Logistics and Supply

Chain in Indonesia:

Emerging Practices

Togar M. Simatupang

School of Business and Management

Bandung Institute of Technology

Indonesia

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Copyright © 2013 by Togar M. Simatupang. All rights reserved. No part of this work may be reproduced, stored or distributed in any form or by any means, electronic or mechanical, including photocopying, without written permission from the author.Product or company names used in this set are for identification purposes only. Inclusion of the names of the products or companies does not indicate a claim of ownership by the author.

Logistics and Supply Chain in Indonesia: Emerging Practices / Togar M. Simatupang. Summary: This manuscript of the book provides the latest development of logistics and supply chain in Indonesia as a developing country, highlighting themes from macro logistics, horticultural supply chain, heavy equipment supply chain, strategic outsourcing at a Telco-company, and business model of logistics enterprise. - All work contributed to this manuscript is new, previously-unpublished material.

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Table of Contents

Preface ..................................................................................................................................................iv

About the author ..................................................................................................................................v

Chapter 1 Trends of Macro Logistics in Indonesia ................................................................................................1

Togar M. Simatupang, Bandung Institute of Technology

Chapter 2 A New Collaborative Approach for Horticultural Supply Chain .........................................................27

Togar M. Simatupang, Bandung Institute of Technology Yuanita Handayati, Bandung Institute of Technology Tomy Perdana, Universitas Padjadjaran

Chapter 3 Heavy Equipment Supply Chain in Indonesia.......................................................................................44

Togar M. Simatupang, Bandung Institute of Technology

Chapter 4 The Formulation of Sourcing Strategy Model at Telkom Indonesia ....................................................70

Togar M. Simatupang, Bandung Institute of Technology Ega Nugraha Putra, Bandung Institute of Technology

Chapter 5 The Alignment of Strategy, Business Model, and Operating System in Logistics Enterprises ............93

Rizky Yoga Pratama, Bandung Institute of Technology Togar M. Simatupang, Bandung Institute of Technology

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Preface

The aim of this manuscript entitled Logistics and Supply Chain in Indonesia: Emerging Practices is to

provide latest issues on logistics and supply chain in Indonesia as a developing country. In the advent

of new economic era of free trade agreements between countries across regions, logistics and supply

chain has a key role in enhancing the free flows of goods and services. The complexity of logistics

and supply chain not only grows in a dramatic and dynamic way but also changes the way business to

business interact with their customers around the world. Understanding logistics and supply chain

thus becomes important to deal with emerging markets. Practitioners need to be equipped with real

cases of logistics and supply chain in Indonesia.

In this manuscript, logistics is defined as a set of activities to acquire and provide goods and services

for customer’s needs. A larger picture of logistics in network is called a supply chain. A supply chain

is a complex and dynamic supply and demand network that includes all of the logistics management

activities between companies.

This manuscript provides a deep understanding of macro logistics issues in Indonesia and emerging

practices in horticultural supply chain, heavy equipment supply chain, and specific applications in

outsourcing strategy at a national Telco-company and business model of logistics enterprise. The

potential audiences of this manuscript are well distributed among academics and practitioners

especially for masters students interested in and related to logistics and supply chain in Indonesia.

Acknowledgements

I would like to thank the contributors who show enthusiasm in completing this work, including

Yuanina Handayati, Tomy Perdana, Ega Nugraha Putra, and Rizky Yoga Pratama. I like to thank

Akbar Adhi Utama and Jann Hidajat Tjakraatmadja for introducing me to the collaboration between

the School of Business Management of ITB and the Kyoto University Graduate School of

Management. I am grateful to our colleagues at the Kyoto University Graduate School of

Management who provide constant support in preparing this manuscript. Specifically, I thank Kiyoshi

Kobayashi and Hayeong Jeong. Finally, I would like to thank Sudarso Kaderi Wiryono and Mursyid

Hasan Basri for encouraging me to realize the collaborative work with Kyoto University.

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About the Author

Togar M. Simatupang is a Professor of Operations and Supply Chain Management at Bandung

Institute of Technology, Indonesia. He holds a PhD degree from Massey University in New Zealand.

At the School of Business and Management ITB, he teaches Technology and Operations

Management, Supply Chain Management, Operations Management, and the Creative Economy. He is

associated with the Indonesia Community of Logistics and Supply Chain, Bandung Creative City

Forum, and the British Council in developing creative community. His research interests include

supply chain collaboration, inventory models, operations management, service science, and creative

economy.

His other research focuses on the development and management of collaborative relationships such as

how to design and manage supply chain collaboration, how to equalize their risks and rewards, and

how to share the benefits of collaboration. The results of his research have been published in a variety

of journals, including the International Journal of Logistics Management, Total Quality Management,

Management Decision, Business Process Management Journal, Supply Chain Management: An

International Journal, Benchmarking: An International Journal, the International Journal of Physical

Distribution & Logistics Management, International Journal of Value Chain Management, and

International Journal of Logistics Systems and Management. In addition, he has presented his work at

national and international conferences.

He was a recipient of the Emerald Literati Network Award 2006 for the highly commended paper

published in the International Journal of Logistics Management. He was also rewarded Endeavour

Award from the Government of Australia for a postdoctoral study at the University of Newcastle in

2008. He received the Faculty Award for Achievement in 2012 in the category of Research and

Scholarly Activities, awarded by the Rector of Bandung Institute of Technology.

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Chapter 1

Trends of Macro Logistics in Indonesia

Togar M. Simatupang School of Business and Management

Bandung Institute of Technology Indonesia

Abstract

Logistics becomes a new weapon of competitiveness not only at company levels but also at country levels.

Macro logistics describes logistics activities accompanying trade and business with spatial complexity.

The purpose of this paper is to report on the latest trends of a macro view of logistics in Indonesia. The

study applies literature reviews and content analyses to develop a set of macro-logistics dimensions that

determine the current status of logistics development in Indonesia. The coverage includes the current

situation of macro logistics in Indonesia, Master plan for Acceleration and Expansion of Indonesia

Economic Development, national logistics plan, and ASEAN logistics network. As an archipelago

country, Indonesia has neglected the importance of coastal logistics and railway transportation. The

paper would conclude with macro logistics challenges in Indonesia.

Keywords: macro logistics, logistics infrastructure, Indonesia

Introduction

Logistics phenomenon is a day-to-day affair experienced by every person in meeting the needs of food,

shelter, and clothing. For example, each household arranges when and how much to buy, store, process,

and consume foods. The business world cannot be separated from the logistics activities such as

purchasing raw materials to be processed and to be sold or purchase merchandise to be resold at a higher

price. A mining company makes estimation on its mining deposit and determines the best way to mine in

order to maximize the recovery of valuable minerals.

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Logistics is also an important part in the agricultural sector. Farmers often perform logistics activities

such as the determination of a commodity to be planted; procurement of raw materials for production,

such as the selection of fertilizers and pesticides; how to harvest; how to process; and the delivery of the

crop to the hands of consumers. In addition, logistics activities are also related to election activities, such

as determining the location of polling, providing ballot boxes and ink, temporarily saving evidences, and

announcing the results of the vote count. Also, logistics is a critical success in humanitarian operations

when natural disasters occur. The smooth logistics determine the effectiveness of rescue and

rehabilitation.

