Logistics Strategy 1 Definitions 1 Logistics Logistics is

Logistics Strategy 1

Definitions (1) • Logistics: Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers' requirements • Logistics management: The process of managing logistics to achieve the established logistics goals of the company • Supply chain: The supply chain involves all processes that a company uses to conceive, design, produce and deliver products or services successfully to customers, including receipt of payment. It is a vastly broader term than logistics • Logistics outsourcing: The management of 2 or more interrelated logistics activities to an external provider, enabling the shipper to focus on core competencies and to receive enhanced cost and/or service value 2

Definitions (2) • International freight forwarder: Usually an asset light entity, it acts as the agent of both the shipper and the carrier (ocean or air cargo). Common activities are cargo rate referral and booking, arranging for cargo delivery to port or terminal, preparing and delivering private and government documentation, e. g. letters of credit, insurance, shippers export declaration, and for assuring regulatory compliance. Compensation is customarily a combination of fees paid by the shipper for specific services rendered and commissions paid by the selected carrier. Many forwarders have established a customs brokerage capability. Some have created or purchased NVOCCs, which permit them to issue their own bills of lading (with limited liability). Compensation for this service is the spread between what’s billed to the customer and paid to the carrier. Traditionally each shipment represents a stand along transaction, where payment results when one or more of the service is provided. 3

Definitions (3) • 3 rd party provider: Acts on behalf of shippers, may possess some assets, especially distribution or transport equipment. Normally payment is directly from shippers, with few or no commissions paid by carriers. 3 PLs stand apart from traditional providers as carriers and freight forwarders because of their ability to manage broad cross functional processes, e. g. order fulfillment. Many 3 PLs provide an analytical and consulting capability as part of their service. The term logistics outsourcing became identified with 3 PLs because 3 PLs often took over selected activities within logistics departments and became responsible for managing process improvement. Generally compensation is in the form of management fees and performance incentives, e. g. increased order fill rates, reduced order cycle times, increased productivity, lower total costs, etc. Short and long term contracts between provider and user are sometimes employed 4

Definitions (4) • 4 th party provider: The 4 PL term was first introduced and trade marked by Anderson Consulting in the mid 1990 s. With the increasing popularity of using 3 PLs to outsource broad transport and distribution management functions, Anderson concluded that a non-asset (few or no transport, equipment or distribution facilities) based entity would be needed to oversee and manage a wide variety of 3 PLs and traditional providers engaged by large global shippers. 4 PLs are expected to possess a comprehensive overview of logistics and its separate functions, understand the supply chain and specific industry sectors, have process reengineering and consulting capabilities, and regularly employ state of the art technology and systems tools. Compensation is likely to be a combination of management fees, performance incentives and profit sharing with the shipper. Arguably no 4 th party company exists today that can manage in the comprehensive manner and on a global scale described here. However, an amalgam of different types of alliances between consulting companies, E-logistics firms, asset providers and 3 rd parties may result in the emergence of a bone-fide 4 th party over the next several years. 5

Provider Spectrum Provider Freight forwarder Small, traditional Increasing: • Process integration • Management integration • Performance metrics • Risk/reward agreements Integrated forwarding Emerging global alliances 3 rd party 4 th party Domestic, transport warehouse Technology driven, multimodal, globally capable Responsible managing 3 rd party & other providers Fully integrated strategic supply chain issues Customer 6

Group Work • Select a company who can be classified according to each of the definitions and explain why it fits to the definition – International Freight Forwarder – Logistics Management – Supply Chain Management – 3 PL – 4 PL – Logistics Outsourcing 7

Globalization of Markets 8

Trends: Consolidation and Globalisation Mergers and Aquisitions: Reduction in number of automotive manufacturers: Source: E-Business and the Automotive Supply Chain, London, 2000 9

Trends: Reduced Lead Times in Distribution Reduction in lead time in European distribution: Reduction in time from order to delivery in automotive industry: -33% -25% Source: European Logistics Association/A. T. Kearney Source: E-Business and the Automotive Supply Chain, London, 2000 10

