistics services. The company is focused on becoming an integrated logistics provider across Asia with a strategy built on owning and managing transport and logistics assets. Source: Toll (2006).

Summary The 3PL market is highly competitive with demanding customers that are challenging their providers to supply a wider range of solutions and greater geographical reach. The market is also highly fragmented and changing quickly. There is much consolidation, and the larger providers are getting bigger and more powerful, while the smaller providers are becoming increasingly marginalized. DHL Logistics is the largest 3PL by some margin, and while parcels operators UPS and FedEx are growing their global supply-chain capabilities, logistics providers like Kühne + Nagel and Schenker are also working hard to close the gap, as shown in Figure 4.13. Of the top 30 third-party logistics companies, Europe and the United States each have ownership of 13 of the businesses, as shown in Figure 4.14. However, the picture is more complete when the revenues for each region are analysed. As can be seen in Figure 4.15, more than half the total revenue of the top 30 providers comes from European companies. This is

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Figure 4.13 Largest 10 global 3PLs by revenue

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explained in that four of the top five 3PLs are based in Europe as shown in Figure 4.13, making the European region a powerhouse in global thirdparty logistics. After looking at the overall 3PL market and the growth predictions, this chapter reviewed the emerging global logistics providers, concluding that in fact very few currently have the coverage and scale to claim this title. The chapter then focused on the large and complex 3PL market of Europe, showing the strength of the German and Swiss operators. The following section analysed the US providers, showing a mix of 3PLs emerging from their express parent companies and others transforming themselves from their trucking legacies. Finally, the chapter reviewed the 3PLs from Asia Pacific. Led strongly by Japanese providers, many of which have risen from shipping backgrounds, Asian 3PLs have faced intense competition from European and US providers.

4 13

Europe USA APAC

13

Figure 4.14 Distribution by region of the largest (by revenue) 30 global 3PLs

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Euro Europe USAUSA

46.1

90.3

APAC APAC

Values converted into billions of US dollars All revenues referenced to source under 3PL entries

Figure 4.15 Revenue totals for the largest 30 global 3PL distributed by region

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5

Key drivers Introduction A large number of reasons are given for why companies either should or should not outsource their logistics operations – and the pluses and minuses of outsourcing may be viewed very differently, depending on which company you talk to and whom you talk to within that company! Very often, similar advantages are claimed for both third-party and ownaccount distribution operations. This might be expected in a conversation between a contractor and an own-account operator, but it is also heard in discussions between users. The truth is that this is an area of some controversy. Very often, and not surprisingly, it is the experience of a user company that colours the view it has of outsourcing. Where it works very well, companies will be keen and positive. Where there have been problems – and this is not uncommon – the views will be more negative. One other important factor is that outsourcing is not necessarily the right thing for all companies. There are some businesses that are better suited to keeping their logistics operations in-house. Thus, it is important to be able to assess the potential benefits and drawbacks of outsourcing with particular reference to each company that is considering the option. There are no hard and fast rules that will always apply. Some of the different aspects can be objectively assessed and quantified. Others are subjective, relating more to company convention and personal preference than to anything else. This chapter of the book considers the key drivers for outsourcing. It begins by putting the outsourcing decision and the reasons or drivers for outsourcing into the context of the company business and logistics environment: alternative channels of distribution are described, a series of channel objectives are defined and various different channel characteristics are outlined.

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Consideration is given to outsourcing in other industries and functions to see whether there are any lessons that might be learned. In particular, the main drivers for outsourcing the IT function are discussed. It will be seen that there are some reasons for IT outsourcing that are similar to those for logistics, and also some that are surprisingly different. A number of external drivers for outsourcing are reviewed, particularly globalization, supply-chain complexity, emerging markets and e-commerce. For some companies one or more of these aspects may be influential in providing an important reason for outsourcing all or part of their logistics operations. The importance of understanding and taking account of a company’s competitive advantage is also discussed, particularly the need to understand the balance between trying to achieve a cost or a service advantage. This will have a major impact on determining outsourcing objectives and requirements, and in identifying the preferred type of outsourcing relationship. The major logistics drivers for outsourcing are then described, together with a consideration of some of the drawbacks. Finally, there is a review of which factors seem to be most critical for the outsourcing decision. Several company case histories are included.