Logistics has become a routine activity that is often underestimated. Many regard that logistics can be

done without requiring certain skills. For them, as long as there is a demand, and an instruction is given,

logistics will ioccur bty itself. Affairs related to demand creation and demand fulfillment are two different

things. Indeed, both of them require coordination although each requires its own expertise. Logistics

expertise consists of competence in and knowledge of handling the needs of goods, goods procurement,

contract negotiations on goods, goods transportation, goods storage, use of goods, and goods disposal.

Attention to logistics will be so much when food crises, shortages of items in the store, the scarcity of fuel

oil (BBM), or unavailability of raw materials in the country happen. Wastage will be a direct result of

mismanagement of logistics. For example, fuel shortages make the user have to queue for hours and

businesses lost their production. Food logistics crisis certainly will cause worse situation in which it can

lead to mass starvation and death.

Entering the era of globalization, logistics can no longer be responded reactively. For example, when a

logistics problem arises, the logistics solution is spontaneously sought. The new paradigm is to anticipate

the future prospects and challenges so that logistics can be realized as an important element in decision

making at both the policy and operational level of businessmen and community members. In other words,

the logistics become an important element in boosting competitiveness.

Logistics sector macro determines the competitiveness of a country. If competitiveness is defined as the

ratio of productivity and costs, then the competitiveness can be measured by the percentage of logistics

costs to a country's gross national income. The lower the cost, the better logistics competitiveness of the

country is. Developed countries like the U.S. and Japan issued its logistical cost between 9 and 12 percent

of its gross national income (GDP). The Economist estimates that in 2006 China's logistics cost reaches

by 21% of its GDP, Thailand 18%, Singapore 7%, India 13%, the European Communities 11%, Japan

11%, and the United States by 9%. Malaysian logistics cost is estimated between 12 and13% of itsGDP,

and Vietnam amounts its logistic cost between 19 and 20%. When compared with other ASEAN

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countries, Indonesia's logistics cost is estimated between 22 and 27% of its GDP. This is a value that is

not small, so it requires special attention.

The fact that Indonesia's logistics cost is the highest in Southeast Asia is a reflection of the condition of

facilities, technology, human resources competencies, and logistics policies that have not yet been

developed optimally (Herliana and Parsons, 2011). This high logistics cost has contributed to the high

economic cost for the low competitiveness of Indonesia’s products. This condition requires an attention of

all stakeholders in the field of logistics. Logistics improvement is urgent, especially when it is associated

with the opening of free trade with ASEAN, China, and India in the near future.

Taking into account the importance of the role of logistics in improving a competitiveness, the present

portrait of Indonesi’s contemporary logistics and its relationship with ASEAN regional logistics should be

understood in order to identify the opportunities and barriers that exist. The question is whether Indonesia

can leverage its logistics to increase its competitiveness. This paper aims to analyze both the weaknesses

and challenges of Indonesia’s logistics so that the improvement of Indonesia’s macro logistics

performance can be made. The approach is based on the framework of macro logistics that views logistics

as a driver of cross-regional trade. The data Sources are based on the documents and the results of the

discussions of various media.

Macro and Micro Logistics

The question that is often asked is what logistics is. History has recorded that the military its movement

depends on logistics in winning a battle. Just in recent decades, logistics has become the concern of many

governments and business world. The term logistics comes from the Latin word logisticus, which means

numeracy. Oxford Dictionary defines it as detail organization and an execution of a complex operation.

The military defines it as a science of movement, supply, and maintenance of military personnels in a

military operation. The business world sees it as the management of material flow, from raw materials to

finished goods.

In general it can be said that the logistic is the flow of goods or services from source to destination in

support of a program or activity. Logistics has a function of getting things needed to fulfill a requirement.

A more detailed understanding of logistics is that it is a process of planning, implementing, and

controlling the flow of goods or services (including its related information) effectively and efficiently

from a point of origin to a point of use to meet specific needs. The basic concept of logistics concerns the

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flow and stock that connect the source and destination by providing goods in the right quantity, right time,

right location, and the right cost. There are 14 areas of logistics activities, namely: customer service, order

processing, distribution liaison, inventory control, demand forecasts, traffic and transportation,

warehouses and storage, plant and warehouse layout of selected land, material handling, material

procurement, spare parts and maintenance service support, industrial packaging, returns processing , and

waste disposal.

Why is logistics important in the economy? Transactions in the economy offer five main values, namely:

location, time, quantity, form, and ownership. The first three are related to the logistics function. The

value of form relates to the production function, and the value of ownershp relates to the marketing

function. Logistics allows the production process to happen through making the necessary raw materials

available. Logistics also allows the purchase process to happen through the product delivery into the

hands of users.

Logistics plays an important role in determining the competitiveness of an organization. Competitiveness

can be seen from the two dimensions: value and cost superiority. The first relates to the fact that

customers do not purchase the products, but purchase the value, while the second relates to the fact that

every action requires cost. Simply put, if each dimension has a high and low scale, the "normal" status

applies to an organization that has a low superiority scale in both its value and cost, whereas the

"cheaper" status applies to an organization that has a cost superiority. An organization will be called

"better" when it has a superiority that can satisfy its customers. An organization is called "superior" when

it has superiority in both its value and cost.

The role of logistics in achieving a "cheaper" status is through a logistics engineering process of reducing

costs, among others: through the capacity setting, economy scaling, logistics streamlining, and inventory

reduction. The "better" strategy can be implemented by using accurate reliability and responsiveness to

ensure a perfect order fulfillment. Sub strategy is "faster" to be realized by managing the time planning,

among others: by using forecasting with better data, queue optimization, on-time production and

distribution, and transportation mode selection.

Logistics approach is different from trade approach, which emphasizes on the balance between demand

and supply. trade Mechanism mostly relies on setting prices so that the supply can match the demand.

When the supply is excessive, the price drops, and when the demand is excessive, the price goes up.

Logistics sees that excessive demand means loss of revenue, and excessive supply means a waste of

resources. Tools that are used not only price adjustment but also time and capacity of logistics system .

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Price adjustment is a symptom of a problem, not a solution. Logistics help use resources efficiently,

optimize the tradeoffs against conflicting objectives, and redesign a logistics system.

Logistics is not just happening in the organization but also between organizations called a supply chain

(Christopher, 2010). A supply chain is a related logistics network and is maintained by several companies

from a point source to a point of use. The application of a logistics network or a supply chain requires the

related organizations to coordinate the customer priorities, production control, product delivery to suit

customer needs, and the development of an integrated information system. Coordination among actors

along a supply chain can reduce inventory and transportation costs while improving service performances.

Why is it so difficult to implement logistics network management although the potential benefits are real?

There are at least three reasons why logistics network management becomes difficult. The first is the

divergence of interests between the actors involved. The largest conflict of interest is the income for a

player is the expense of the other. Not to mention there is a clash in an operation, such as delivering goods

in large or small volume. The second reason is the uncertainty that occurs along the supply chain, ranging

from the uncertainty of demand, of raw material availability, and of machine reliability to natural

disturbances. The third reason is the complexity of logistics system has increased not only the variety and

quantity of goods, the number of business partners, but also the amount of regulatory production and

technological development.

Solving logistical problems requires an interdisciplinary approach. Management can contribute to the

planning, control, and improvement of logistics systems. Engineering is required for computing and

optimization. While economics is required for the allocation of scarce resources and an efficient trading

system, political logistics is required for determining policy. Therefore, a dialogue and communication

between logistics actors are required to realize exchanges of ideas and commitments to the improvement

of the overall logistics. A political instrument relates to a logistics policy. Policy Logistics is the process

of planning, facilitation, implementation, monitoring, and controlling the flow and storage of goods

within and between logistics systems used by corporates, agencies, governments, or organizations with

the goal of improving their competitive advantages, efficiency, and fairness.

