Final Project Proposal

Freight Forwarding Related Issues Faced by Azgard 9

Submitted by:

Ayisha Ashraf L1S09MBAM1207

Madiha Ahmad L1S09MBAM1196

Advisor

Prof. Saadat Kirmani

Freight forwarding related Issues faced by Azgard 9

1

Azgard 9

Problem Statement

Azgard 9 is facing tremendous amount of freight forwarding related problems. Freight forwarding companies are directly in conta Company profile

Pakistan is basically an agricultural country, most of its exports based on its agricultural products, and the main strength of Pakistan’s agricultural sector is cotton and cotton based products. Now Pakistan is moving towards industrialization and the share of industrial sector is also increasing. Being a Pakistani textile company our main advantage is its world class cotton, cotton yarn and cotton fabric.

Statistics

Textile exports during the period 2006 were $9,816 million. The substantial increase of 82.59 percent to $61million recorded in export of yarn other than cotton yarn which stood at $33 in preceding period of last fiscal year. Exports of readymade garment recorded 5.53 percent increase during first eleven months of outgoing fiscal year. Country’s readymade garments exports were recorded $ 1,254 million, which was $1,190 in the same period of fiscal 2005-06.

Pakistan’s

The jeans came into existance in 1873 and since then has remained an icon generations after generations. Levi Strauss a young Bavarian immigrant left Newyork to San Fransico to sell his supply of dry goods. There he found the need for rugged long lasting trousers. Levi patented cotton riveted waist overall which later became the legendary Jeans.

Azgard 9 is fully vertical specialized textile company. We manufacture virgin fiber to retail ready products (finished Garment), which are marketed through our global sales and distribution set up. Azgard nine limited is about a 100 million US$ company with sales offices in 5 countries.

Our head office is in Pakistan and branch offices in Italy, USA, Sweden, and Turkey.

2

Azgard 9 was established in 1972 by Ismail Shaikh, the grandfather of existing CEO Mr Ahmed Shaikh. It was started as a family business over four generation ago. The Shaikh family now in their 4th generation, is one of the oldest business families in the sub-continent with experience in different sectors and having a proven track record of successful leadership in four continents.

Specialized yarn products were started in 1972

Spinning denim were started in 1995

Garment division was established in 1996

Mission

Our mission is to become a $300M International branded jeans business by the end of 2007.

Vision

Our vision is to become a major Global Fashion Apparel Company.

Our quality Policy is to provide products of best possible standards to satisfy our valued customer. Encourage all types of waste minimization by ensuring optimum utilization of resources. To comply all the applicable regulatory & other requirements that applies with our business operation. Emphasize on discipline & personnel training to promote teamwork. Make continual improvement in our processes & systems.

Company Products

Our major products are integrated denim apparel, yarn & fabric confectioning & laundering, 30% of denim fabric converted into finished garments, 70% of fabric and 80% of total yarn output & apparel exported. Finished garments include denim jeans, jackets, skirts, shorts & children garments.

3

We position our self in the market as high in price, high in fashion & high in quality.The primary focus & concentration of Denim Division is to devise value added ‘Fashion Forward’ advance denim fabrics. Company’s multi-cultural commercial offices in Italy, USA, Sweden & Turkey are able to provide services from trend analysis to sales support, product design & development.

The Garments Division is the addition to complement the Azgard9 portfolio & thus completes the fully vertical composite aspirations and visions of the group. The operation is manned by the best team of specialists brought in from Italy – the garment ‘MECCA’ of the world. The human capital that created this operation was drawn from the ‘Best of Breed’ talent pools across the globe in order to bridge the gap between the 3rd & the 1st world nations

Garments Machinery

Description Brand Made in

Stitching machines Brother, Juki, Kansai,

VI- Be-Mac, Reece

Japan, Italy, USA

Auto loop attach VI-Be-Mac Italy

Auto pocket setter VI-Be-Mac Italy

Needle detection machine Besta China

Washing machines Tenello, Tolan, Miano Italy, Turkey

Dryer Machines Local Pakistan

PI department ensures that IQA is conducted as per IQA plan; corporate quality report is submitted every month, Certification status of GBU is maintained.