Outsourcing context Before we address what are considered to be the main drivers for outsourcing logistics operations, the overall context of the decision needs to be understood. For this reason, a number of different elements will be discussed, starting with the broad requirements for channel selection itself. Manufacturers and retailers need to understand the many different channels that are available to get a product to market. Outsourcing is one of many approaches that may be adopted. Also, before contemplating outsourcing as an option, a company needs to be clear what its key objectives are and which channel characteristics may impact on its decision. It is also worth taking a somewhat broader perspective to consider the more general points related to outsourcing – those that may not directly be of concern to logistics but which may be relevant in a broader context within a company. These are considered together with some external drivers that may be influential. It is also important to make the outsourcing decision within the context of the competitive advantage that a company enjoys, so that any such advantage is not sacrificed or diminished as a result of outsourcing all or part of the operation.

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Channel alternatives There are several alternative physical channels of distribution that can be used, and a combination of these may be incorporated within a channel structure. Figure 5.1 shows the manufacturer-to-retail environment, and illustrates the main alternative channels for a single consumer product being transferred from a manufacturer’s production point to a retail store or shop. The circles in the diagram indicate the times when products are physically transferred from one channel member to another. There are, of course, other channels that are used – channels from industrial suppliers to industrial customers, or channels that are direct to the final consumer – and these are discussed separately later in the chapter. The alternative channels in Figure 5.1 are outlined below.

Manufacturer direct to retail store The manufacturer or supplier delivers direct from the production point to the retail store, using its own vehicles. As a general rule, this channel is only

Retail store

Retail store Parcels carrier collect Retail store

Cash & carry Wholesale warehouse

Retailer’s warehouse

Retail store Broker

direct delivery Retail store Production

3PL service

Retail store

Manufacturer’s warehouse

Retail store Retail store

Figure 5.1 Alternative distribution channels for consumer products to retail outlets

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used when full vehicle loads are being delivered; thus it is quite unusual in today’s logistics environment.

Manufacturer via manufacturer’s distribution operation to retail store This used to be one of the classic physical distribution channels and was the most common channel for many years. Here, the manufacturer or supplier holds its products either in a finished goods warehouse, a central distribution centre (CDC) or a series of regional distribution centres (RDCs). The products are trunked (line-hauled) in large vehicles to the sites, where they are stored and then broken down into individual orders that are delivered to retail stores on the supplier’s retail delivery vehicles. All of the logistics resources are owned and operated by the manufacturer. Since the 1970s, the use of this type of physical distribution channel has declined in importance due to a number of developments in alternative channels of physical distribution. However, it is still commonly used by the brewing industry.

Manufacturer via retailer distribution centre to retail store In this channel, manufacturers supply their products to national distribution centres (NDCs) or RDCs, which are facilities run by the retail organizations. These centres act as consolidation points, where goods from the various manufacturers and suppliers are consolidated. The retailers then use their own delivery vehicles to deliver full vehicle loads of all the different manufacturers’ products to their own stores. In the United Kingdom this type of distribution channel grew in importance during the 1980s as a direct result of the growth of the large multiple retail organizations that are now a feature of the high street and of the large retail parks. Most retailers now use third parties to run these final delivery operations.

Manufacturer to wholesaler to retail shop Wholesalers have acted as the intermediaries in distribution chains for many years, providing the link between the manufacturer and small retailers. However, this physical distribution channel has altered in recent years with the development of wholesaler organizations or voluntary chains. These wholesaler organizations are known as ‘symbol’ groups in the grocery trade. They were generally begun on the basis of securing a price advantage by buying in bulk from manufacturers or suppliers. One consequence of this has been the development of an important physical distribution channel because the wholesalers use their own distribution centres and vehicle fleets.

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Manufacturer to cash-and-carry wholesaler to retail shop Another important development in wholesaling has been the introduction of cash-and-carry businesses. These are usually built around a wholesale organization; small independent shops collect their orders from regional wholesalers, rather than having them delivered. The increase in cash-andcarry facilities has arisen as many suppliers will not deliver direct to small shops because the order quantities are very small.