Logistic activities occur not only within a company and between companies but also involves a course of

aggregated activities of flowing goods and providing services from one point to another. The concrete

logistics activities -- resulting from the engagement amongst consumers, producers, and enterprises that

take place in a small geographical space of specific logistics activities -- are defined as micro logistics.

Micro issues are concerned with the logistics flow of activities between companies and the circulation of

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products and services operated by transportation companies. One characteristic of micro logistics is to

focus on strategy, which includes the interests of a company, the goal of maximizing company’s profit,

the level of corporate supply chain (inbound logistics and outbound logistics), the element of price and

availability, and criteria regarding the effective and efficient company.

The logistics that occurs as a result of trade and spending in the logistics sector is called macro logistics.

In other words, from the perspective of the socio-economic logistics, logistics activities belong to the

macro logistics. However, from the perspective of business logistics, logistics activities belong to micro-

logistics. Macro logistics relates to the cross-border value chain with geographically dispersed logistics

activities such as warehousing, transportation, sourcing, and inventory management. One characteristic of

logistics is to focus on macro policy, which involves the interest of many parties, the purpose of benefits

for all stakeholders, the level of an industry chain (collection of similar companies), the tariff and non-

tariff elements, and the success criteria, including effective, efficient, and fair for many parties.

The Logistics portrait in Indonesia

Indonesia's logistics performance in international ranking is not something to be proud of. One clear

assessment indicator that can be used to conduct perfomace measuremnet against logistics performance of

a country is by looking at the value of Logistics Perfomance Index (LPI) issued by the World Bank. In

assessing the performance of logistics sector of countries in the world, the World Bank based its

assessment on the perceptions of behavior, consisting of 7 (seven) measurement components, namely:

customs, infrastructure, ease of arranging international shipments, logistics competence of actors and

local service providers, tracking and tracing, domestic logistics costs and delivery timelines.

Data reported by the World Bank showed that Indonesia's Logistics Performance Index in 2010 was

ranked 75 of 155 countries surveyed. Compared to neighboring countries Indonesia is far behind.

Singapore ranked second to the world, Vietnam was ranked 53, Philippines was on the order of 44,

Thailand ranked 35, and Malaysia was on 29 ratings.

The Logistics Performance Index (LPI) issued by the World Bank in 2012 showed Indonesia was ranked

59th out of 155 countries surveyed, declining from its 46th position in 2011. If you look at the level of

ASEAN, Indonesia's logistics performance is still far away from Singapore (world number 1), Malaysia

(29), Thailand (38), Philippines (52), and Vietnam (53). Infrastructure is the biggest obstacle for getting

the worst ratings among other assessment components for Indonesia.

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According to the Ministry of Trade, Indonesia's logistics cost in 2011 reached 24.64 percent of

Indonesia's GDP, or Rp 1,800 trillion. Table 1 shows Indonesia's logistics cost as a ratio to gross domestic

product (GDP). The largest cost component of national logistics is for ground transport, accounting for

66.8 percent roomates. It is followed by inventory handling cost, which is at 27.56 percent. And the rest is

administration cost. This condition is much higher than some other countries such as the United States,

Japan and South Korea. The U.S. logistics cost only 9.9 percent, Japan was 10.6 percent, and South Korea

was 16.3 percent. According to the Institute of Economic and Social Research (LPEM) at the University

of Indonesia, Indonesia is one of the countries with the highest logistics cost, accounting for 14.08 percent

of sales revenue. In contrast, Japan’s logistics cost is 4.88 percent. When compared with the neighboring

country of Malaysia, Indonesia is still far behind (Asworo, 2013). As an illustration, the logistics cost

from Cikarang to Tanjung Priok with a distance of 55.4km is US$ 750. In contrast, in Malaysia, from

Pasir Gudang to Tanjung Lepas, Johor Baru, with a distance of 56.4km costs US$ 450.

One of the causes of the high logistics cost is that the logistics infrastructure in Indonesia is still very

limited in the eastern region of Indonesia, thus creating an imbalanced economic growth between the

Western Region and Eastern Region (Herliana and Parsons, 2011). In addition, the backhaul without

paying load has resulted in freight to the eastern region is higher compared to the western part of

Indonesia. The disparity between the western and eastern regions has resulted in a lack of investors to

invest their capital in the eastern region, thus slowing down the economic growth in this region.

Table 1. Indonesia’s Logistics Cost 2004 – 2011 National logistics cost (Rp trillion) Ratio of logistics cost to GDP (%)

2004 633.8 27.6 2005 762.9 27.5 2006 961.2 28.8 2007 1,016.60 25.7 2008 1,238.40 25 2009 1,397.30 24.9 2010 1,543.80 24 2011 1,829.70 24.6

Source: Bappenas, Sislognas Expert Team in Meeting on Measurement of Sislognas Performance, presented in Bappenas Office, 11 March, 2013.

Some other problems include the existence of illegal charges and transaction costs that lead to high-cost

economy. In addition, there are other problems such as the high export-import service time and the

operational constraints in port services as well as the limited capacity and network service of national

logistics providers. Other issues also arise, such as shortages in the stock of basic commodity and the

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fluctuations in price of basic commodities of the consumers, especially in the national holiday and

religious celebration days. In fact, a wider disparity occurs in the border, remote and outer areas.

The high logistics cost has lowered the competitiveness of Indonesia’s products compared with the same

products produced by competing countries. The low competitiveness happens not only in the domestic

market but also in the international markets. The low performance of Indonesia’s logistics has impacted

on Indonesia’s high economic cost and poor quality of logistics services. Indonesia still has to work hard

to overcome its weakness in this sectors. Therefore, it has to make serious improvements in customs

affairs, infrastructure, international shipments, logistics competence, tracking and tracing, and time

accuracy.

Logistics problems faced by Indonesia is the low competitiveness of Indonesian products and the slow

delivery time. The competitiveness of Indonesian products is very low compared to other countries’

products if seen from the price of the product. This is one of the drivers of high logistics costs.

Competitive price of a product cannot be separated from the logistics cost that is borne by the company

that produces the product. In the report of the World Economic Forum (WEF) from 2009 to 2011 showed

a number of indicators that are directly related to logistics cost, among others: non-reguler/bribery cost

incurred and the costs incurred from the applicable customs and trade tariffs.

The slow delivery time that occurs is due to the conventional Indonesia's logistics infrastructure, such as

road structures, port systems, intermodal relations, and so forth. In addition to these conditions, the slow

delivery time is also caused by the disintegrated inter-connectivity between one location with another

location that connects the centers of production with the centers of consumption so domestic container

shipment is more expensive than overseas container shipment. In the report of the World Economic

Forum (WEF) from 2009 to 2012, the quality of Indonesia's infrastructure was ranked 82 of 134

countries. Compared to other Asian countries, Indonesia's position can be said to be bad. For example,

Malaysia was ranked 23.

Logistics activities of governments are often spotlighted by the mass media due to their irregularities in

expending the fund of the state budget for the procurement of goods and services. The types of

irregularities that occur include a wrong procedure, fictitious data, bribery, and the price rise.