Trends: Focus on Core Business - Outsourcing Investigation of 277 large US shippers: Current degree of outsourcing and future intent ”Logistics” 11 Source: Ernst & Young/University of Tennessee, 2000

Globalization of Markets ! ! ! Growth in numbers and size of global companies Standardization of products and services on a global basis Reduction of the number of players in each phase of the Supply Chain 12

Globalization of Markets ! ! ! Reduction in the number of competitors and increased market shares of the remaining Global division of tasks and skills Transportation and logistics share of the value chain will increase significantly 13

Globalization of Markets ! The survivors in the future global markets – Customer Loyalty – Production cost has to be equal or lower than competitors – Control over supply and distribution – Products and services must be differentiated from the competitors – Customer awareness – Supply Chain Integration PProcess Management PIT integration along the supply chain 14

Formation of Strong Supply Chain Networks 15

The Supply Chain Model S U P P L I E R S “Plan” Planning and Forecasting “Buy” “Make” Procurement Manufacturing “Move” “Sell” Distribution and Logistics C U S T O M E R S . . . Organizations Buy, Make, Move, and/or Sell Goods. . . 16

SCM Implication – Companies will in the future compete between supply chains and not within them C o r e C o m p e t e n c i e s Supply Chain “A” The Market Supply Chain “B” The Customer: Share, Loyalty, Retention Supply Chain “C” Customer Value 17

The Integrated Supply Chain Global ecommerce Integrators Product Flow Cash Flow Supplier s $ Spend Manufacturing $ Spend Distribution $ Spend and Collect End Custom ers $ Collect Organizational Flow 18

The Supply Chain creates pockets of inventory The challenge: to reduce inventory investment while still maintaining capacity utilization and achieving customer satisfaction. Stores Warehouse Supplier u u Components Raw Materials u In Transit Inventory u Raw Materials u u Factory Distribution Network Work-in-Processu In Transit Finished Goods Inventory u Finished Goods Customer u In Transit Inventory VELOCITY Most companies have multiple product lines and many supply chains. Effective inventory management becomes more difficult and complex as products increase and service requirements expand. 19

Trends: Supply Chain Development 1980’s JIT (Automotive Industry) 1990’s Supply Production Distribution Consumer (Retail Industry) 2000’s Customer Sophistication Power of IT 20 Kearney Source: European Logistics Association/A. T.

Future Challenges for the Customers of Maritime Services 21

Cost of Distribution Typically Quoted as 30% Dealer Manufacturer or distributor Product development Purchasing Marketing 8 -15% Organisation 4 -6% Warranty Logistics 1 -2% 2 -4% Manufacturing Contracting Platform Outsourcing Development Commonality Strategic sourcing Partnerships Dealer margin 10 -18% The “black hole” Distribution 25 - 35% Total cost Expanding Lean manufacturing Outsourcing Network factory ? Source: WW ASA 2000 22

Cost of Distribution Typically Quoted as 30% Dealer Manufacturer or distributor Product development Purchasing Marketing 8 -15% Organisation 4 -6% Warranty Logistics 1 -2% 2 -4% Manufacturing Distribution 25 - 35% Total vehicle cost Deep Sea Transportation: Expanding Contracting Platform Outsourcing Development Commonality Strategic sourcing Partnerships Dealer margin 10 -18% The “black hole” Lean manufacturing Outsourcing Network factory ? 0, 3 - 1 % 23

Leading Factors in Awarding Logistics Contract Price Potential cost/inventory savings Product/business expertise Technology capability Geographical scope Industry reputation Breadth of service offerings Financial strength Prior relationship Other Sales presentation Least important Most important Source: Lazard Fréres & Co. LLC 24

3 PL- Third Party Logistics Providers Historical Future Sender/ Passenger Air Transport Ground Transport Water Transport Intermodal Transport Organiser Outsourced Logistics Air Transport Ground Transport Water Transport Intermodal Transport Outsourced Logistics Organiser/ Supporter Recipient/ Passenger Future Transportation Firm Activities = Potentially disintermediated Source. Pw. C analysis 25