Manufacturer via third-party distribution service to retail shop Third-party distribution or the distribution service industry has grown very rapidly indeed in recent years, mainly due to the extensive rise in distribution costs and the constantly changing and more restrictive distribution legislation that has occurred. Thus, a number of companies have developed a particular expertise in logistics operations. As outlined in earlier chapters, these companies include those offering general distribution services as well as those that concentrate on providing a ‘specialist’ service for one type of product (such as china and glass, or hanging garments), or for one client company.

Manufacturer via small parcels carrier to retail shop Very similar to the previous physical distribution channel, these companies provide a ‘specialist’ distribution service where the ‘product’ is any small parcel. There was an explosion in the 1980s and 1990s of small parcels companies, specializing particularly in ‘next day’ delivery. The competition generated by these companies has been quite fierce.

Manufacturer via broker to retail shop This is a relatively rare type of channel, and may sometimes be a trading channel and not a physical distribution channel. A broker is similar to a wholesaler in that it acts as intermediary between manufacturer and retailer. Its role is different, however, because it is often more concerned with the marketing of a series of products, and not really with their physical distribution. Thus a broker may use third-party distributors, or may have its own warehouse and delivery system. The broker can provide an alternative physical distribution channel. The main alternative physical distribution channels previously described refer to those consumer products where the movement is from the manufacturer to the retail store. There are additional channels for industrial

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products and for the delivery of some consumer products that do not fit within the structure of the diagram because they bypass the retail store. They necessitate the consideration of different types of distribution channel.

Mail order The use of mail order or catalogue shopping has become very popular. Goods are ordered by catalogue, and delivered to the home by post or parcels carrier. The physical distribution channel is thus from manufacturer to mail-order house as a conventional trunking (line-haul) operation, and then to the consumer’s home by post or parcels carrier, bypassing the retail store.

Factory direct to home The direct factory-to-home channel is a relatively rare alternative. It can occur in the context of direct selling methods, often as a result of newspaper advertising. It is also commonly used for ‘one-off ’ products that are specially made and do not need to be stocked in a warehouse to provide a particular level of service to the customer.

Internet and shopping from home There is now an important development in shopping from home via the internet. Initial physical distribution channels were similar to those used by mail-order operations – by post and parcels carrier. The move to internet shopping for grocery products has led to the introduction of specialist home-delivery distribution operations. These are almost all run by thirdparty companies. In addition, it is now possible to distribute some products, such as music, software and films, directly, computer to computer.

Factory to factory/business to business The factory-to-factory or business-to-business channel is an extremely important one, as it includes all of the movements of industrial products, of which there are very many. This may cover raw materials, components, part-assembled products and so on. Options vary according to the type and size of product and order, may range from full loads to small parcels, and may be undertaken by the manufacturers themselves or by a third party. It can be seen from the list of alternative channels that the channel structures can differ very markedly from one company to another. The main differences are:

Key drivers ឣ ឣ

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the types of intermediaries (as shown above); the number of levels of intermediaries (how many companies handle the product?); the intensity of distribution at each level (are all or just selected intermediaries used at the different levels?).

An individual company may have many different products and many different types of customer. Such a company will therefore use a number of different channels within its distribution operation.

Channel objectives Channel objectives will necessarily differ from one company to another, but it is possible to define a number of general points that are likely to be relevant. These should normally be considered by a company in the course of its distribution planning process to ensure that the most appropriate channel structure is developed. The main points that need to be addressed are as follows: ឣ

ឣ

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To make the product readily available to the market consumers at which it is aimed. Perhaps the most important factor here is to ensure that the product is represented in the right type of outlet or retail store. Having identified the correct marketplace for the goods, the company must make certain that the appropriate physical distribution channel is selected to achieve this objective. To enhance the prospect of sales being made. This can be achieved in a number of ways. The most appropriate factors for each product or type of retail store will be reflected in the choice of channel. The general aims are to get good positions and displays in the store, and to gain the active support of the retail salesperson, if necessary. The product should be visible, accessible and attractively displayed. Channel choice is affected by this objective in a number of ways: – Does the deliverer arrange the merchandise in the shop? – Are special displays used? – Does the product need to be demonstrated or explained? – Is there a special promotion of the product? To achieve cooperation with regard to any relevant distribution factors. These factors may be from the supplier’s or the receiver’s point of view, and include minimum order sizes, unit load types, product handling characteristics, materials handling aids, delivery access (for instance, vehicle size) and delivery time constraints. To achieve a given level of service. Once again, from both the supplier’s and the customer’s viewpoints, a specified level of service should be established, measured and maintained. The customer normally sees this as