Perocurement of goods and services is vulnerable to corruption, collusion, and nepotism. Corruption

Eradication Commission (KPK) noted that about 80 percent of cases that are handled relating to the

procurement of government goods and services. According to the report of Agency for the Procurement

Policy of Government Goods/Services (LKPP), the annual inefficiency can reach at least 20-30 per cent

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of the total state budget allocated for procurement of government goods and services. The inefficiency

value has reached Rp 70 trillion. This figure does not include the inefficiency that occurs in the local

regions.

The importance of logistics as an economic driver is reflected in the Master Plan of Acceleration and

Expansion of Economic Development (MP3EI) issued by Presidential Decree No. 32 of 2011. Under this

Master plan, the acceleration and expansion of economic development shall be done through the

economic corridor approach. It is expected that this approach shall increase the flow of goods and people

in a region that occur simultaneously with the development of telecommunications, energy, tourism,

health, education, agriculture, infrastructure, and regulation. It is also expected that this approach will

encourage the development of the private sector. In other words, MP3EI seeks to reduce barriers to

business and attract investment in infrastructure development.

Will the infrastructure development create commercial knots, borders, market gates, and exchanges? The

key to the success of economic corridor is the logistics policy. Logistics is the process of policy planning,

facilitation, implementation, monitoring, and controlling the flow and storage of goods within and

between logistics system with the goal of improving business competitiveness and regional competitive

advantage. Logistics policy has not become a concern of MP3EI yet. Economic corridor is the last stage

of logistics development, and it is not just about connectivity and logistics. The logistics development

consists of four stages (Banomyong, 2010): Stage 1 concerns the transport corridor: physically connected;

stage 2 concerns the intermodal transport corridors: support of various transport modes; stage 3 concerns

logistics corridor: institutional facilitation, information technology, and finance; and stage 4 concerns

economic corridor: business and investment transactions between locations. Thus, the development of

economic corridor needs to be done in the above-mentioned stages.

Cooperation between the public and logistics professionals as well as supported by a law is absolutely

necessary in the implementation of MP3EI. Otherwise, the ideas proposed in MP3EI may not be realized

because of the lack of coordination and monitoring, high sectoral ego and low participation of local

governments. Cooperation is needed not only in resolving the problems faced but also in logistics policy

development and logistics competence improvement of human resources.

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Logistics Industry in Indonesia

Humans are increasingly recognizing the importance of the role of the logistics industry because it can

support cross-regional trade flows. Logistics industry plays an important role in planning, control, and

regulation of the movement and supply of goods, services and information across borders between

countries and even cities. Logistics business concerns services to move, store, search for resources,

provide information, and handle shipping documentation. Business logistics starts from raw material

suppliers to the consumers, including the arrangement of return items and containers.

There are various different types of logistics business, depending on goods ownership and the degree of

services, namely: 1PL, 2PL, 3PL, and 4PL. A first party logistics provider is a company or an individual

that needs to transport cargos, freights, goods, produces or merchandises from point A to point B. The

term first-party logistics provider represents both as the cargo sender and the cargo receiver. A 1PL can

be a manufacturer, trader, importer/exporter, wholesaler, retailer or distributor in the international

commerce field. A second party logistics provider, an asset-based carrier, specializes in one particular

area of a supply chain which actually owns the means of transportation to transport goods from one point

to another. Typical 2PLs would be shipping lines which own or lease their ships, airlines companies

which owns or lease their planes, or truck companies, such as DHL and UPS, which own or lease their

trucks.

A third party logistics (3PL), according to the Council of Supply Chain Management Professionals’

glossary, is defined as a firm [that] provides multiple logistics services for use by customers. Preferably,

these services are integrated by a provider. Among the services that 3PLs provide are transportation,

warehousing, cross docking, inventory management, packaging, couriers, freight cargo, air cargo, and

freight forwarding. 3PL companies usually hold and transport goods without actually owning them. For

example, company A outsources part or all of its logistics to a company B (3PL), which handles the

whole process.

A fourth-party logistics provider assemblies the resources, capabilities, and technology while at the same

time giving advice and solutions to other companies regarding their comprehensive supply chain

solutions. A supply chain integrator that assembles and manages the resources, capabilities, and

technologies of its own organization with those of complementary service providers to deliver this service

might use 2PL and 3PL providers to build and run the most successful supply chain solutions. For

example, company A (4PL) advises company B to use company C for their supply chain and logistics

needs. Deloitte and Accenture are the examples of 4PL.

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Recently, the logistics business potential in Indonesia is very large which is characterized by the

increasing trade flows between islands and between countries. The magnitude of this potential gives both

local and foreign logistics service providers the opportunity to compete competitively. The local and

foreign logistics players that gain market share in Indonesia, among others: Maersk Line, APL, Samudera

Indonesia, Yusen, Hanjin, Evergreen, Meratus (freight forwarding and shipping line), UPS, DHL, FedEX,

JNE, Tiko, and Pos (couriers and express delivery), Linfox, Exell, Kamadjaya, Pantos, CKB, JNE

Logistics, Dunex (logistics value added), and Pandu Logistics. The Indonesia’s state owned companies

that participate in logistics services, among others, are BGR, KA Logistics, AP Logistics, KBN, and Pos

Logistics.

Logistics cost is an important factor that is used in the selection of 3PL. Logistics activities include

warehousing, logistics information systems, inbound and outbound transportation, customs, inventory

management, product packaging, and product return services. Since the use of logistics services has

reduced the cost of logistics enterprises, many companies use logistics services. An efficient logistics

partner can help improve operational efficiencies for any business by cutting cost and delivery time. This

ultimately translates into market share and profits for the business.

The parameters in measuring customer satisfaction relate to market share (national and international),

warehousing facilities, experience of the company, payment flexibility, customized service, the use of

Enterprise Resource Planning software (ERP), Global Positioning System (GPS), and the use of Radio

Frequency Identification (RFID) in vehicle tracking. The use of RFID is still rarely used due to the high

cost of investment. According to a survey conducted by Frost and Sullivan, (2007), the Third Party

Logistics (3PL) Indonesia awarded best performance in the ASEAN logistics awards for Best Automotive

is PT NYK Puninar Logistics, for Best IT/Electronics is PT NYK New Wave Logistics, for Best Fast

Moving Consumer Goods is APL Logistics, for Best Pharmaceutical is Agility Logistics, for Best Retail

is Maersk Logistics, and for Best Domestic is Samudera Indonesia Group (Frost & Sullivan, 2007).

Frost & Sullivan predicts that Indonesia's logistics industry will grow by 14.5 percent and reach USD

1,634 billion in 2013 from last year's estimate of Rp 1,427 trillion. This initiative has been driven by the

development of the logistics industry, government, and strong economic growth. Gopal, Vice President

Global Transportation & Logistics Practice of Frost & Sullivan in the Indonesia Logistic Industry

Outlook 2013, revealed that relocation and strong capital flows are expected to boost manufacturing

activity and increased demand for logistics in Indonesia.

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Foreign trade to Indonesia is expected to rise moderately by 16.7 percent to reach 446 billion U.S. dollars

in 2013. Business activities in Indonesia related to forwarding, shipping and transportation of goods by air

both exports and imports would gain from foreign trade activity growing continuously.

The growth of foreign direct investment (FDI) is expected to continue in 2013, with an estimated

investment of 42.7 billion U.S. dollars. Party for Foreign Direct Investment realization in transport and

storage sector reached 2.8 billion U.S. dollars in 2012. It is the second largest investment of the whole

Foreign Direct Investment after the mining sector, which is worth about 4.3 billion U.S. dollars. The

massive flow of Foreign Direct Investment to the mining industry will continue to drive growth in the

industry and offer business opportunities for transportation and logistics industry.