4

Awards

1. Top 25 companies award from KSE twice in the lat 15 years.2. First ECO Tex certified textile Co in Pakistan.3. Highest value garments exporter from PRGMEA from Cat 6 (Woven bottoms).4. ISO 9001 certified.5. Member & License Holder of ‘Cotton USA’.6. Highest credit rating in textile sector of Pakistan by PACRA. Rating ‘A’ in the long

term and ‘A1’ in the short term.7. Listed, Rated Secured & Convertible Term Finance Certificate Issue of PKR 2,000

Million (With a Green Shoe Option Of PKR 400 7th Export Excellence AwardSpinning Capacity is planned to increase by 51% to 51,000 spindles. A new Denim Mills is planned which will take fabric capacity up to 26 million meters.

Company departmental functions

Our merchandising department is divided in different sub departments; PPC department procures fabric for merchandising department and MMC departments arranges the accessories and trims,

We are working with H&M, Esprit, Lindex, Dressmann, Kappahl, Stadium, Cubus, Bikbok and Mango.

5

Effective integration of different departments helps Azgard 9 to become efficient and active to meet its targets.

Merchandizing

Merchandizing department is responsible to:1. Ensure CA is available on planned date2. Ensure CSI is maintained at desired level3. Ensure customer complaints are not exceeding from the minimum standard

Product Planning and Control Department

PPC department is responsible to ensure shipments are made on planned date and measures are taken to avoid air shipments due to the bad planning factor

Material Management and controlling

MMC department is responsible to ensure supplies (accessories) are made on planned date, control the supplier’s rejection rate, and Control the rate of process reliability and the lead time of sample development

IE & Training

IE & Training department is responsible to Control the rate of un-measured work, Improve the efficiency of Plant, Control the lead time of style change and the lead time of 1st bundle stitching

Work In Process

WIP department ensures that process loss is under controlled limits

Cutting

Cutting department is responsible to Ensure that rejection of markers , cutting rejection rate, deviation from cut plan, re-cutting and garments rejection due to cutting is under controlled limitsStitching

6

Stitching department is responsible to control the rejection of garment, re-stitch rate, deviation from feed plan, and lead time of stitching.

Garment dry Processing and Garment wet processing

GDP & GWP department is responsible Ensure that rejection of dry & wet processed garment, re-work, planned vs. actual failure rate, and lead time of GDP & GWP is under controlled limits.

Finishing Finishing department ensures that rate of re-packing garment, re-inspection, and deviation from planned, and lead time of finishing & packing dates is under controlled limits

Quality Assurance

Quality Assurance department ensures the control of the rate of re-screening of shipment, amount of customer claims (due to quality problems).

Sampling department

Sampling department is responsible to control the rate of rejection, rate of re-work, sample developing lead time and the rate of deviation from plan

Maintenance department controls the rate of Machine down time.

Creative cell

Our creative cell develops its promo collection twice a year, and sent it to our sales offices in other counties just for reference.

Azgard Nine Limited is not engaged in or supports the use of child labor.

It is committed not to expose young workers to situations in or outside of the workplace that are hazardous, unsafe, or unhealthy. It does not hire any employee under the age of 18 years for full time employment,

For securing certain minimum standards of skill, Azgard Nine Limited makes provision for promoting, developing and regulating systematic apprenticeship programs.

7

There are certain people who force their children to work with them so that they can be helpful for them in earning. To discourage this phenomenon Azgard Nine Limited offers the Education Promotion Program details as below:

Company offers 15 scholarships for the children of company permanent employees who have completed at least 1 year service with Azgard Nine Limited. These scholarships are awarded purely on merit basis.