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crucial, and relative performance in achieving service-level requirements is often used to compare suppliers and may be the basis for subsequent buying decisions. To minimize logistics and total costs. Clearly, costs are very important, as they are reflected in the final price of the product. The selected channel will reflect a certain cost and this cost must be assessed in relation to the type of product offered and the level of service required. To receive fast and accurate feedback of information. A good flow of relevant information is essential for the provision and maintenance of an efficient distribution service. It will include sales trends, inventory levels, damage reports, service levels, cost monitoring and other data.

These points all need to be addressed when a company’s distribution channels are designed and also, therefore, when a company tries to determine whether or not it should outsource any of its logistics operations. It is from assessing factors such as these that a company will be able to identify the main drivers that make outsourcing an attractive alternative for consideration.

Channel characteristics In association with the type of objectives outlined in the previous section, there are a number of important associated channel characteristics that also need to be considered. These characteristics are likely to affect the decisions that need to be made when designing a channel to be used in a distribution system, or when trying to identify any key outsourcing requirements. They can be summarized as follows.

Market characteristics The important consideration here is to use the channels that are the most appropriate to get the product to the eventual end user. The size, spread and density of the market is important. If a market is a very large one that is widely spread from a geographic point of view, then it is usual to use ‘long’ channels. A long channel is one where there are several different storage points and a number of different movements for the product as it is transferred from the point of production to the final customer. Where a market has only a very few buyers in a limited geographical area, then ‘short’ channels are used. Thus a company must identify what is appropriate for the market, what type of distribution channel is needed to support this channel and then, where appropriate, choose a suitable third-party service provider that can fulfil the requirements. A simple example of what are known as ‘long’ and ‘short’ channels is illustrated in Figure 5.2.

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Long channel Manufacturer’s warehouse

Retail shop

Manufacturer’s depot

Retailer ’s regional depots

Third-party central depot

Third-party regional depots

Short channel Manufacturer’s warehouse

Buyer’s factory warehouse

Figure 5.2 ‘Long’ and ‘short’ distribution channels

Product characteristics The importance of the product itself when determining channel choice should not be underestimated. This is because the product may well impose constraints on the number and type of channels that can be considered, and may well influence outsourcing requirements and opportunities. For example: ឣ

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High-value items are more likely to be sold direct via a short channel, because the high gross profit margins can more easily cover the higher sales and distribution costs that are usual from short channels. In addition, the security aspects of highly priced items (such as jewellery, watches and CDs) make a short channel much more attractive because there is less opportunity for loss and theft than with a long channel. Because these products can bear a high distribution cost, there will be greater opportunities for outsourcing. Complex products often require direct selling because an intermediary may not be able to explain how the product works to potential customers. It is usually difficult to outsource the distribution of such products. New products are often distributed via a third-party channel because final demand is unknown and supply channels need to be very flexible to respond to both high and low demand levels. Existing own-account operations can seldom deal effectively with the vagaries of new product demand.

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Products with a time constraint need a ‘fast’ or ‘short’ channel, for obvious reasons; examples include bread, cakes and newspapers. Products with a handling constraint may require a specialist physical distribution channel, as is the case with frozen food, china and glass, or hanging garments.

Competitive characteristics Competitive characteristics that need to be considered concern the activities of any competitors selling a similar product. Initial channel decisions are whether to sell the product alongside these similar products, or whether to try for different, exclusive outlets for the product to avoid the competition. It may well be that the consumer preference for a wide choice make it necessary to supply the same outlets. Good examples include confectionery and most grocery items. Of particular significance, however, is the service level being provided by the competition. It is essential that channel selection is undertaken with a view to ensuring that the level of service that can be offered is as good as, or better than, that which is being provided by key competitors. This may well be the main area for competitive advantage, especially for those products where it is very difficult to differentiate on quality and price. So, any move from in-house to third-party distribution must be undertaken with a view to ensuring that there is no reduction in service level compared with the company’s major competitors.