The prediction of Frost & Sullivan stated that the transportation and logistics market in Indonesia will

grow 14.8 percent CAGR for the period of 2013-2017. However, the inadequate infrastructure will slow

the growth if such barriers continue to happen in the coming years. The poor connectivity, which tend to

be a long process and long-winded, and the infrastructure, which is still weak have caused problems and

high cost in transportation sector in Indonesia. The next obstacle relates to existing trade facilities, which

are mostly still on hand writing system or 'paper-based systems', which not only reduces the efficiency but

also adds to the cost of logistics. Other obstacles in the transport and logistics industry in Indonesia are

the frequent occurrence of late delivery of for export goods and delays of local delivery.

In addition, Indonesia's logistics market is highly fragmented due to many players in the logistics market.

The players consist of small, medium-sized, and big companies. The big companies even have to face

stiff competition from the other two company types. This fragmented market logistics service has

encouraged the small logistics providers to apply a smaller economical pricing strategies rather than

focusing their services on the quality and diversity of services.

The total volume of cargo moving through the Indonesian seas are expected to rise by 6.1 percent to reach

1 billion tonnes in 2013 from the year 2012 that reached 943.1 million tons. The port controls 90 percent

of the total cargo traffic of non-road in Indonesia. Indonesian shipping industry is likely to be affected by

the impact of slowing global growth, especially by the European crisis and by the falling demand from

China. Despite that, the industry is expected to maintain its steady growth because of the strong domestic

demand and the availability of new ships, especially for the oil and coal industries.

The volume of good shipments by rail is expected to increase by 8 percent to reach approximately 25.5

million tonnes in 2013 from the year 2012 that reached 23.6 million tons. The government plans to

accelerate the development of Jakarta-Surabaya double track will increase the amount of freight transport

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capacity as much as three times because it will reduce the burden of road and cut both logistics costs and

time.

The air freight volumes are expected to increase by 19.6 percent to 1.16 million tons from 970,000 tons in

2012. There will be a significant potential for the air freight industry, which are from the seasonal goods,

the components, and high-value equipment. Soekarno Hatta contributed as much as 36.7 percent of the

total air freight in Indonesia.

Logistics industries are also affected by the presence of a strong inclination to outsource a variety of

value-added services in the Indonesian market. Therefore, the logistics service providers have to focus its

business on an effort to provide value-added services while strengthening the service they have. The end

users of logistics services have also started to switch to a network of suppliers that have been integrated

with professional service providers.

The competition among logistics business players is getting tougher. Logistics service providers in

Indonesia have started offering specialized logistics service solutions for specific industries, such as:

Fast-moving consumer goods (FMCG), construction, service parts, and mine. They should not be stuck to

the existing basis of logistics services that give common value-added services. Logistics networks for

industrial centers should be built on the outskirts of Jakarta to facilitate access to the port of Tanjung

Priok because of the high levels of congestion in Jakarta has an impact on the length of time of ordering,

delivery delays, and inefficiency in the supply chain.

Macro logistics context in the Master Plan for Acceleration and Expansion on

Indonesian's Economic Development

In line with the national development vision, as stated in Law No.17 of 2007 about National Long Term

Development Plan of 2005-2025, the vision for the Acceleration and Expansion of Indonesian Economic

Development is "Creating an Independent Community Indonesia, Forward, Just and Prosperous". The

Master Plan for Acceleration and Expansion on Indonesian's Economic Development lays out Indonesia's

ambitious plans to Accelerate and expand economic growth. Through the MP3EI’s step, acceleration and

expansion of economic development will place Indonesia as an advanced nation in 2025 with per capita

incomes ranging between USD 14,250 and USD 15,500 with the total GDP ranges between USD 4.0 and

USD 4.5 trillion. To realize this, the real economic growth of between 6.4 and 7.5 per cent in the period

of 2011-2014 and of between 8.0 and 9.0 per cent in the period 2015-2025 are required.

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The 2025 vision shall be realized through three (3) missions that emphasize on the following things:

1. Adding value and expanding the value chain of production processes and distribution of asset

management and potentials of natural resources, geographic region, and human resources through

the creation of an integrated economic activity and synergy within and between regional centers

of economic growth;

2. Encouraging the realization of improved production and marketing efficiency as well as the

integration of domestic markets in order to strengthen the competitiveness and durability of the

national economy; and

3. Strengthening the national innovation system in the production, processing, and marketing to

achieve the sustainable global competitiveness and innovation-driven economy.

The development strategy consists of 3 (three) main pillars based on the vision and mission that have

been set. One is the strategy of increasing the potential of the region through the development of growth

centers in the economic corridors. Two is the strategy to strengthen the national connectivity. Three is the

strategy to increase the capacity of Human Resources and Science and Technology. Government

functions as the motor for the creation of inter-regional connectivity, which is realized in the form of:

Realizing a system that integrates the national logistics, national transportation system, regional

development, and communication and information systems;

Identifying the transportation hubs and distribution centers to facilitate the logistics need for both

the main and supporting commodities;

Strengthening both intra and inter- corridor connectivity and global connectivity; and

Improving communication networks and information technology to facilitate all economic

activities, government activities, and national education sector.

The development of economic corridors can also be interpreted as a regional development to create and

empower an integrated, competitive, and sustainable economic base. The Master Plan identify six growth

centers, or economic corridors, to boost the economic development. The centers are Sumatra (center for

the production and processing of natural resources and as nationa's evergy reserves), Java (driver for

national industry and service provision), Kalimantan (center for production and processing of national

mining and energy reserves), Sulawesi (center for national production and processing of agricultural,

plantation, fishery, oil and gas), Bali-Nusa Tenggara (gateway for tourism and national food support), and

Papua-Maluku Islands (center for development of food, fisheris, energy, and national mining). Indonesia

needs almost Rp 2,000 trillion (U.S. $ 220 billion) in investment between 2010 and 2014 for its

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infrastructure development, with most of those funds expected to come from private investment (the

Jakarta Post, 2010).

The total length of the Indonesian coastline is 54,716 kilometers. It stretches along the Indian Ocean, the

Strait of Malacca, the South China Sea, Java Sea, Celebes Sea, Molucca Sea, Pacific Ocean, Arafura Sea,

Timor Sea, and in other small areas. In the Indonesian islands, there are several strategic sea lanes both

economically and global military wise. These lanes are Malacca Strait (SLoC), Sunda Strait (ALKI 1),

Lombok and Makassar Straits (ALKI 2), and Ombai Wetar straits (ALKI 3). Most of the world's major

cruise use these lanes as their seafaring lines. MP3EI prioritize the utilization SLoC and ALKI

(Indonesian archipelagic sea lanes) above. Indonesia can gain many benefits from this maritime

modalities to accelerate growth in the various regions in Indonesia (especially the eastern Indonesia), can

build its maritime competitiveness, and can enhance its national security as well as its economic

sovereignty. For the benefit of the national strategic position, the efforts stated in MP3EI need to take

advantage of the presence of SLoC and ALKI as waterways for international shipping.

To achieve the purpose of strengthening the national connectivity, the connectivity components that are

interconnected need to be integrated into an integrated planning. Some components function to form a

national connectivity posture are: (a) National Logistics System; (b) National Transportation System; (c)

Regional Development (RPJMN and RTRWN); and (d) Information and Communication Technology

(ICT / ICT).

