IBM Global Business Services

Transportation Strategy Workshop

IBM Global Business Services Point of View on the Logistics Provider Industry through to 2015

May 2006

deeper

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Agenda

Logistics Provider Industry Overview Transport Strategy Considerations

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Executive summary

Logistics providers need to reinvent their business model in order to meet buyers more demanding requirements
Executive Summary
More demanding requirements Buyers are seeking consistent global capability to provide greater reliability at lower total cost. This requires managing trade-offs between cost of inventory, transport, and storage. This calls for end-to-end integration, more tightly engineered synchronization, industry specialization, and optimization. This implies deep integration with buyers and partners across people, processes, information, and cash flow Most providers over promise and under deliver. The business model of most providers trap them by failing to generate returns which will allow them to meet buyer demands

Gap between buyer needs and provider capabilities

The model reinvented

Market shapers will develop shared user offerings which will be difficult for buyers to substitute. They will develop componentized solutions to increase returns, and will move away from country-centric to global line of business profit & loss management as portfolio managers. Tighter integration delivers greater value and increased lock-in across the network. Success will be measured by how well they increase reliability and reduce total cost
Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt Copyright IBM Corporation 2005

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Contents

Executive summary Industry Overview Five Drivers of change Future industry picture Implications for industry participants Appendix

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Industry Overview

The provider business model is evolving to offer greater scope and deeper integration
Key Attributes of Freight Logistics Roles
Service Offerings Outsourcing Models
Supply Chain Integrator (SCI) or Lead Logistics Manager (LLM) or Global Trade Orchestrator Lead Logistics Provider (LLP) Lead Logistics

Incremental Attributes
Broad supply chain expertise Knowledge and information-based Inventory minimization End to end network optimization Advanced integrated technology Adaptive, flexible and collaborative Total transport planning Operate and buy logistics services Project manage network improvements Single point of contact: total wallet Limited technology integration with client

Relationship

Pricing

rea sin Inte g Sco p gra tion e and

Synchronized Supply Chains

Collaborative more than Contractual Partnership

Shared risk and reward

Contractual

Fixed and variable with some risk sharing

Inc

Value-Added

Integration limited to transport with Third-Party warehousing Logistics Provider Limited geographical reach (3PL) Freight Forwarders Multi-modal transport management

Contractual

Fixed and Variable Transactional Transactional

Contractual Contractual and/or Spot

Foundation Services

Transport, Warehousing, Customs broking

Focused cost reduction Niche services

Source: Adapted from Third-Party Logistics Results and Findings of the 2004 Ninth Annual Study. Authors are C. J. Langley, Georgia Institute of Technology, G. R. Allen, Capgemini, and T. A. Dale, FedEx Supply Chain Services, Inc. 5 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt Copyright IBM Corporation 2005

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Industry Overview

The untapped prize is to reduce the inventory carrying costs currently over twenty percent of total logistics cost
2800 2600 2400 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0

Global Freight Logistics Market: US$ 2.7 trillion (~7% of global GDP)
Total Size ~ US$ 1.2 trillion
139 108 750

Total Size ~ US$ 750 billion

US$ (billions)

Total Size ~ US$ 734 billion

59
Third Party Logistics (3PL)

531 136 125

Air Freight, $56B Water-Other, $76B Ocean-Container Shipping Lines (CSL) Rail Freight Road Freight Freight Forwarding (FF) Parcels

675

In-house Logistics

Distribution / Warehousing

Transportation

Inventory Carrying Costs

Freight Logistics Segments

Notes: A combination of top-down and bottom up approaches have been used for the overall market size. Inventory Carrying Costs and Distribution/Warehousing are approximately 2% of the global GDP. Total Transportation segment size has been estimated through a bottom-up approach by totaling the market size of each sub-segment. Other sources have estimated the total global freight logistics market size at 3.1 to 3.5 trillion US$ which is in the approximate range of 7-9% of global GDP. CSL denotes container shipping lines and other Water includes bulk shipping, tankers and other means of water transport Source: IBM Estimates for 3PL, FF, and Parcels market sizes , IBM BCS analyses, Baird Report Oct 2004 for Air Freight market size, DPWN fact book Nov 2004 for In-house and Outsourced Logistics market sizes, Datamonitor Global Trucking, and Global Railroad for Road and Rail Freight market sizes, Baird Report and Goldman Sachs report on Shipping Nov 2004 for CSL and other Water market sizes; X-rates.com for Euro Dollar exchange rate of 1.26 (2004 average) 6 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt Copyright IBM Corporation 2005