Company resources In the final analysis, it is often the size and the financial strength of the company that is most important in determining channel strategy. Only a fairly large and cash-rich company can afford to set up a distribution structure that includes all of its own distribution and transport facilities. A company may like to do this because it feels that such a structure gives it greater control and can enable it, more easily, to provide the service it thinks its customers require. However, smaller and less financially secure companies may have to use intermediaries or third-party organizations to perform their distribution function because they do not have the financial resources to allow them to run their own distribution operations.

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211

Business drivers Why other functions outsource It is useful to be able to make comparisons with other industries and functions from outside the logistics environment to see if there are any lessons that might be learned. One such function is IT. Many companies now outsource their IT operations. It can be seen from a short review of the potential drivers for outsourcing IT that there are some similar reasons compared to logistics and some that are surprisingly different. The key drivers discussed below are drawn from Heywood (2001).

Improved cash flow This can occur sometimes when the service provider pays for assets that are transferred from the client. In IT, this might include facilities, hardware and equipment, and software licences. This is because the provider can then use these assets to help provide the agreed service. Heywood notes that in some instances, such cash injections are just another benefit from the many that outsourcing brings, but that in others, ‘the outsourcing deal appears to have mainly come about because of the client’s need for new short term funds’. This may certainly be an important driver for outsourcing some logistics operations. Indeed, the transfer of assets from client to third party is a very important aspect of logistics outsourcing because most in-house operations will have a great deal of cash tied up in depots, vehicles and other equipment.

The need to relocate The rapid growth in IT was reflected in a similar growth of IT departments, often leading to the need for relocation to bigger and better premises. Because of the difficulty of estimating exactly what the requirements might be, and because IT was seldom the core function of a business, many companies saw outsourcing as a sensible option. For logistics, the need to relocate can also be important, but usually for different reasons. Relocation in a logistics context normally means that a strategic study has indicated that demand and perhaps supply points have shifted such that existing depots are inappropriately located and that some need to be closed and other new ones opened. This is potentially an enormous cost to any company, as well as being potentially very disruptive to operations and service levels during the period of change. Thus, it may become both financially and operationally attractive to outsource.

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The need for system change The speed of development in both hardware and software systems has meant that companies have had to make very large-scale changes to their information systems. This occurred particularly with financial systems. Because IT outsourcing service providers made substantial investments in hardware, software, expertise and implementation experience, it soon became clear that outsourcing was a very attractive solution. This was endorsed by the lack of success of many companies that implemented systems themselves. This also applies in logistics, as many client companies have seen the opportunity to benefit from the systems and expertise that logistics service providers can offer with regard to certain leading-edge high-tech developments, particularly in IT and IS. Examples might include warehouse management systems (WMS), track and trace, and radio frequency identification (RFID).

Improvement consolidation Some companies have adopted the view that, although they have completed successful performance-improving projects in IT and have effective systems, this is a good time to outsource. This is because: ឣ

ឣ ឣ

What they have is appropriate for what they need – why not consider outsourcing now to see what it would cost to get the same service? Outsourcing at this stage will not give the service provider easy savings. It is difficult to constantly keep the systems up-to-date, so in a short period of time it will be a good time to outsource because new developments will soon be appearing and changes will need to be made.

This approach is probably not often taken as far as logistics is concerned, but it has its merits. For example, many companies do outsource their logistics because of operational or service deficiencies that they cannot or do not wish to solve within their own operations. This certainly makes it easier for potential service providers to identify the obvious improvements by which they can ensure that they can provide a better service and can also perhaps make a more than reasonable profit.

Release scarce resources Rapidly developing markets and technology create the need for constant change and mean that functional heads and their staff have to spend much of their time ‘fire fighting’ to initiate change and solve the associated

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problems. Outsourcing can alleviate this, allowing staff to concentrate on other, more strategic, issues. A similar advantage is identified by many managers in logistics.