New entrants are approaching the market + Greater Functional Integration + Broader Operational Autonomy Client BOA Arrangement 1990 s-2000 s Shippers 4 PL Service Providers Outsourcing 1980 s-1990 s Client 3 PL Providers Internal Logistics Operations 26

Shareholder Value Growth S&P 500: 20% Overall Third-party Equipment Transportation Logistics Leasing Industry Services Railroads Air Parcel Trucking Truckload Ocean Carriers Source: Mercer Analysis. All figures for US public companies only, except ocean carriers. Compound annual growth rate for market capitalization, 1993 - 1997. 27

New Entrants Are Approaching the Market Recent alliances between transporters and IT leaders: s le p m a Ex 28

Retail Car Buyers Are Going To Use E-commerce. . . Use of E-commerce in car buying process Would buy on Internet Source: FT World Motor Conference, Sept. 1999 29

30

31

The Logistics rationale 32

The Logistics rationale (1) The key components of logistics represent about 10 % of world GDP, or about US$ 4. 0 trillion Source: Cass Information Systems & Pro. Logis 33

The Logistics rationale (2) In billions USD 1999/ 2000 921 In billions USD 1999 4000 Total logistics Outsourcing represents 5. 7% of total logistics Although global logistics outsourcing is a small % of global logistics today, it is still a significant number 228 531) U. S. logistics & outsourcing market 1) Net Third Party U. S. Based firms: Logistics revenues in the range of 28 -29 billion USD in Extrapolating U. S. data suggests size of global market World logistics & outsourcing market Source: Cass Information Systems & Pro. Logis 34

The logistics rationale (3) Logistics: Break-up of costs Source: Cass Information Systems, Inc. & Pro. Logis 35

The logistics rationale (4) Billion USD The outsourcing market According to Northeastern University and Armstrong & Associates, the outsourcing market is growing nearly 20 % annually 125 billion USD in net revenue for 3 PLs The difference between gross and net is that we take out the cost of transportation purchased for clients to calculate net revenue Net revenue for 3 PLs is approximately 53 -55% (in the US), and profits before taxes are 6 -8% of gross(? ) revenues according to Cass information Systems Inc. , Pro. Logic & Armstrong & Associates 36

The logistics rationale (5) Growth in the outsourcing market Survey Time frame : 277 US shippers : 2000 -05 Source: Ernst & Young/University of Tennessee, 2000 37

The logistics rationale (6) Different customer philosophies with respect to outsourcing of logistics ”Movement towards more and more outsourcing to systems integrators” Lou Sorchevich, Director of international transportation, GM ”Would like the carriers to provide more value-added services, especially in booking and control of various supply chain activities like point to point services and contracts where land side processes at both origin and destination are managed by the ocean carrier” Bob Frinier, Vice President, Logistics, Nissan ”Do not know whether VWT is profitable and feel it is probably irrelevant, since it is viewed as a ”strategic” investment by senior management” Joe Manschke, Ken Fletcher, Chuck Domke, Logistics, transport processes, VWT/VW ”Our company intends to co-develop global process systems with our partners and integrate operations with a few of the best providers in the logistics area” Bill Carrigan, Manager Global Marine Transport, Ford 38

The Logistics rationale (7) Cost of Distribution Typically Quoted as 30% Dealer Manufacturer or distributor Product development Purchasing Marketing 8 -15% Organisation 4 -6% Warranty Logistics 1 -2% 2 -4% Manufacturing Contracting Platform Outsourcing Development Commonality Strategic sourcing Partnerships Dealer margin 10 -18% The “black hole” Distribution 25 - 35% Total vehicle cost Expanding Lean manufacturing Outsourcing Network factory ? Source: A. T. Kearney 39