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Industry Overview

Margins between services vary, but the highest rewards for market share gains lie in activities driven by economies of scale
Potential Scale Economies in Outsourced Logistics
Asset free Supply Chain Mgr Asset Supply Chain Mgr

High

Freight Forwarding Dedicated User 3PL Consolidation Center Cross-dock DC Warehouse

Shared User 3PL

Parcel carrier

Complexity

Less Than Truck Load Full Truck Load

Low Low
Source: IBM BCS analysis 7 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt Copyright IBM Corporation 2005

Scale Potential

High

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Industry Overview

The level of returns in this industry make it relatively hard to attract capital
Return on Invested Capital (ROIC) and Operating Margin comparison
30% 25% Industry Average Operating Margin : 8.1% CH Robinson Wincanton Expeditors

Return on Invested Capital

20% 15% 10% 5% 0% 0% -5% -10% Operating Margin (EBITDA/Total Revenues) Kuehne & Nagel Exel Kintetsu Geodis EGL Nippon 5% Hays TNT

UPS

Toll K&S FedEx UTI Weighted Average Cost of Capital: 10.9% Yamato Deutsche Post Christian Salvasen 10% 15% 20% 25% Industry Average ROIC: 10.7% Patrick

Notes: ROIC and Operating Margins are average values calculated for the latest five years. ROIC is defined as Net Income/Total Capital. Industry Averages are the simple averages of all players plotted on the graph. Weighted Average Cost of Capital is based on US Industry Average Source IBM BCS analysis, Thomson Financial for financial data, WACC data from Ibbotson & Associates 8 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt Copyright IBM Corporation 2005

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Contents

Executive Summary Industry Overview Five Drivers of Change Future Industry Picture Implications for Industry Participants Appendix

Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

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Five Drivers of Change

More Demanding Buyer Requirements

Buyers have more demanding requirements

Requirements in Priority Order
1. Greater Reliability 8. Industry Specialization

2. Lower Total Cost

7. Optimization

What Buyers want

3. Consistent Global Capability

6. More Tightly Engineered Synchronization

4. Global End-to-End Integration 5. Deep Integration with Buyers and Partners

Source: IBM BCS analysis 10 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt Copyright IBM Corporation 2005

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Five Drivers of Change

Global Sourcing

As global sourcing increases, providers must respond by extending their capabilities

Global Sourcing Issues
Manufacturing Wage Costs

India China Mexico Brazil Poland Taiwan France Singapore Japan USA Germany UK 0 400 800 1200 1600 2000 2400 2800 3200 43 113 311 383 1024 1168 1927 1940 2675 2798 3225 3278 3600

Key Drivers
Competitive labour rates Availability of skills Favourable Tax rates Low Duty rates

Constraints
Reliable transport and infrastructure Uncertainty drives up inventory as safety stock is increased

US$ per Month

Notes: Graph incorporates latest available yearly data: UK and USA 2004; Germany, Japan, Mexico, Poland, and Singapore 2003; Brazil, China, France and Taiwan 2002; India 2001 Current currency conversion factors have been used. Hourly data was converted to monthly data by multiplying hourly rate by 40 hrs per week times 52 weeks per year and dividing by 12 Source: International Labor Organization LABORSTA Database 11 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt Copyright IBM Corporation 2005

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Five Drivers of Change

Outsourcing Envelope Slowly Widening

The boundaries of the opportunity space are slowly widening . but not as fast as investors have been promised
Customer Relationship Linkages
Product Development Product Management