Strategic reasons Outsourcing allows organizations to concentrate their resources on core functions because non-core operational functions are undertaken by an external specialist. This is a classic reason given by companies that outsource their logistics operations.

Risk reduction The fast rate of change in activity, legislation and, particularly, IT means that there is an increasingly high risk in any large business investment. Service providers, to a certain extent, can reduce this risk because they can spread the investment over a number of clients. This certainly hold true in logistics, and particularly so in the area of logistics IT and IS. However, there is a counter-argument concerning risk that is often used by those considering the outsourcing of their logistics operations. This is that there are other risks in outsourcing that need to be considered and assessed. These include, amongst others, the loss of direct control over logistics operations, the loss of direct contact with the customer at delivery points, and the risk of third-party failure with the dire consequences that that would bring. These points will be addressed later in the chapter when the main drivers and drawbacks of logistics outsourcing are reviewed in some detail.

External drivers In addition to the logistics-related drivers for outsourcing that will be discussed later in this chapter, there are also several external drivers that might influence a company towards outsourcing. Many of these can have a knock-on effect on a company’s logistics structure and operation. The most important drivers are outlined below.

Globalization One area of significant change in recent years has been the increase in the number of companies operating in the global marketplace. This necessitates a broader perspective than when operating as an international company. In

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the latter case, although companies may have a presence across a wide geographic area, this is supported on a local or regional basis through local or regional sourcing, manufacturing, storage and distribution. In the former, the company is truly global, with a structure and policy that represents a global business. Typical attributes will include: ឣ ឣ ឣ ឣ ឣ

global branding; global sourcing; global production; centralization of inventories; centralization of information.

However, these must coexist with the ability to provide for local requirements, such as electronic standards for electrical goods, language on packaging, and left/right-hand drive alternatives in the automotive industry. To service global markets, logistics networks become, necessarily, far more expansive and far more complicated. There is a continuing need to plan and manage logistics as a complete and integrated system, but to achieve this is far more difficult, and often the best solution is to outsource. Globalization is discussed in more detail in Chapter 1.

Complexity Linked closely to the globalization of business is the increase in the complexity of supply-chain management. As already indicated, globalization almost certainly leads to greater complexity. Complexity provides some significant implications for logistics operations, such as: ឣ ឣ

ឣ

ឣ ឣ ឣ

extended supply lead times; complex node management (including distribution centres, consolidation centres, cross-docking); extended and unreliable transit times, creating the need for greater visibility in the supply chain together with better information systems; multiple, single and inter-modal freight transport options; complicated freight cost options; production postponement with local added value (finishing, kitting, badging, tagging, etc).

In order to succeed in this new, more complex, environment, many companies choose to outsource their supply-chain management. This echoes the argument for concentrating on core competencies or key business areas, but it is also a direct result of the difficulty of setting up and running such convoluted and complicated supply chains. This too is discussed in more detail in Chapter 1.

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Emerging markets In the current business environment there are some very significant regional market developments. The most important is probably the Far East, in particular the opening up of China, which has seen astounding growth in both the supply of and the demand for many different types of product. There are obvious implications for logistics regarding the flow of products out of the Far East, whether raw materials, components or finished goods, and the inward flow of mainly finished goods into the region. The implication for logistics of these long supply chains was identified earlier in this chapter. Once again, a good solution for many companies is to outsource these operations because of the complexity of the flows, the difficulty of setting up in-house operations in these regions, and the risk of investing in organizations and structures that may not see the growth in supply and demand that is initially forecast. Also important is Eastern Europe. Here, from a Western European perspective, the sources and markets do not have the problem of distance, with the associated time constraints and supply-chain complexity. Nevertheless, there are still some real issues for logistics because of the poor transport infrastructure and the problem of initial low levels of supply and demand. So, again, there are good reasons for manufacturers and retailers to avoid the high risk and high cost of setting up in-house operations, making the outsourcing of these operations a natural and attractive alternative. Third-party providers are in a much better position to undertake investment because they can spread the costs across a number of different customers. This is discussed in more detail in Chapter 2.