The logistics rationale (8) The 3 PL industry appears poised for significant growth • The world’s largest companies are heavy users (50% have used for more than 5 years) • Survey of 500 firms by Northeastern university & Andersen Consult, 2000’ • “Based on all research we have done, logistics stocks over the next 5 years will continue to outperform stocks of other transportation companies. The crux of it is that we think the logistics sector is at an early stage, maybe in the first or third inning, of a secular (long-term) growth found in the outsourcing of transportation functions”. • Lazard Freres (NY investment bankers, 2000) • “Marine shipping business is mature. Logistics will be our focus, equaling 1999 container revenue of $4. 2 billion within 3 years. ” • Flemming Jacobs, CEO of NOL/APL, 2000’ 40

The logistics rationale (9) Shareholder Value Growth S&P 500: 20% Overall Third-party Equipment Transportation Logistics Leasing Industry Services Railroads Air Parcel Trucking Truckload Ocean Carriers Some of the large ocean carriers are familiy owned and controlled, implying that stocks are underpriced. Competitive advantages from capitalisation if owners sell down. Note that 3 PLs have no problems in receiving funds Source: Mercer Analysis. All figures for US public companies only, except ocean carriers. Compound annual growth rate for market capitalization, 1993 - 1997. 41

The Logistics rationale (10) Net logistics revenues for some 3 PLs 1999, [million USD]: Ryder Penske Logistics UPS Logistics APL Logistics Source: Armstrong & Associates 1287 959 488 406 42

The logistics rationale (11) – Companies will in the future compete between supply chains and not within them C o r e C o m p e t e n c i e s Supply Chain “A” The Market Supply Chain “B” The Customer: Share, Loyalty, Retention Supply Chain “C” Customer Value E. g. Ford/UPS/Exel 43

Players in Maritime Logistics 44

Asset based logistics companies - Maritime Logistics offerings can be seen as a continuum, ranging from single purpose offerings, to enhanced core business services to fully integrated separate profit centers Single purpose logistics firms • Many container, break bulk and special purpose ships that provide high level maritime and even land transport services Some enhanced integrated logistics capability • ANZDEL • K-Line • NYK • Mitsui • WWL Emerging profit driven logistics units • OOCL • COSCO • Hapag Lloyd • Yang Ming Fully autonomous physical & I. T. based logistics units • Maersk Logistics • APL Logistics Future ? ? Global physical, IT, analysis & risk sharing capabilities are built into provider’s competitive offerings. 45

Maersk Logistics versus APL Logistics (1) A comparison of the key logistics attributes of two of the most advanced marine logistics providers today is useful to benchmark ones’ own market position Maersk Logistics Strong endorsement from parent A. P. Moller, although appears less enthusiastic than APL Independent profit center & staff. Report direct to Moller not MS. Attempt to leverage liner investments and brand name Key Attribute Attitude of parent company top management Relationship to parent & sister companies APL Logistics Per NOL top management and CEO future is in logistics. Sees liner shipping as mature industry, growing only if trade expands Independent profit center. May link more closely to parent goals, e. g. IS joint strategy, & “exception management” approach. Note Mc. Kinsey & Mercer roles today 46

Maersk Logistics versus APL Logistics (2) A comparison of the key logistics attributes of two of the most advanced marine logistics providers today is useful to benchmark ones’ own market position Maersk Logistics Revenues (net): $420 m Margins: $12 -24 m Handle all physical and information needs of key global industries and customers with strict accountability Key Attribute APL Logistics Estimated Financial status Revenues (net): $406 m Margins (EBIT): $28 m Logistics mission Link together all information from disparate operating units to enable end to end management of global customer shipments 47

APL Home. Port From 10, 000 to 67, 000 Internet business transactions per month from Jan -98 to Sep -99 Types of transactions (Sep -99): • Schedules 43% • Tracing 32% • B/L Print 8% • Status 1% • Other 14% “Marine shipping business is mature. Logistics will be our focus, equaling 1999 container revenue of $4. 2 billion within 3 years” Fleming Jacobs, CEO, APL 48