Customer Fulfilment
Supply Chain Strategy

Distribution
Network and Asset Configuration Distribution Oversight

Manufacturing
Manufacturing Strategy Manufacturing Oversight

Supply
Strategic Sourcing Supplier Relationship Management

Strategy

Integrated S & OP

Retail Marketing Execution In Store Inventory Management Customer Account Servicing

Demand Planning and Forecasting

Distribution Planning

Manufacturing Planning

Supplier Planning

Planning and Control

Customer Fulfilment

Primary Inbound Transport Transport Distribution Centre Operations Transport Resources

Line Scheduling Make Product/Components Assemble/Pack Products

Plant Inventory Management

Execution
Manufacturing Procurement

Product Directory Customer Directory Product Movement

Product Movement Data

Customer Directory

Product Directory

MES Data

Supplier/Materials Directory

Data

Performance Measurement

Retained Core - Not for outsourcing

Source: IBM BCS analysis

Traditional core candidates for outsourcing - Extend scope of outsourcing to transform? Either multi-sourced teams (in & out source) or total outsource Non-core - Probably already outsourced
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Drivers of Change

Integration

The extent of incorporating technology advances into logistics services may ultimately separate the winners from losers
Suppliers

Supply Chain
Flows: Product, Process, Information, Cash + Capital Management

Customer Channels
Stores Distribution Centers

Manufacturers

Plan

Source

Make Make

Deliver Deliver

Sell
Multiple channels and customer touch points
Single source dashboard to view overall performance Tracking from order to delivery Knowledge of total pipeline customer inventory

Synchronizing supply and demand

Integrating customer forecasts and demand with their suppliers to plan logistics requirements Participation in customers Sales & Operations Planning process

Multi-source orders and fulfillment

Ability to track purchase orders through their entire lifecycle Knowledge of total pipeline supplier inventory

Integration with manufacturers systems

Access to order commitments & delivery schedules Visibility into order production status

Monitoring shipment status

Monitor shipment status throughout pipeline with proactive event notification Improved ability to identify short and over shipments

Standardized data definition, Key Performance Indicators & event monitoring for collaborative decision making
Distributed information Dozens of planning and execution systems Inaccurate information Slow moving information
Source: IBM BCS analysis 13 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

EQUALS

Excess inventory Long lead times Excess manpower Deteriorated customer service Business performance uncertainty & risk
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Speed of convergence may be limited by learning how to performance manage businesses with widely differing core competencies

Five Drivers of Change

Consolidation & Convergence

Provider Segments

3PL/ Customized Distribution

Freight Forwarding

NetworkTransport Express- Parcels LTLs Containers

Point-to-Point + Charter Transport

Relative Asset Profile

High Customer Intimacy

Low

High Yield Management

Medium Capacity Management

Core Competency

Buying

Source: IBM BCS analysis 14 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt Copyright IBM Corporation 2005

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Five Drivers of Change

The challenges faced by Providers makes the status quo unsustainable, and makes a compelling case for reinvention
Challenges
Profitably increasing scope and integration Realizing the inventory reduction prize Achieving scale economies Raising returns on capital

Drivers
More demanding buyer requirements Global sourcing Outsourcing envelope slowly widening End-to-End integration Consolidation and convergence

Model reinvented
15 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt Copyright IBM Corporation 2005

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Contents

Executive Summary Industry Overview Five Drivers of Change Future Industry Picture Implications for Industry Participants Appendix

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Future Industry Picture

We expect the industry in 2015 to be more global, concentrated and segmented, and better at execution
2015
Limited number of global networks Segmented around buyer types Improved execution excellence

Global

Fortune 500 companies become more global businesses Logistics Providers follow the flag

Top 10 providers control more than 50% of the market The top provider controls around15%

~20% of buyers have large volumes (top 25 in the AMR list), are most demanding for specialized services, and global ~50% of buyers have medium volumes and are mostly continental in geographic reach ~30% of buyers are low volume and mostly national in geographic reach

Source: IBM BCS analysis

Business processes are standardized and systems are integrated Better visibility of end-toend supply chain information and integration with partners and customers Effective & shared metrics to continuously measure performance Exception management through event monitoring Single view of customer
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Future Industry Picture

