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Globalisation 4

In my opinion Logistics industry can be described as wheels of Globalization and key to the market expansion and competitive product availability to the growing global consumers. Dynamic business conditions and confronting economic conditions are driving globalization. Globalization is resulting due to expanding markets, exploding retail market, product proliferation, ever changing needs of customers, economic downturn, cost pressures, technology, cultural integration and government policies around the world. It would be wrong to assume that globalization influences economy and trade only; we are seeing integration in the areas of culture, media, education, research and development, tourism and even climate change.  On political front, we see collaboration and collective approach in addressing daunting challenges we face today.   Globalization will make our societies more creative and prosperous, but also more vulnerable and in transforms economies more competitive.

Let us review some vital statistics (Source: Armstrong & Associates Inc.).  First let us review the region wise Logistics spend vs. 3PL revenue (2012):

Globalisation 1

Obviously Asia Pacific Region heads the chart in all categories if we exclude remaining other countries which were consolidated under other countries.  It would be worth looking into Asia Pacific region by country in order to identify the growth countries.  Top five are highlighted here under:

Globalisation 2

If we look globally, it would be interesting to compare the numbers and easy to identify the globalization impact on different countries:

Globalisation 3

It would be very interesting to analyse 2013 numbers as the world trade is not promising.  World trade is expected to grow by 2.5 percent this year and 4.5 percent in 2014 (source: The World Trade Organisation).  More and more companies are developing agile supply chains and compressing product supply lead time and at the same time reduce the cost of production.  In order  to achieve all these goals, outsourcing supply chains is one of the solutions.  According to CAPGEMINI Consulting 2014 report 72% of the shippers are planning to increase use of outsourced logistics services and whereas the 3PL companies believe that 78% increase in business.  Let us hope economy responds well in 2014!

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The Story of Three Arrows

three arrows

As we all know that the Global Economy is not heading in the right direction.  One of the best indicators of global growth is oil prices.  Oil prices (Brent) are assumed to average about $105 per barrel (pb) in 2013-2014, compared to $110 pb in 2012.  Unemployment remains elevated in many developed economies, with the situation in Europe being the most challenging. A double-dip recession in several European economies has taken a heavy toll on labor markets. The unemployment rate continued to climb to a record high in the euro area during 2012, up by more than one percentage point from one year ago. Conditions are worse in Spain and Greece, where more than a quarter of the working population is without a job and more than half of the youth is unemployed.

Christine Lagarde, Managing Director, International Monetary Fund (IMF), described the global economy recovery in 2013 as “fragile and timid” because the Eurozone is prone to political crisis and slow decision-making processes.

Some believe that China is the engine that propels global economy growth in the right direction.  There is a belief that China is recovering and that signals global recovery.  However, the statistics reveal a mixed result according transport intelligence.com.  The February figures from Container Trade Statistics (CTS) show that, if anything, container trades are heading downwards. Overall, Asian exports – including on intra-Asian trades – fell by 26.4% as compared to January and by 8% as compared to February last year. In addition, import activity for Asia fell by 10% compared to January 2012, whilst on a year-on-year it was down by 12%. The export traffic indicates a twelve month low.  This is confusing and one thing is certain and that is economic downturn is here to stay some more time.  When we look at the major air cargo carrier performance during the first quarter, the results are no different.  Lufthansa Cargo has reported a 1% increase in its aircraft utilisation in the first quarter of 2013. In a difficult market environment, the cargo carrier scaled back capacity by 7.4%. Due to a smaller decline in sales, by 5.9%, the company was able to increase its load factor to 71.4%.  Overall, Lufthansa Cargo carried approximately 400,000 tonnes of freight and mail in the first quarter of the year – a decline of 7.2% compared with the same period in 2012.

Keeping in view of the global financial trend, business houses have to develop strategies that will take them through the tough financial conditions.  Any organisation will target three different improvements and they are, top line revenue growth, bottom-line improvement and increase satisfied customer base.  In order to meet the above, organisations will develop number of objectives, each describing a desired future condition toward which efforts are directed. An objective is a statement that clearly explains actions to be taken or tasks to be achieved by an organisation. If the objectives are accomplished, then the business should be a success.

Research reveals that most of the business organisation will have two types of business objectives and they are Economic and Socio-human objectives.  However, the organisation can focus on socio-human objective only when they are financially successful.  Hence, the focus is on economic objectives and they are mainly three objectives targeted by most of the entrepreneurs.  They are (1) Business prosperity through improved margins and increased sales volume (the upward arrow); (2) Speed to the market place to maximise product availability (the side way arrow) and (3) Cost reduction/optimization to make the product competitive to sustain in the market place (the downward arrow).  In fact all three objectives are inter-related and driven by cost trade-off decisions within supply chain.

The purposes of objective setting are, to establish a standard for evaluating the success of the business and set priorities for its management and staff. Objectives help keep management and staff focused on achieving set targets and keep them away from distractive activities that drain business resources.  The appropriate organisational goals will also to address the challenges of global economy.

The risks of doing business and competing in a global economy seemingly change by the day. At the same time, risk management and cost seem to go hand in hand, leaving many executives to wonder: Is it possible to reduce risks and still grow the top line? The answer is yes, and there are stories to prove it. A key ingredient is a “conscious” approach to managing risks in your organization’s supply chain. Every business that depends on goods and services in a global supply chain is at risk for various supply chain disruptions, or worse: contamination or product failure.