Asset based logistics companies – Motor/air origins Logistics offerings can be seen as a continuum, ranging from single purpose offerings, to enhanced core business services to fully integrated separate profit centers Single purpose logistics firms • 10 s of thousands of these firms exist today that provide single purpose capability Some integrated logistics capability • Many firms claim to offer some level of multiple integrated services as part of core business Separate profit driven logistics entity Highly developed, technology rich company • Potential • UPS for conflict • Fed Ex with goals • RIL of parent & customers leads to separation: - Schneider - Menlo Future ? ? Global physical, I. T, analysis & risk sharing capabilities are built into provider’s competitive offerings 49

Logistics outsourcing in auto industry Large scale outsourcing has occurred in the auto parts sector in recent years, but now there is evidence of expansion to include finished units, e. g. Ford/UPS alliance: 50

Transit time [days] UPS/Ford: North America Source: Global Automotive Logistics conference, 2000 51

UPS/Exel/Ford: Europe Exel and UPS Logistics Group Europe have formed an alliance to review the effectiveness of all current inbound logistics processes for production parts and components for the Ford Motor Company in Europe. (10/24/00) Detailed process specifications will be jointly developed by Exel, UPS Logistics Group and Ford in an alliance that will provide supply-chain support across all Ford’s European plants. The deal follows the successful strategic alliance of the Ford Motor Company and UPS Logistics Group in the US and Exel's 20 -year relationship with Ford, including established operations in Southern Europe, USA and Brazil. Ford's new inbound logistics network in Europe is designed to achieve significant improvements in transportation and distribution processes and inventory. 52

Non asset based logistics companies Logistics offerings can be seen as a continuum, ranging from basic forwarding firms to complex public and private solutions driven enterprises Niche Small focused under capitalized intermediaries firms 10 s of thousands of these firms exist today that provide a wide variety of services Many firms in this category that survive by customizing their services to particular customers or industry sectors. Hybrid relationships betwn asset and non asset firms Examples: - Lufthansa Cargo Services - Cosco and Bolero alliance 2 types of mega global forwarders have emerged as result of acquisitions • Type 1: Driven by public sector • Type 2: driven by private FF expansion Panalpina NFC/ Exel Schenkers Future ? ? Public driven expansion Who will emerge with sufficient IS content and SC skills to manage all or most customer logistics? TPT Post Deutsche Post Private driven expansion ABX Logistics 53

Competitor actions: Develop a competitor rating scheme Parent company support ost K NY ch uts De UP S Lo g e. P g Lo L AP ae M Logistics attribute rs k Lo g Example only Key: - Low Logistics vision - Medium Current financial - High Marketing strat Operating strat 54

E-logistics 55

Why e-logistics (1/2) • Increase value to customers, partners and suppliers through expanded service offerings • Improve communication channel with established market, open to new segments/niches • Improve efficiency, reduce costs (automate) 56

Why e-logistics (2/2) E-logistics will bring three areas of functionality: • Increased pipeline visibility, e. g. global inventory management • Improved collaboration between all SC participants • Improved functionality in managing global SC, e. g. applications that can be downloaded, e. g. booking in transport, trade compliance in trade management, finance and duty paid landed costs, etc. 57

E-Logistics: Trends (1) • The significant increase ($1 trillion seems to be a consensus estimate) in global electronic logistics over the next 4 years will be driven by 3 forces: – Increase value to customers/partners/suppliers – Lower cost – Improved internet functionality 58

E-Logistics: Trends (2) • Supply chain visibility – information transparancy – Internet – open standard infrastructure – Reduced IT systems cost (Internet/ASP) – Customer core business focus – outsourcing • Supply chains ”without fat” – impossible to hide & protect high profit activities over time • Logistics capabilities of increasing importance 59

E Logistics: Implications • To compete globally shippers will focus on supply chain process improvement as a major source of competitive advantage. • Increasingly this process improvement will be enabled by web-based information technology • Carriers and other providers of logistics services must assess the impact these emerging logistics offerings have on their business and develop an appropriate strategic response 60