The industry faces three distinct buyer segments: the battle will be for the middle ground
Logistics Buyer Segments
Increasing Scope and Integration of Offerings
Outsourced global, supply chain services Buy/manage end to end solutions: physical and technology Desire supply chain flexibility in terms of plug and play Shift to on demand business structures Desire greater visibility and reliability Gain lower costs, through scale of fewer providers Desire less complexity Focus on simplicity and standardization Some information integration and more value added services Keep in play specialized providers but switch frequently to lower prices Brands dont matter High level of operational efficiency provided by suppliers within the silos within which they service Sufficient understanding of visibility of pipeline and provider capabilities allows disintermediation of 3PLs and more use of foundation services

Buying type

Solution Buyers
Diversified Portfolio of Services, Specialized Segments

Bundled Services Buyers

Foundation Services

Commodity Buyers
National Continental Global

Extent of Geographical Reach

Source: IBM BCS analysis 18 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt Copyright IBM Corporation 2005

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Future Industry Picture

The Provider industry will eventually shake out to form three provider segments, each serving a buyer segment
Logistics Provider Segments
Able to deliver end-to-end supply chain integration and synchronization repeatedly for many global customers Drives standards that add value to buyers: data, visibility, ease of doing business, trade finance benefits etc. Able to support supply chain flexibility in terms of physical and IT application plug and play, which drives confidence in delivery capability Undertakes supplier management for buyers Likely to emerge as a consortium including a Lead Logistics Provider and other parties Good at acquiring scale and scope in new emerging parts of the world drives consolidation Acquire a broad range of capabilities; also drives consolidation Globally integrated offering seamless physical and information services Better at mass customization Deliver what they advertise Foundation service providers are more sought after than 3PLs Transport providers grow in scale and become more concentrated Very little product differentiation May be a highly specialized niche provider Geographic reach is mostly national May start by partnering with Lead Logistics Provider but end by being acquired by them

Increasing Scope and Integration of Offerings

Synchronized Supply Chain Services

Provider Types

Lead Logistics Providers

Foundation & Value Added Services

Commodity Buyers Bundled Services Buyers

Solution Buyers

Source: IBM BCS analysis 19 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

Buyer Types
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Contents

Executive Summary Industry Overview Five Drivers of Change Future Industry Picture Implications for Industry Participants Appendix

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Implications for Industry Participants > Strategic Clarity

Additionally, processes, systems, organization, and metrics must align with chosen segment strategy
Processes, Systems, Organization, and Metrics for Different Segments
Foundation & Value Added Services Providers Process
High standardization relatively limited customization options

Lead Logistics Providers

Culture of high process standardization and componentized activities; customized products are turned into replicable ones for other buyers Tightly coupled with buyer systems Automated forms of optimization (network, schedule, etc.)

Synchronized Supply Chain Services Providers

Culture of high process standardization with activities componentized by buyer supply chain. Customization limited to maintain scale economies. Real time, end-to-end integration; deeply integrated into the customers business Plug & play component based n-tier architecture (Service Oriented Architecture) Sector based global P&L to improve conformance on global customer contracts Superior partnering skills Excellent skills around analysis, synchronization, optimization under uncertainty, change and project management Non core processes completely outsourced On-time delivery Fill rate Error rate Damage rate Cost/Sales Profitability
Source: IBM BCS analysis Copyright IBM Corporation 2005

Systems

Standardized, but high integration is local

Organization

Country based P&L Outsourcing of non-core processes Able to value customer knowledge

Sales and development teams able to sell benefits of standardization Able to reduce labor outlays by leveraging recruitment and onboarding skills Non core processes mostly outsourced Cost/Sales On-time delivery Profitability Fill rate Error rate Damage rate

1. 2. 3. 4. 5. 6. Profitability On-time delivery Fill rate Error rate Damage rate Cost/Sales

1. 2. 3. 4. 5. 6.

Top 6 Metrics (illustrative)

1. 2. 3. 4. 5. 6.