E-commerce and e-fulfilment One of the most dramatic developments in recent years has been that of the internet and the World Wide Web. Associated with this has been the increase in the opportunity for both business and consumers to purchase goods online from a variety of sources, whether traditional or new. As indicated in Chapter 3, internet shopping is now very common and this has resulted in a similar growth in the demand for the fulfilment (or e-fulfilment) of these internet orders. Internet access does provide a direct and instantaneous link from the customer to the selling organization, but the actual physical fulfilment must still be undertaken by more traditional physical operations. This often necessitates the introduction of a new means of physical distribution, because traditional channels are not appropriate for home delivery. The area as a whole is one that few internet companies wish to develop, and so there are big opportunities for 3PLs to specialize in

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e-fulfilment delivery operations and to offer these as value-added services together with the more traditional distribution functions. The particular reasons for outsourcing e-fulfilment can be summarized as: ឣ

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Lower set-up costs: outsourcing avoids the need to invest in distribution, so start-up cash can be concentrated into online business development. Very fast set-up of fulfilment capabilities: this allows companies to be able to support their online retailing business as soon as it starts operating, and thus avoid disappointing early customers through delivery delays and failures. Scale economies of shared facilities and transport: thus fulfilment can be economic despite initially low volumes and throughput. Lower operating costs: transport costs can be minimized if customer orders are consolidated with other users. Small companies face a difficulty in delivery operations known as the density problem, whereby they have insufficient delivery or order density in their network to make separate delivery operations viable. This applies particularly to online retailers, which virtually always start from a low business base when opening their online retail sites. Easier expansion of geographic coverage: this is a classic reason for outsourcing delivery transport in growing businesses, which applies equally to online retailers. Opportunity to benefit from value-added services: as summarized in Chapter 3, there are a multitude of value-added services that third-party providers now offer. Online retailers can use these at an early stage of their business operation. Typical examples might include track-and-trace of orders, returns and inventory visibility.

Size matters One key driver for outsourcing is that of size. As already indicated in the previous section on e-commerce and e-fulfilment, it is almost impossible for small companies that are trying to offer a broad geographic coverage to run their own transport operations cost-effectively. This is the density problem mentioned earlier. Basically, vehicles would have to travel uneconomically long distances between delivery drops. Thus, outsourcing into a multi-user third-party transport operation is the major alternative. A similar argument about size applies to warehouse operations. Here the cut-off points for outsourcing are slightly different, as Figure 5.3 indicates. Based on daily orders and volumes, a small company with limited orders, volume throughput and SKUs is likely to undertake its own storage operation: (a) in the diagram. This is because it does not have sufficient requirements to attract a reasonably priced alternative from a third-party provider.

Key drivers

Unit Cost

10,000

1,000

Multi-user outsourcing costs

In-house costs

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(c) In-house or dedicated outsource

(b) Multi-user outsource

(a) In-house

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Volume per day

Optimal strategy

Figure 5.3 An indicator of when to outsource a warehouse or depot operation based on the size of the business

The overhead cost of setting up and managing the operation would be likely to make it unattractive. It is impossible to be precise as to when the cut-off occurs as this will be influenced by many other variables (space availability in the 3PL depot, opportunity to carry out more value-added (and profitable) services, prospects for future business and so on). Outsourcing becomes attractive when the business is large enough to bear a reasonable overhead cost and to start to benefit from the scale economies that a multi-user operation can offer: (b) in the diagram. This could continue through a fairly long phase of business growth, and the client could steadily move from being a small to a very big player for the 3PL. The next stage occurs when the business reaches sufficient size for the warehouse or depot to be run as an operation dedicated to the single business: (c) in the diagram. For many companies, this will be an opportunity to take the operation back in-house. Of course there may be many other reasons (as discussed in the final section of this chapter) why a company may choose to remain with outsourcing as the preferred business option.

Competitive advantage Attitudes towards distribution and logistics have changed quite dramatically in recent years. It had been a long-held view that the various elements

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within logistics have merely created additional costs for those companies trying to sell products in the marketplace. Although there is, of course, a cost associated with the movement and storage of goods, it is now recognized that distribution and logistics also provide a very positive contribution to the value of a product. This is because logistics operations provide the means by which the product can reach the customer or end user in the appropriate condition and required location.