Many companies today have a customer focus (or customer orientation). This implies that the company focuses its activities and products on consumer demands. Generally there are three ways of doing this:

The customer-driven approach

The sense of identifying market changes

The product innovation approach.

In the consumer-driven approach, consumer wants are the drivers of all strategic marketing decisions. No strategy is pursued until it passes the test of consumer research. Every aspect of a market offering, including the nature of the product itself, is driven by the needs of potential consumers. The starting point is always the consumer. The rationale for this approach is that there is no point spending R&D funds developing products that people will not buy. History attests to many products that were commercial failures in spite of being technological breakthroughs. Success in business, as in life, is based on the relationships you have with people. Marketers must aggressively build relationships with consumers, customers, distributors, partners and even competitors if they want to have success in today's competitive marketplace. There are four type of relationships (1) win-win (2) win-lose (3) lose-lose (4) lose-win. (Customer-vendor)

Companies with a greater number of resources than their competitors will have an easier time competing in the marketplace. Resources include: financial (cash and cash reserves), physical (plant and equipment), human (knowledge and skill), and legal (trademarks and patents), organizational (structure, competencies, and policies), and informational (knowledge of consumers and competitors). Small companies usually have a harder time competing with larger corporations because of their disadvantage in resource allocation.

Azgard 9 is purely a customer oriented company and our main objective is to provide the customer the highest level of satisfaction, by providing quality and timely products. It is based on relationship and value.There is always a room to success and we are reaching the level of excellence through our commitment. We treat our customers as we want to be treated.

8

Freight Forwarder

A freight forwarder (often just forwarder) is a third party logistics provider. As a third party provider a forwarder dispatches shipments via asset-based carriers and books or otherwise arranges space for those shipments. Carrier types include waterborne vessels, airplanes, trucks or railroads.

The international freight forwarder is the entity whichmoves goods from point of origin to overseas point of destination and ensures thatinternationally traded merchandise arrives in good time, safe condition and at the most economical cost. Specifically, freight forwarding firms arrange transportation fromshipper’s factories or warehouse to ports, packing or consolidation of cargo if necessaryaccording to the customers needs, documentation, customs clearance, shipping (land, sea and air or combination thereof), unpacking or deconsolidation if required anddelivery at customer designated location(s).

History of Freight Forwarders

The original function of the forwarder, or spediteur, was to arrange for the carriage of his customers' good by contracting with various carriers. His responsibilities included advice on all documentation and customs requirements in the country of destination. His correspondent agent in far-away lands looked after his customers' interests and kept him informed about matters that would affect movement of goods.

In modern times the forwarder still carries out those same responsibilities for his client. He still operates either with a corresponding agent overseas or with his own company branch-office. In many instances, the freight forwarder also acts as a carrier for part of a movement it can happen that in a single transaction the forwarder may be acting either as a carrier (principal) or as an agent for his customer.

Freight forwarding firms in Pakistan can be segmented into:

1) Primary Service Providers Labeling themselves as freight forwarders but effectively operating as brokers offering competitive tariffs to small and medium shippers for LCL cargoes, negotiating maximum margins from consolidators searching for smaller consignments to complete container loads and arranging customs clearance, documentation and payment of custom’s levies.

9

2) Middle Order Firms These firms act as nominated agents for overseas buyers.

3) Total Solutions Providers

These firms offer full range of services with access to global networks through overseas associates

Customs clearing agent:

is an agent licensed by the Central Board of Revenue through the customs authorities to complete documentation formalities and arrange, on behalf of the merchant, payment of custom duties, taxes etc.

International Freight Forwarding firms in Pakistan

International freight forwarding firms in Pakistan can be segmented into:

• Primary service providers labeling themselves as freight forwarders but effectivelyoperating as brokers offering competitive tariffs to small and medium shippers for LCLcargoes, negotiating maximum margins from consolidators searching for smallerconsignments to complete container loads and arranging customs clearance,documentation and payment of custom’s levies.