Group Work • What effect will the future competition between value chains have on traditional shipping companies? • What effect will the future development in e -commerce have on traditional shipping companies? • Which new fields of competence should shipping companies develop to participate in the new economy? 61

WW ASA’s Logistics Strategy 62

The Need for Change Customers’ Value Chain Planning and Forecasting Procurement Manufacturing Distribution/ Sales WW ASA’s’s Global Services (and Internal Processes) WW ASA’s s Organisation & Systems 63

Possible Project Approach • • • Understand the market development Identify core competencies Develop standardized products and services Develop global infrastructure Train organization Implement strategy (Balanced Scorecard) 64

Strategic Challenges • WW ASA has to develop a thorough understanding of both its customers and customer’s customers value chains 65

Strategic Challenges • Market developments – The customers and customer’s customers value chains – Competitors value chain • Standardization of products and services • Throughout identification of core competencies 66

The Strategic Processes in WW ASA Market Analysis Scenarios Balanced Scorecard GLM Concept Development Pilot 1 Implement new services Pilot 2 Pilot 3 67

WW Global Logistics Strategy Physical cargo flow and WW focus WWL Manufacturer Land Transport Port Sea Transport Port Land Transport Customer/ Dealer BI BARWIL WW Chartering 68

WW Global Logistics Strategy Develop cross-functional competence and cooperation in the WW Group: - between the principal companies and corporate - within the principal companies WW 50% WWL Wilship Barber Int. Logistics Strategy Barwil Logistics Strategy WW Group Logistics Strategy 69

Logistics Strategy Project Structure Feasibility Study Dec ‘ 99 - April ‘ 00 Main Project Implement new services 1999 2000 2001 2002 70

Global Logistics Strategy Project Future Market/ Scenario Analysis Present & Future Customer Requirements Logistics Services Requirements Logistics Organisation Implications Competitor Analysis IT Solution Knowledge Management Process Re-engineering Methodology Alliance Building Process Alliance Agreements Tools Performance Measurement System 71

Supply Chain Reengineering 72

New Holland’s Supply Chain Model Credit check management Markets forecast Demand capacity Reconcil (MOP’s creation) Market allocation POCQA explosion Order inquiry (Locator) Order entry Distribution Scheduling Manufacturing Scheduling (W+7) Schedules to suppliers Shop Manufacturing floor Sequencing control (W+2) (W+0) Shipment Invoicing Develop and Reporting Implement Improvements Supplier call-off Order tagging and specs change 2. Schedule 3. Execute 4. Report 1. Plan Interaction between New Holland WWL 5. Implement Improvements 73

Physical Cargo and Information Flow Physical Cargo Flow Land Transporter Pre Booking WW Pre Booking Pre Loading Planning (orders/ prognosis) Loading Land Voyage Pre Loading Sea Transport Port Delivery/ production Land Transport Port Customer/ Dealer Cust. Post Disomer Evaludischarge Follow- ation charge up Loading Pre Booking Land Transporter Manufacturer Land Transport Manufacturer Sea Voyage Cust. Post Disomer discharge Followcharge up Pre Loading Logistics follow-up Evaluation Loading Land Voyage Cust. Post Disomer Evaludischarge Follow- ation charge up Customer Follow-up 74 Evaluation

Process Re-engineering Map present state Reengineer distribution process/lanes Test & evaluate new distribution lanes Implement improved solution Main deliveries: · Detailed mapping of existing distribution process/lanes · Proposed improved distribution process - validated and improved distribution process from WWL · Identified possible improved IT solutions with; infrastructure, software and potential alliance partner(s) 75

Germany - UK Dealer logistics chain 76

Germany - UK Dealer logistics chain (Detail ed 1) 77

Germany - UK Dealer logistics chain 78

Time Mapping Process 1 Pr 2 Process 3 Process 5 Pr 7 Process 8 Process 4 Process 6 Time 79

Cost Mapping 80