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Industry Overview

Although there is geographic variation, the retail industry is the largest user of in-house and outsourced logistics by value across all regions
Breakdown of Freight Logistics Industries Served by Geography (~14% excluded)
United States Europe Japan + China

Source: Datamonitor

Retail and Consumer Products

Automotive

Hi-Tech

Pharmaceutical

Consumer Electronics

Consumer

22

Business
Automotive Hi Tech Pharma/health Aerospace Construction Agriculture

Asset
Asset Driven Energy Utilities Defence Aviation

Service
Financial Education Government Entertainment Business Services

End User Demand Driven Grocery Drinks White goods Brown goods Textiles DIY/Furniture Books/music/video

Of course, each industry buying segment also has its own unique freight logistics needs

Notes: Europe consists of UK, Germany, France, Italy, Spain, the Netherlands, Belgium, Denmark, Sweden, Finland and Norway
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Drivers of Change

Consolidation and convergence among providers is likely to continue as they try to improve capabilities and extend reach
Convergence Between 3PL and FF
Ocean Group which was a top FF with a presence in 3PL merged with Exel, a much bigger 3PL skewed towards the UK and US to form the combined Exel - 2000 Exel acquires Tibbett & Britten, the #3 3PL - 2003 Deutsche Post starts offering parcel and express services and acquires a 25% stake in DHL Express - 1998 Acquires leading FF and 3PL Danzas, also acquires airfreight provider AEI 1999 Acquires majority share in DHL Express 2002 Acquires Airborne Express - 2003 TNT Group, originally operating a mail and parcels business builds 3PL business with major acquisitions in USA and Italy enabling them to become highly innovative in automotive inbound supply chain. Introduced more IT in inbound supply chain and common collaborative layers - 1999 -2001 Broadens portfolio by acquiring FF Wilson Logistics - 2004 UPS Logistics Group to provide supply chain solutions is formed in 1995 Acquiring FF Fritz 2001 Acquires FF Menlo - 2004 Broadens portfolio with acquisition of LTL Overnite Express in 2005

RPS subdivision of Caliber Systems (acquired in 1998) re-branded as FedEx Ground in 2000 Acquires leading LTL American Freightways (AF) in 2001 and re-brands services offered by AF and prior acquisition Viking as FedEx Freight in 2002 Kuehne & Nagel establishes KN Lead Logistics to take on Lead Logistics Provider role - 2002
Source: Company Websites 23 Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt Copyright IBM Corporation 2005

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Agenda

Logistics Provider Industry Overview Transport Strategy Considerations

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Transportation Maturity Matrix Model

Most companies evaluate their processes against a Maturity Matrix Model.
Stage I Freight Procurement
Contracted rates Many carriers Decentralized purchasing Inbound freight controlled by vendors

Stage II
Core carriers Central purchasing with decentralized execution No compliance tracking Limited inbound freight controlled Electronic orders Manual with limited planning tools Decentralized Outbound only Manual routing guide for outbound and inbound Limited use of automation Dispatch and Delivery notification Limited use and reliance on EDI External Match and Pay Core Carriers Limited Performance monitoring

Stage III
Core carriers with volume commitments Central support and execution Compliance tracking Inbound freight fully integrated Automated load planning at the Entity level Centralized Inbound and outbound Automated carrier assignment No use of inbound carrier assignments in outbound planning Dispatch, shipment status, and delivery notification Integrated EDI Internal Match and Pay

Emerging
Carrier partnerships Use of electronic brokering

Shipment Planning

Paper orders Decentralized Manual without planning tools

Automated load planning at the Enterprise level

Carrier Assignment & Dispatch

Shipment Monitoring and Control Post Shipment Activities Carrier Management

Manual Via Phone Based on carrier availability Vendors control inbound assignments Dispatch only Exception notification by customers Post Audit only

Automated carrier assignment using inbound carriers Continuous moves Integration of spot buy capabilities Proactive tracking and exception management Use of Internet Self Invoicing Working with Carrier community to reduce cost to serve

Many Carriers, Many Rates No Performance monitoring

Core Carriers w/ vol, commitments Performance Tracking Timely Reviews

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