• Middle order firms providing core services provided by primary services acting asnominated agents for overseas buyers.

• Total solutions providers offering full range of services with access to global networksthrough overseas associates.Customs clearing agent: An agent licensed by the Central Board of Revenue through theCustoms authorities to complete documentation formalities and arrange, on behalf of themerchant, payment of custom duties, taxes etc.

TEU: Twenty-foot equivalent unit a standard measurement of volume in containershipping. The majority of containers are either 20’ in length, or 40’ in length. A 20’container is one TEU, a 40’ container is two TEUs.

LCL: Less than container load cargo

FCL: Full container load cargo

Size: Freight forwarding companies have been classified according to annual TEUshandled as under:Small = 360 TEUs Medium + 1200 TEUs Large = 4800 TEUs

Shipper: Merchant or manufacturer selling goods to overseas buyers (exporter)

Consignee: Merchant or manufacturer buying goods form overseas suppliers (importer)

10

Shipping Agent: An agent licensed by the Central Board of Revenue through the Customsauthorities for servicing vessels calling at Pakistan’s ports. The agent represents theinterest of the vessel/carrier and arranges payment of port dues, etc.

Economic importance of Pakistan’s international freight forwarding industry

Contribution to GDPThe international freight forwarding industry is classified in the transportation, storage andcommunication segment of the services sector, the largest contributor to Pakistan’s GDP.This sector attracted the largest inflow of investment in 2004, which rose by nearly 33%over the previous year.The importance of the industry lies in managing the logistics of the country’s internationaltrade. The services provided by international freight forwarding companies facilitateexports including cotton and its made-ups, leather and leather goods, sports goods,surgical, rice and seafood which collectively generate over 80% of the country's foreignexchange earnings. At the same time, imports handled by the industry ensureuninterrupted flows of industrial raw materials, plant and machinery, spares andcomponents to maintain industrial production at competitive costs.

Value-additionThe industry’s annual turnover for 2004 is estimated at Rs 43.3 billion while gross incomeis estimated at Rs 3.3 billion. The value-added by the freight forwarding industry can bemeasured as the residual balance after deducting all expenses from aggregate industryreceipts except wages, profits and rent which amounts to Rs 1.3 billion.This is considered a conservative estimate given the difficulties in obtaining accuratefinancial data as well as secondary value- addition through business volumes generated forvendor industries namely trucking, clearing and port handling.

Global competitivenessLogistics costs play an important role in determining any country’s competitiveness in theglobal market. Research has established that such costs vary from 10% to 30% betweencountries depending on the efficiency of their transportation and international freightforwarding services. In many countries, an inefficient logistics infrastructure imposes fargreater economic cost than tariff barriers restricting market access. The role of theinternational freight forwarder as the “architect of efficient logistics” is acquiringincreasing importance as global trade becomes driven by competitive market forces.Countries with the capacity to ensure timely and secure transportation of goods betweentheir primary producers and ultimate consumers are likely to win increasing market sharein the emerging world trade environment.

Export financing

Due to competitive market structures, the industry provides forced credit terms to itsclients. Working capital financing is extended to shippers as a revolving credit on 30–60day terms. Based on annual industry turnover of Rs 43.4 billion, this indicates an exportsubsidy of about Rs 5.2 billion at current interest rates.

11

Importance of external tradePakistan has a relatively open economy. Since 2001, the country’s external trade to GDPratio has averaged 27%. National economic activity is, therefore, heavily influenced byexternal sector developments. A significant proportion (13%) of aggregate demandcomprises of exports, while imports, mostly comprising industrial raw materials andcapital goods, sustain manufacturing activity. Among leading textile export, Pakistan isranked fourth in terms of the share of textiles in total exports.