National Logistics System

In order to develop the National Logistics System as one of the infrastructure in building national

competitiveness and to support the implementation of the Master Plan for the Acceleration and Expansion

of Indonesian Economic Development 2011 - 2025, PERPRES No. 26 Year 2012 on the Blueprint of

National Logistics System Development has been set. The blueprint is intended to be a guide and

guidelines for relevant stakeholders. Its role (Sislognas) is to ensure the smooth flow of goods, reducing

transaction costs, building national competitiveness, preserving the environment, and promoting the

public welfare.

The vision and mission of the National Logistics System are formulated based on the current national

logistics practices and national and global environment development. The vision of the national logistics

system of 2025 is "locally Integrated, Globally Connected for National Competitiveness and Social

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Welfare". There are two missions of national logistics system. First is to facilitate the flow of goods

effectively and efficiently to ensure the fulfillment of the basic needs of the people as well as improving

the competitiveness of national products in the domestic, regional, and global market. Second is to build

national logistics knots and their connectivity, such as rural areas, urban areas, inter-region areas, inter-

island areas, and International Hub Ports through collaboration among stakeholders.

The purpose of national logistics system is to accelerate the flow of goods effectively and efficiently by

way of: (i) reducing logistics costs, facilitating the flow of goods, and improving logistics services that

improve the competitiveness of national products in both the global and domestic market; (ii) ensuring the

availability of basic and strategic commodities throughout Indonesia at an affordable price so as to

encourage the achievement of a just and prosperous society as well as to strengthen the sovereignty and

integrity of the Republic of Indonesia; and (iii) preparing to achieve the targets of ASEAN logistics

integration in 2013, the integration of the ASEAN market in 2015, and the integration of global market in

2020.

Given the primary activities of logistics is to move goods (commodities), the paradigm used is "ship

follows the trade". However, with the vast of Indonesia's geographical location and the constraints for

reaching certain areas, then the paradigm "ship promotes the trade.” should also be used. The national

logistics system will create a network of trade distribution that can ensure the smooth flow of goods and

the availability of basic goods as well as strategic goods needed by the people at an affordable price.

The policy development of the national logistics system is based on six factors. They are as follows:

1. Determination of a key commodity in an order of logistics and supply chain networks,

management, and effective and efficient administration;

2. Integration of logistics infrastructure, both the logistics nodes and logistics links, which serves to

flow the goods from point of origin to point of destination. Logistics node includes logistics

players and consumers, while the logistics links include distribution networks, transportation

networks, information networks, and financial networks, which connect the communities of rural

areas, urban areas, centers of economic growth, inter-islands and cross-nations. The integration of

these logistics nodes and logistics links has become the main cornerstone in realizing local,

national, and global connectivity to achieve national economic authority and security as well as

the establishment of Indonesia as a State Maritime;

3. Development and implementation of information and communication systems that are reliable

and secured;

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4. Development of players and provider of world-class logistics services;

5. Development of professional human resource in logistics field; and

6. Reorganization and harmonization of rules and regulations in the field of logistics to ensure legal

and business certainty as well as synchronization between logistics players and providers both at

central and local levels to support efficient logistics activities and create a conducive business

climate. The reorganization includes the implementation of effective institutional management of

national logistics system.

National Logistics System is developed towards an effective and efficient integrated logistics system by

using the concept of Supply Chain Management (SCM) which is based on synchronization, integration,

and collaboration of the involved stakeholders by utilizing information technology contained in a reliable

institution and effective organizational system. National Logistics System is expected to be

operationalized by professional and ethical logistics service actors and providers and be supported by the

availability of adequate and reliable logistics infrastructure.

ASEAN logistics system

The AEC, popularly known as the ASEAN single market, was created to integrate the economies of the

region. ASEAN Economic Community (AEC), which will soon be enacted in 2015, has a strategic value

in encouraging economic growth in Asia. Currently, the average rate of economic growth in ASEAN is

5.5% and has a population of 608 million people, which is a potential market and a large labor force. For

its summit in 2015, AEC has prepared a blueprint that focuses on the establishment of a single market and

production base, a highly competitive economic region, a region with equitable development, and a

region that is fully integrated with the global economy. This integration should be aimed at facilitating all

ASEAN members to achieve positive and continuous growth. From Indonesia's point of view, as the

largest economy in the region, the ASEAN integration is considered to be necessary milestones for further

opportunities. Yet, challenges still remain to achieve this goal.

The national connectivity enhancement needs to be integrated with the growth of cooperation

development at the ASEAN level that has the following purposes:

Facilitating the formation of agglomeration economies and the integration of production

networks;

Strengthening regional trade among ASEAN countries;

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Strengthening the attractiveness of investment and the reduction of the development gap among

ASEAN members and between ASEAN and the countries in the world.

The above efforts were made through strengthening the network infrastructure, communications, and

movement of commodities (goods, services, and information) effectively and efficiently. This is part of

the international connectivity. The main elements of strengthening ASEAN connectivity consists of:

1. Physical connectivity, such as: transportation, technology, information and communication,

energy;

2. Institutional connectivity, such as: facilitation and trade liberalization, trade facilitation and

liberalization of investment and services, mutual cooperation, regional transport cooperation,

cross-border procedures, capacity empowerment program.

3. Social-cultural connectivity (people-to-people connectivity), such as education, culture, and

tourism.

Within the framework of the ASEAN Framework Agreement on Services (AFAS) on December 15, 1995

in Bangkok, Thailand, there are 8 sectors agreed to do trade liberalization, namely: Air and Sea Freight

sector, Business Services sector, construction service sector, telecommunication services sector, tourism

services sector, the financial services sector, Health Services sector, and logistics Service sector. As for

the liberalization of the services sector, it is be targeted to comprehensively commence in 2015.

If AEC is enacted in 2015, ASEAN will be open to the free flow of goods, free flow of services, free flow

of investment, free flow of capital, and free flow of skilled labor. The question is to what extent Indonesia

is ready to face AEC in 2015 when seen from its economic potential and challenges. Is Indonesia ready

to enter the ASEAN free market in the remaining two years? With the open market conditions, it is not

impossible Indonesia will also suffer the same fate as when Indonesia accepted the free trade area

agreement between ASEAN and China (ASEAN-China Free Trade Area), where Indonesia were flooded

with the imported products from China, resulting in Indonesia being deficit in its balance of trade.

In terms of economic potential, Indonesia is a country that is now emerging to be one of ASEAN's

economic strength with GDP of US$ 1 trillion, the highest economic growth compared with Brunei,

Malaysia, the Philippines, Singapore, and Thailand. The average growth rate of Indonesia is 6.4%, which

is estimated to be higher than the average growth of the other 10 ASEAN countries, which is at 5.5% per

year from 2013 to 2017. Also, Indonesia is the most populous nation, with 247 million people. In

addition, its potential is also supported by such factors as natural resources, growth in private

consumption, and the potential for a growing investment climate.

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In addition to the huge potential, the main challenge faced by Indonesia is its low competitiveness

compared to other ASEAN countries. According to the Global Competitiveness Index issued by the

World Economic Forum of 2012-2013, Indonesia’s competitiveness ranks at 50th position out of 144

countries, down from its 46th position in 2011. For the ASEAN region, Indonesia ranks at the 5th, just

below Singapore at the 2nd, Malaysia at the 25th, Brunei at the 28th, and Thailand at 38th.