Cost versus service advantage It is therefore possible for companies to compete on the basis of providing a product either at the lowest possible cost (so that the customer will buy it because it is the least expensive) or at the highest possible value to the customer (for instance, if it is exactly where and how the customer wants it). Some companies may, indeed, try to achieve both of these objectives. This is particularly important these days as there are many products that are not sold on the basis of their brand name alone but that are, in fact, like commodities sold on the basis of availability or price. This applies to many food products as well as technical products such as mobile phones and personal computers. These ideas are illustrated in Figure 5.4. This shows that a company may compete as a service leader, where it is trying to gain an advantage over its competitors by providing a number of key service elements to differentiate itself. Or it may compete as a cost leader, where it is trying to utilize its resources so that it offers the product at the lowest possible cost, thus gaining a productivity advantage. Examples of how this might be achieved are given in Figure 5.4. For a value advantage, this might include the provision of a specially tailored service or the use of several different channels of distribution so that the product is available in the marketplace in a number of different ways. It might include a guaranteed service level or a regular update on the status of orders. For a cost/productivity advantage, this will include a number of different means of cost minimization, such as maintaining very low levels of inventory and ensuring that all manufacturing and logistics assets are kept at a high utilization. A good knowledge and understanding of the competitive advantage that it is aiming to achieve is therefore essential when a company considers whether or not to outsource its logistics operation. It is also important to know this when comparing the final choice of the third-party providers during any selection process. Equally, it is crucial that the third-party provider is aware of what the client company is trying to achieve, so that a suitable tender can be prepared that is based on the client’s wishes for achieving competitive advantage and reflecting their needs for an appropriate cost and service balance.

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Cost & service leader Service leader

Cost leader

Commodity market

VALUE ADVANTAGE

COST/PRODUCTIVITY ADVANTAGE

Logistics leverage opportunities

Logistics leverage opportunities

     

   

tailored service distribution channel strategy reliability responsiveness information flexibility

capacity utilization asset turn low inventory low wastage

Figure 5.4 The logistics implications of different competitive positions

One size doesn’t fit all It should also be emphasized that for many companies it is necessary to develop differently configured logistics structures to cater for the variety of service offerings that they need to provide. It is now appreciated that a ‘onesize-fits-all’ approach to logistics is usually too limited, because suppliers need to take account of a range of different customer requirements and make sure that their competitive advantage is understood and applied in all market segments. As noted in a recent European Logistics Association survey: ‘One size fits all policies will rarely work when applied to modern, diverse service offerings…. Leading companies are segmenting their supply chains according to the service and cost needs of the customer’ (ELA and Kearney, 2004). The difficulty of establishing a one-size-fits-all solution is another point that both client and potential provider need to be aware of. There are likely to be some product groups, customer types or service demands that cannot be treated in the same way as is normal for most. Special systems and processes may be needed for these, or indeed they may have to be completely excluded from the agreed operation and catered for in another way. Clients should note that non-standard operations generally necessitate additional costs that the service provider will have to cover!

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One example of such an incompatibility in a single company, where a one-size-fits-all logistics solution is inappropriate, is summarized in Table 5.1. This company is a global manufacturer and distributor of high-value consumer products. In the UK, it has two major businesses: first, domestic retail to supermarkets, CTNs and similar outlets; and second, travel retail to airports, ferry ports and the like. It became increasingly evident to the company that the logistics equipment and process requirements used in its in-house logistics operation for the two different channels of distribution were incompatible, even though the physical nature of the product was basically the same. One obvious solution was to outsource one or even both of the operations. An initial summary of requirements for the two operations, as shown in Table 5.1, identified some major differences and underlines the need to be aware that a ‘one-size-fits-all’ solution may well be inappropriate. It is interesting to note the many different logistics elements that had very dissimilar requirements across the two businesses.

Table 5.1 Some major logistical differences in the main channels of an FMCG manufacturer and distributor Travel Retail

Domestic Retail

Product range/brands Brand variants

international high

domestic low

Packaging variants

high

low

SKU proliferation*

high (800+)

low (