It is evident that the key to the success of any organisation lies in Supply Chain efficiency.  The industry has realised that if one manages the supply chain efficiently aligns it to the business dynamics; the success of the organisation is assured.  The optimisation of Supply Chain was handled by different section of experts in different ways.  Some think that technology is the solution to the supply chain efficiency some believe that the strategy is the key to the success. And some believe that people (the right team) are responsible for supply chain innovation through thought leadership.

Supply chain performance has never been as critical as it is today. In today’s dynamic world what is good today can turn into ugly tomorrow in market place.  At some stage buffer inventory was recommended to meet the demand fluctuations (JIC) and now carrying inventory more than required levels is undesirable and JIT is the favoured option. Under these ever changing circumstances, supply chain efficiency plays a very vital role in keeping the organisations alive. In order to achieve maximum benefit from a supply chain and creating competitive advantage in the supply chain wars, a supply chain must be performing at its best and continue to perform that way.  We have seen organisations flourishing through the product innovation and we are today witnessing organisational superiority in the market place through innovative supply chains.

If we take a hard look at the IT hardware industry, most of the big brands and your local assembler provide more or less same product.  However, there is huge price variation which is possible due to supply chain innovations.  When we look at the retailers, the product range is the same, origin of supply is the same and the quality of the product is almost the same.  However, there is huge price variation.  The reason is supply chain efficiency.  The procurement strategy, the distribution strategy and the organisational objectives make the difference.

Supply Chain efficiencies cannot be ignored by any industry in today’s economic downturn.  However, the truth is that some of the organisations do not recognise what is appropriate for their supply chain and pursue inappropriate policies and concepts.  Fortunately, we have only two supply chain processes and they are known as Pull and Push. The failure and success of the business model mainly depends upon selecting the appropriate process.  If a retailer who predominantly follows push process decides to use pull process, the end result would be a catastrophe.  At the same time if an IT hardware manufacturer decides to use push process, will end up with high inventories and obsolete stock in the warehouse.  If one can align the supply chain with the business dynamics, it is truly possible to register revenue growth and improve velocity and also reduce costs.

In today’s world what is critical to the business success is the right supply chain strategy that could meet customer expectations and the last but not least is the right team with the ability to think outside the box and innovate with thought leadership.

save costs

Image credit: San Francisco Sentinel

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The growth rate of major economies such as US, Europe and Japan were less than 1% during 2009.  Naturally the impact of this financial uncertainty will have impact on the contract logistics as well.  Contract logistics which was growing around 10.0% during 2005 to 2006 period reported early setbacks in 2009 with a 1% growth rate fall and further 4% plummet by 2008 and ultimately 8.2% negative growth by 2009.  This is a disaster and this is one way of understanding the impact of economic recession on contract logistics.

Outsourcing penetration rate:

The outsourcing penetration rate was growing marginally in spite of financial recession. In my opinion the real growth of logistics outsourcing should reflect in the penetration rate.  As long as penetration rate is more or less static, the logistics outsourcing world-wide is not growing.

 

 

When we review by regional performance, Western Europe recorded highest penetration rate of 30% followed by USA 20.7%. China presents the greatest opportunity for contract logistics with a lowest penetration rate of 2.7%.

Market Share:

The global contract logistics market is still fragmented in spite of several years of consolidation.  DHL leads the pack with 8.4% followed by CEVA at 2.3% and the third position was taken by KUEHNE+NAGEL based on top-line revenues.

Interestingly if we evaluate the performance of these companies based on their margins, CEVA stands first at 5.7% followed by KUEHNE+NAGEL at 1.7% and DHL ended with negative (-)1.66% margins.  Other notable performers included, UPS SCS at 3.98%; DSV at 3.39%; and Ryder at 3.13%.

Margins of almost all players showed negative growth whereas KUEHNE+NAGEL shown a 16.4% growth in the margins and Con-way – Menlo logistics has improved from negative margin of 1.56% to 2.13% in spite of financial recession in 2009.  Whereas the market leader DHL improved the margins it’s position by reducing the losses from -6.7% to -1.66%.

Contract Logistics Market by Region:

Three dominant regions contribute 93.3% global share of contract logistics.  Western Europe contributes 37.2%, Asia Pacific 28.3% and closely followed by North America at 27.8%.  One would be surprised to know that Japan contributes 38.8% to the Asia Pacific market and followed by China at 24.2% and South Korea at 9.2%.  This could soon change with phenomenal growth anticipated in China, India and South Korea by 2013.

The negative growth seen in Contract Logistics less felt in Asia Pacific at 6.5% and whereas Western Europe recorded 9.5% and North America was closely behind WE at 9.4% negative growth.

Looking into Future CAGR (2009-2013):

Future for contract logistics seems to be promising with an impressive projected growth of 9.5% globally.  The promising regions/countries include Central & Eastern Europe with an impressive CAGR of 18.7% is followed by Mexico 13.1%  and China is expected to grow by 20.6% and India at 15.2%.

Top 3 Leading Logistics Service Providers by Region:

Asia Pacific list is topped by Hitachi Transport followed by Sankyu Inc. and Mitsubishi Logistics Corporation.

Europe top three services providers based on their top line revenues include, DHL Supply Chain, Wincanton, and CEVA.

North America top three service providers included DHL Supply Chain, Penske Logistics and UPS SCS.

Focus: Asia Pacific

Review of top five economies in Asia reveals that contract logistics market size growth in the next four years will be propelled by China, India, South Korea, Australia and Japan.

The Contract Logistics CAGR (2009-2013) of Asia Pacific Countries:

The future looking promising, contract logistics is here to stay. This means job creation, make economies to expand, and infuse flexibility to business and make them to focus on core competencies. Let me  close with a compelling quotation, “If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business.”

Data Source: Transport Intelligence Ltd.

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