Market size and trends

DemandThe demand for international freight forwarding services derives from the volume ofPakistan’s external trade. After virtual stagnation between 2000-02, Pakistan’s externaltrade has increased sharply over the last two years. During 2004, the country’s total tradeamounted to about US$ 28 billion, reflecting a sharp increase of nearly 44% over 2002levels. Survey respondents who confirm the uptrend in business volumes over this periodcorroborate the trend captured in official data.

The enabling factors underlying rising demand include:

Increasing containerisation of Pakistan’s overseas trade; according to industrysources, container throughput of Pakistani ports doubled between 1995-2004 toone million TEUs. Higher volumes and an expanding number of unitized cargoes,particularly bulk commodities such as rice and cotton, accounted for rapid growth.

Growing trend among large overseas retail chains to nominate Pakistan basedinternational freight forwarding firms to effectively operate as liaison offices,monitor status of ordered merchandise, negotiate competitive freight tariffs,consolidate ordered merchandise and execute loading plans. This was largely dueto increased high frequency of delayed shipments and manipulation of shippingdocuments by suppliers to camouflage production delays.

High shipping tariffs and withdrawal of shipping lines from the LCL businessopening up a market niche for consolidation services by international freightforwarding companies.

SupplyThe increase in cargo volumes accompanying rising external trade and the expandingdemand for specialized services including consolidation/de-consolidation also fosteredthe growth of Pakistan’s international freight forwarding companies. The growth trendwas subdued initially but gained momentum after 1992 peaking at 20% annuallybetween 1995-2002.

Industry sources indicate that the supply of international freight forwarding servicesclosely matched demand between 1985-1990. In recent years however, the rate of newentrants into the industry has outpaced growth in demand. This has resulted in excesscapacity and a competitive market environment. The key factor behind the mushroominggrowth is the virtual absence of entry barriers which are practically nonexistentat the bottom end of the value chain and increase progressively upwards. New

12

entrants to the industry have managed to established viable businesses by attractingcustomer through discounted freight charges.

Industry structureCurrent size and geographic dispersionAt present, the industry comprises approximately 450 companies. These include 380entities registered with the industry’s trade body and the balance comprising freightforwarders without formal membership. The overwhelming majority of freightforwarders are located in Karachi, while the balance is mostly clustered in Lahore andSialkot.

Age profile

The industry is relatively new in Pakistan. The average age of firms is eight years andalmost half of them have been in business for only five years or less. Mushroom growthis due to the emergence of new firms set up by former employees of older establishedcompanies as well as those formed as a result of breaking-up or realignment of oldpartnerships.

Forms of business organisationThe majority of industry players comprise smaller proprietary or partnership firmsoperated with a maximum of 15 employees. Survey results indicate that 55% of thefirms surveyed are sole proprietorships/partnerships, while 45% comprise private limitedcompanies. The latter include some multinational corporations that have either enteredinto joint ventures with local companies or established independent offices.

Investment aspects5.1 Fixed investmentThe international freight-forwarding companies at the low end of the services scale donot incur substantial capital investment in their business. Capital requirements growproportionately to the scope of value-added services and the client base of freightforwarders. The aggregate fixed investment in the industry is estimated aroundRs 1 billion.

Working capitalWorking capital requirements are rising to support higher operating overheads andgrowing trade receivables. Cash flow management is a major challenge for internationalfreight forwarders. This is because in some cases shipping companies extend about 15days credit while clients usually stretch payments up to 60 days and occasionally evendefault.

Survey data on working capital indicates that cash requirements are mostly met throughinternal funds while the use of bank borrowings is virtually non-existent. Only thelarger companies are able to attract working capital financing which is usually fullysecured through personal mortgages, guarantees or indemnity bonds and carries apremium over prime borrowing rates. Banks are unwilling to finance internationalfreight-forwarding companies due to perceptions of high risk resulting from aninadequate understanding of the industry, lack of regulatory framework within theindustry and until recently, the absence of operating procedures or standard tradingconditions. Most firms are therefore, forced to manage the cash cycle through juggling

13

receivables and payables. Feedback from industry sources indicates that financialpressures are increasing as new entrants facilitate clients with larger credit terms.