Of course, in driving national competitiveness, Indonesia’s regional preparedness should be encouraged

in facing AEC 2015. Indonesia’s local regions should be the center of attention because they will

determine the readiness of Indonesia to compete in the free market of ASEAN. If the local regions are not

empowered, then the Indonesia’s horticultural products may be replaced by foreign horticultural products

at an affordable price. For example, Pontianak’s oranges may be replaced by China’s oranges; Indonesia’s

durians may be replaced by Bangkok’s durians. In other words, local regions in Indonesia could become a

victim of the implementation of the ASEAN free trads if they are not empowered according to their

potentials. Moreover, in this era of globalization, the concept of competition has shifted from mere

competition between countries to competition between individuals, companies, provinces, and

municipalities. Through the AEC, each city in ASEAN regions will grow into power with its comparative

advantages. For example, Singapore will grow as a financial center, Johor as a manufacturing hub,

Bangkok as a terminal agribusiness industry, and Phuket as a tourist center.

The only advantage Indonesia has is just in the procurement of raw materials based on natural resources,

both mineral and agro raw materials. There are nine national industrial commodities that are prioritized to

enter the ASEAN market, which are currently categorized as having relatively higher competitiveness

than the other ASEAN countries’ industrial commodities. The nine commodities are agro-based products,

such as palm oil, cocoa, rubber; fish and dairy products; textiles and textile products; footwear; leather

and leather goods; furniture; food and beverages; fertilizers and petrochemicals; machinery and

equipment; and basic metals, such as iron and steel. However, later with the loss of the barriers in the

ASEAN countries, we can be sure that Indonesia will increasingly lose the added value of its natural

resources during the implementation of the ASEAN Single Market by 2015.

From people’s perception, a study conducted by Benny and Abdullah (2011) shows that Indonesian

people generally have high awareness of the ASEAN’s existence, functions, and objectives. They also

have a good understanding of Indonesia’s roles in the ASEAN as well as the importance of closer mutual

agreements between Indonesia and other ASEAN members. Although they know much about the

ASEAN, Indonesian people appear to have only little knowledge about the idea of the AEC. Most of the

respondents (around 80%) have never even heard or read about the AEC and its founding document.

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There are several reasons to explain their lack of knowledge about the AEC. This could be due to the

government’s failure to socialize and explain the concept of the AEC to the public. The idea of the AEC

might be elitist and state-centric and designed without involving public participation. The public might

also see little relevance between the potential benefits that the AEC could provide and their day-to-day

lives. Nevertheless, despite their lack of knowledge about the AEC, most of the Indonesian respondents

still agree with the concept of the AEC.

It is predicted that even when the target of ASEAN logistics integration has to be met by 2013, the

performance of the logistics industry in Indonesia is still considered to be under the countries in Southeast

Asia, although the World Bank noted Logistics Performance Index (LPI) Indonesia increased from

position 75 in 2010 to position 59 in 2012. This increase has been mainly experienced by private logistics

and transportation companies. The World Bank’s data have confirmed the seriousness of pursuit of the

private logistics companies in creating more efficient competitiveness of Indonesia's logistics.

Indonesia is now faced with the reality in which the logistics sector have to fight against foreign parties

and foreign transportation and logistics corporate conglomeration. These two realities can threaten the

existence of private logistics company in Indonesia. To overcome these problems, the government had to

intervene by not letting the private logistics players go bankrupt. In addition, the acceleration of

infrastructure projects should be encouraged and the high tariff rate of inter-port should be lowered.

Indonesia currently only occupies the 6th position in the ranking of readiness among ASEAN countries in

dealing with the implementation of the ASEAN Single Market 2015 (Bustami, 2010). According to the

assessment matrix that was released by ASEAN Secretariat, Indonesia’s score only reached 81.3 percent,

far behind other competing countries such as Thailand, Malaysia, Laos, Singapore, and Cambodia. In the

third phase of assessment (2012-2013), Thailand would be the most ready country to face the

implementation of the ASEAN Single Market by 2015, with 84.6 percent readiness rate, followed by

Malaysia and Laos that have accumulated points of 84.3 percent. The next position is occupied Singapore

with 84 percent and Cambodia with 82 percent.

Based on the results of a study conducted by the Ministry of Industry, there are four factors that have

reduced Indonesia's competitiveness compared with the competitiveness level of other countries in the

ASEAN region. These four factors include the performance of logistics, tax rates, interest rates, and labor

productivity. The unpreparedness of Indonesia has been worsened by the high cost of logistics and the

lack of infrastructure development in the country. In Indonesia, the logistics cost today is 16 percent on

the average of its total production costs. Normally, the maximum logistics cost is between 9 and10

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percent. Currently, logistics is facing such problems as the weak oversight of imported products, the slow

imposition of anti-dumping procedures in case of unfair trade practices, the safety issues which disrupt

the investment climate, the poor quality of infrastructure conditions, and the high terminal handling

charges.

In addition to weak performance in terms of logistics, fiscal policy in Indonesia is still burdensome for

domestic industries. For the ASEAN region, the imposition of corporate income tax in Indonesia is still

higher than that of Singapore, Cambodia, and Brunei Darussalam. Meanwhile, of the 130 countries

recorded by KPMG, the rate of corporate tax in Indonesia is ranked the 59th.

Other issues that could also be a stumbling block for Indonesia is the bank interest rate in Indonesia,

which ranks the 3rd highest in the ASEAN region, after Myanmar and Vietnam. With an interest rate of

5.75 percent, the position of Indonesia is far below Singapore bank’s interest rate, which is only 0.03

percent, Cambodia (1.19 percent), Thailand (2.75 percent), Malaysia (3 percent), the Philippines ( 3.50

percent), Laos (5 percent), and Brunei (5.5 percent). In addition to this, the issue of Indonesian labor

productivity has also been in the spotlight, because among 23 countries in Asia, Indonesia ranks only

15th.

Nusantara Pendulum

Indonesia as an archipelagic country has to build an archipelagic logistics system and a good

infrastructure system so that the economic cost can be reduced, productivity can be increased, and the

quality of goods can be maintained. However, according to Deputy Minister of Commerce, 98 percent of

the distribution of goods in Indonesia is through land, consisting of 87 percent distribution by road and 11

percent by train. Only two percent of the distribution of goods in Indonesia is carried through air and sea

transport. Currently, the government is busy building land infrastructure, while Indonesia is a maritime

region, where between its region is connected by sea. Indonesia requires small ports in the islands so that

cargo ships could use them.

Sea transport is an important component for achieving the national development objectives of the present

and future. The fundamental problem of Indonesia’s marine transportation logistics system is that there is

inequality between its frastructure and its transportation service demand. The provision, ownership,

operation, and maintenance of infrastructure and facilities are still dominated by government and state-

owned enterprises. Consequently, the service tariff rates tend to be under priced.

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This happens because policy rates are made based on political considerations rather than on financial

considerations. As a result, the performance and services of transportation in Indonesia in general is still

very bad. It was compounded by the inability of government to fund the maintenance and rehabilitation of

the assets that have been built, the inability of attracting new investment to meet the increase in demand

for services, and low participation level of private investors. The implication is the occurrence of excess

demand which is characterized by overcrowded transportation and transportation bottlenecks.

The low private investment in maritime transport sector is mainly due to the uncertainty in the

determination of the initial tariff rate, which may be caused by the inflation adjustment and the taxes of

ship and spare parts purchasing. The current tariff rates in most sub-sectors of transport do not reflect

their real costs. In addition, the cross-subsidy policy cannot resolve the problem. The policy even adds

another problem. This happens because the implementation is not transparent and accountable. The

condition tends to lead to moral hazard.