Currently the majority of the country’s international freight forwarding companies outsourcepackaging, transportation, customs clearance and warehousing to vendor firms.This is cost effective for forwarders with moderate volumes. The anticipated growth inbusiness over the medium term will necessitate rising investment requirements on accountof warehouses, forklift trucks, lorries, containers, office premises and informationtechnology infrastructure as mid-sized firms scale upwards to cope with customerrequirements and cost benefit ratios of incremental investment are favourably impacted bysavings in operating costs. However, pressure on profit margin combined with diversionof funds to finance working capital continues to hurt the industry’s ability to accelerateinvestment. This represents a major barrier for the industry’s future development.

Business volumes for Pakistan’s international freight forwarding industry have increasedin parallel to increasing containerization of Pakistan’s external trade. Over the five yearsending 2003, total container throughput increased at the rate of 8% annually, matching thegrowth in the country’s external trade. Industry estimates place current containerthroughput at about one million TEUs for 2004.

TurnoverThe industry is estimated to handle over 500,000 TEUs of overseas cargo annually,representing about 50% of total container throughput. Shipping sources confirm thatvirtually all LCL consignments both export and import is now handled by freightforwarders in addition to about 20% of FCL shipments. Based on the country’s tradingpattern and current freight rates, this translates into an annual turnover of Rs 43.4 billionfor 2004 (details in Annex V).Given the nature of the industry, it is difficult to assess industry revenue through directlytranslating volume into value. Forwarders handling lesser volumes could be derivinghigher sales revenue by providing broader services while those handling larger volumescould represent high turnover, low margin operators. In addition, forwarders are reluctantto disclose sensitive financial information. Despite these limitations, the industry’sfinancial indicators have been estimated based on survey data and industry feedback.

Industry margins vary from 3% for primary service providers to about 10% for totalsolutions companies. Margin differences reflect the intensity of competition in differentsegments, the impact of economies of scale and qualitative differences in the scope ofservices.

Customer profile

The clientele of freight forwarding companies comprises both local companies as wellas multinationals. The industry caters to the needs of a diverse variety of exportersincluding primary products, semi-processed industrial raw materials and manufacturedgoods. The top five items on the export side include cotton and its made-ups, textiles,leather products, sports goods, surgical goods, rice and handicrafts etc. The majorimports handled by the industry include plant and machinery, sophisticated electricalcomponents and pharmaceuticals

14

Client baseThe customer base of the country’s international freight forwarders comprises a diverserange of businesses including small and medium enterprises as well as large corporateclients. The average number of customers ranges from 10 to 20 clients at the lower endto over 800 at the upper end.

Human resourcesThe industry requires trained manpower to manage specialized tasks including multimodallogistic planning, sea freight and inland delivery, pricing, air freight, documentationand handling dangerous goods. The total labour force in the industry is estimated at about12,000 full time employees. In addition, outsourcing generates indirect employment fromallied activities including packaging, warehousing, and transportation handling atports/container terminals and customs clearance at the ratio 1:3 translating into nonexclusiveemployment generation at three times the industry’s workforce.Industry firms encounter major difficulties in recruiting workers from the urban labourforce. This is largely because salaries and benefits in the industry are below averagecompensation in alternative employment, poor prospects for long-term career growth andlack of professional employment practices in closely held family firms.

Training opportunities

Prior to February 2004, training opportunities were virtually non-existent. Employeesacquired the necessary skills on the job. Rapid industry growth in recent years has resultedin an acute shortage of experienced employees. The scarcity of required manpowerresulted in employee poaching within the industry and by shipping lines.In order to address the issue, the industry’s trade body submitted a specific request to theTrade and Transport Facilitation Project under the Ministry of Commerce. With the activeparticipation of PIFFC’s management and its training and education subcommittee, a basicfreight forwarding training course developed by UNCTAD and the InternationalFederation of Freight Forwarding Associations (FIATA) was customized to meet the localindustry’s needs. PIFFC accredited four institutes in Karachi and Lahore to run certificatecourses, which commenced in February 2004. As of September 2004 about 200employees from industry companies had undergone training thereby upgrading the qualityof manpower available to the industry. As an incentive, some industry firms subsidized thecost for their employees. Although it is too early to judge their impact, there is aconsensus among industry sources that the availability of these courses is good for theindustry. The industry body plans to expand the program further to augment the supply oftrained manpower in future years.

Current issues

Infrastructure constraints

The industry is negatively impacted by severe infrastructure constraints. Ports arenotoriously inefficient. Exporters suffer losses via careless handling by dock labour anddamage of less than container load (LCL) cargoes, due lack of covered storage facilitiesexposing merchandise to pilferage and weather hazards. These problems are aggravatedby operations restricted to specified working hours, high wages for port labour anddocument processing by multiple government agencies.

15

Quantifiable economic costs through the above losses are estimated at US$ 93 millionfor the five years ending June 2004. The damage to business relationships, however, isfar greater than measurable losses. Strained relationships with overseas buyers reducetheir willingness to expand business ties with Pakistani exporters resulting in negativerepercussions on long term export growth. The estimated cost of foregone businessopportunities on this account are estimated at three times the amount of measurablelosses

Inefficient transit rulesThe country’s geographic position gives it a strategic advantage in handling transittrade for landlocked Afghanistan and Central Asian countries compared to Iran.However, current transit rules are cumbersome and result in procedural delays hencePakistan has been losing out on the increased goods traffic destined for Central Asia.Pakistan is the only country in the region that is not a signatory to the TIR conventionwhich is the world’s most widely practiced transit cargo procedures agreement.However, recent initiatives taken by some industry members have resulted in PakistanGovernment’s decision to ratify the convention.

Industry trade body

Pakistan International Freight Forwarding Council, (the only trade body prior to theformation of an industry trade association towards the end of 2004) was established inthe mid 1980s. The body has 380 registered members which account for over 80% ofthe total known firms in the industry.

PIFFC’s capacity to promote the industry was hitherto limited by two major factors.These include the trade body’s status as a ‘council’, effectively only a sub-committeeof Federation of Pakistan Chamber of Commerce & Industry (FPCCI), rather than anindependent trade association. This deprived the industry of a strong platform tointeract effectively with national policy makers. Secondly, the body’s activities werepoliticised which prevented the body from focusing on industry promotion.

Despite these limitations, PIFFC’s management undertook several initiatives in 2004with the Trade and Transport Facilitation Project to promote the industry. Theseincluded the development and implementation of the industry’s standard tradingconditions, code of conduct, minimum qualifications for members and their acceptanceby the country’s trade and all its affiliated trade bodies under the Federation of PakistanChambers of Commerce and Industry. The other important initiative related to humanresource development of the industry’s manpower, through organising trainingopportunities for industry employees.

The industry achieved a major milestone towards the end of December 2004 with theestablishment of an independent trade association, namely the Pakistan InternationalFreight Forwarders Association (PIFFA). As a result, the industry is now poised topush for greater government support and in order to play its due role in the nationaleconomy

16

Outsourcing

Outsourcing is not a new phenomenon for the Shipping and Logistics sector. Some of the

biggest companies in this sector have used outsourcing in many of their key functions

routinely- from Ship Management, Training & Development to I.T. Application development

& maintenance. Although the core objectives which drove outsourcing haven�t changed

over the years- viz: need to concentrate on core competencies, lack of in-house expertise

and need to extract greater financial flexibility- what is new is that Shipping and Logistics

companies are now increasingly seeking to gain these benefits by outsourcing business

processes which have been traditionally considered to be too core to be outsourced � much

less offshored. This is just one amongst some of the key trends which we have researched,

which are emerging from this domain.

 

 

A. Laggards w.r.t outsourcing are trying to play catch-up:

Relatively smaller companies are increasingly feeling more and more confident of their

ability to get business processes executed from offshore. These companies now view the

cost advantage and customer service improvement gains from outsourcing as one of the

ways they can face up to the competition from industry heavyweights, in an industry which

is increasingly becoming ever more consolidated through a wave of mergers & acquisitions.

Ex: Recently one of the European NVOCC�s which has now been acquired by an Indian

Logistics company moved some of its key customer service functions, hitherto being

performed from Europe, into India. Companies with geographical origins in the Far East are

increasingly seeking the benefits from BPO. This is significant given that traditionally it has

been the companies from the USA and Europe which have taken a lead in seeking gains

arising out of BPO. Ex: A Japanese shipping giant is presently in the midst of outsourcing

business processes like Customer Documentation to offshore centers in India.

17

B. Leaders themselves are busy moving onto the next evolutionary step in

their outsourcing journey:

  Captives of Shipping and logistics majors are evolving from being a Onshore centric in

terms of decision making and accountability to a model where process related decisions are

increasingly being taken where the process is being performed- the offshore back office.

Historically, the pioneers in shipping BPO established business process models which

required the offshore teams to rely on their onshore counterparts to validate and check work

output, or at the very least, assume final accountability for the output. Given the early

stages where these captives found themselves on the learning curve, this model was the

most logical choice at that point in time. However, while the resources in the offshore unit

went up the leaning curve over a period of time, the original process model stayed at its

historical origins, resulting in a sub-optimal process where- the work input going into the

offshore BPO was first checked onshore for completeness, checked in the offshore captive

again for completeness before being processed, checked offshore after processing the data

and then passing through another layer of onshore checks for completeness and accuracy,

before being passed on to the end customer! The unstated assumption behind this process

model was that the offshore process would constitute nothing more than transactional

algorithmic data entry based on procedures dictated by onshore subject matter experts who

should therefore be finally accountable for the process quality.

This process model is now being turned on its head with the offshore resources increasingly

being seen as the SMEs of the offshored processes. The process level decisions are now

being increasingly taken offshore and these resources are now being even asked to

contribute their knowledge on issues like system architecture changes wrt the application

modules they work on. One shipping captive, for example, interacts directly with customers

on issues related to bill of lading and invoice accuracy Vis a Vis the traditional model where

interactions with customers were always handled by the onshore offices.

This is a major change in both the process model as well as in perceptions related to

capabilities of the offshore vendor.  

   Transactional/Algorithmic data entry to Knowledge oriented

18

No longer are only transactional processes which require little or no decision making, the

only ones that are being offshored. Shipping and logistics companies are increasingly feeling

confident enough to outsource even complex, knowledge oriented processes which require

significant levels of business process knowledge and decision making. Some of the

representative processes which are being performed from offshore which fall into this

category are: Approval of dangerous cargo before loading cargo on board- a process which

requires master mariners with enormous business expertise, Business Process & IT

application helpdesks etc. A few industry majors are even examining the possibility of

outsourcing complex data analytics related to yield management, global accounting and

budgetary control- processes which are currently being executed by senior resources with

considerable industry experience.

   Captive to Third party It is an accepted fact now that companies following the captive

outsourcing model will incur a Total Cost of Ownership (which includes costs such as

attrition, costs related to attracting and maintaining quality resources, among others) which

is far higher than what they would incur in a third party model. A recent Forrester report

entitled

Shattering the Offshore Captive Myth which shook the outsourcing world, confirms what

was being suspected all along. Additionally, the Information & Data security systems of third

party vendors are seen as much more robust than captives given that many of them have

now secured certifications, like the BS7799, from internationally accepted certification

bodies. Recent conversations with the industry make us believe that Shipping and Logistics

companies, which have been traditionally captive heavy in terms of their outsourcing model,

are already looking at the third party model in a more favorable light.

19