The tariff rates that have been distorted by subsidies have given a wrong signal to private investors and

consumers. In fact, the tariff rate or price is a major signal for producers (investors) and consumers in

making investment decisions. Due to the prevailing irrelevant tariff rate, they are not interested in

investing. Another implication of the fundamental problems is the decline in the quality of transport

infrastructure services. The growth in the construction of transport infrastructure networks has also

stagnated, which is indicated by such things as the limited ability in maintaining transportation

infrastructure and facilities, either regularly or periodically. These conditions have resulted in faster

transport infrastructure damage when compared to the estimated economic life of the infrastructure and

facilities.

Logistics costs will remain high if there is no improvement of road and port infrastructure as a whole,

particularly in relation with the development of the port, such as pool depth of ports, shipping lanes, the

length of the pier, and highways. So far, large ships carrying containers above 10,000 TEUs have

difficulty to get into a number of ports in Indonesia. This is caused by, among others: the shipping lanes

and shallow pool.

Based on a review of the Ministry of Transport (MoT), in general the existing shipping channels and

docks are under maintenance. They should routinely be dredged because silting in the harbors is quite

high. Therefore, only small ships of 5,000 TEU class can enter the harbors. In fact, Pendulum Nusantara

program that was launched to drive the success of the economy and to encourage the people’s purchasing

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power is difficult to implement when there is no infrastructure improvements. The prices of goods in

eastern Indonesia are more expensive than the western part of Indonesia because the freight is expensive.

The problems faced by the transport sector are quite diverse. Not only do the problems happen in the sea

and the port but also on the highway. The entrepreneurs in the field of transportation and distribution will

be ready to compete with foreign companies in 2013 if there is a support from the government. The

government can support them, for example in issuing regulations on the abolition of import duty fleet

(container trucks) and components/spare parts. This import duty fleet has burdened the domestic container

trucking entrepreneurs their competition with the foreign companies that run the same business.

Indonesia's logistics industry has both a challenge and a tremendous opportunity in the archipelagic

logistics system. Indonesia's large growth and abundant natural resources should be a high bargaining

power for Indonesian logistics industry. So far, foreign importers use the services of foreign logistics

companies to export goods from Indonesia. In addition, when Indonesian importers buy goods from

overseas, they also use foreign ships. To overcome this unfairness, Ministry of Commerce plans to

implement the cost system of insurance freight (CIF). With CIF, the foreign importers are required to use

Indonesia’s logistics companies when buying goods from Indonesia. This is in contrast with the previous

system or freight on board (FOB) system was applied, where the foreign companies provide their own

transport when importing from Indonesia. To implement the CIF, the government has to have courage and

the domestic logistics company have to be ready. Logistics companies have to ensure that when they send

goods abroad, they also have to be able to bring imported goods to Indonesian. Thus, both the departure

and return cost can be covered.

Logistics service providers and authorities in Indonesia are required to build a proactive nationwide

logistics network for islands to cut freight interference effects. Central and local governments need to

encourage the alliance or cooperation as a safety net for the distribution of essential goods nationwide

when a logistics disruption occurs. One prominent cooperation has been initiated by Pendulum Nusantara

Indonesia Port Corporation (IPC) and the World Bank.

The IPC II collaboration with the World Bank will establish the implementation plan of the Pendulum

Nusantara (Pendulum of the Archipelago) concept and make efforts to reduce logistics costs (Investor

Daily, 2013). This is a contribution in support of the full IPC’s ideals in accelerating the national logistics

costs reduction. The memorandum of understanding for the cooperation was officially signed on May 16,

2013 in Jakarta. The cooperation aims to study the potentials of implementing Pendulum Nusantara

programs into the government's effort to improve the logistics system in Indonesia (Lino, 2012). Under

the umbrella of this cooperation, IPC will fund the studies that will be conducted by the World Bank. The

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studies that will be prioritized are about feeder ports, which is included in the Pendulum Nusantara

concept and about national logistics cost reduction.

Pendulum Nusantara is a corporate act of IPC and IPC I, III, and IV as part of the National Logistics

System (Sislognas) in support of the Master Plan for the Acceleration and Expansion of Indonesian

Economic Development (MP3EI). This act is also intended to reduce the current national logistics costs,

which are still relatively high compared to other countries or reaching 24 percent of the total of gross

domestic product (Asworo, 2013).

There are two main things that will be the subject of study by the World Bank. The first is the study to

determine the potential ports that need to be developed to support the implementation of the Pendulum

Nusantara and implementation of National Logistics System. This archipelago Pendulum plan will

involve six major ports of Indonesia, namely: Belawan, Batam, Tanjung Priok, Tanjung Perak, Makassar

and Sorong. The six ports will become the main gates. A master ship would travel regularly through the

main seaports, serving as a hub. It will move like a pendulum, from one port to another, and the schedule

for smaller vessels will be built around the master ship. Nusantara pendulum is expected to increase the

pace of domestic container services and lower transport costs so that the shifting from land transport using

fright to ocean transport using fright is expected to occur.

The second is the study to identify efforts to reduce logistics costs in Indonesia. This study will be

focused on the inventory of the entire infrastructure, both in terms of hard infrastructure and soft

infrastructure, which is owned by the port, shipping line, customs clearance, inland transportation

services, logistics, and other sectors. Thus, the contribution of each sector to reduce logistics costs to

below 15 percent, or even reach 8 percent of the total GDP as it has be achieved by the United States

today can be mapped.

Conclusion

Indonesia has made a commitment to be an important player in the international market and trade. The

Indonesian government is focusing its attention to ensure the availability of strategic commodities,

promote low cost economic activities, and strengthen the nation’s competitiveness. The Indonesian

government also should integrate transport centers, such as ports, airports, terminals, and distribution

centers, into a transport network. Also, the government should build the infrastructure for the logistics

industry in order to create an efficient distribution process. An efficient and effective integrated logistics

system can improve the competitiveness of national products in the global and regional markets as well as

25

improve the welfare of the community. This can be done by lowering logistics costs and ensuring the

availability of basic and strategic commodities up to the village level.

ASEAN Economic Community (AEC) in 2015 will strengthen the value of exports for countries in the

ASEAN region, including Indonesia. In addition to expanding the market, Indonesian logistics companies

should also strengthen its human resource capabilities with professionals and experienced employees in

the field of logistics. Having 40 percent of economic resources of the region (the Greater ASEAN),

Indonesia must improve the competitive edge of its products and services, improve its human resources,

and prepare its regulations. The government needs to pay attention to infrastructure development in

Indonesia evenly. This is because about 70 percent of its logistics infrastructure is still concentrated in the

big cities in Java. The policy makers must fix the infrastructure inequality for connectivity challenges in

2015.

As a maritime country, Indonesia should develop a more serious archipelagic logistics that provides

greater opportunities for private sectors to participate in the development. Logistics business players in

Indonesia need to work together to create a cluster service that aims to reduce logistics cost with an

economical business scale and to reduce inefficiency. One of the efforts that should be encouraged is to

apply the Pendulum Nusantara programs in order to realize a more competitive logistics cost.

Referring to the low competitiveness it has, it is time for Indonesia to improve its regulation, for example

enacting a regulation that is pro-investment, emphasizing on clean governance, promoting a just and equal

economy, promoting political stability, security and social order, and encouraging technological

innovation. In addition, the key to face the AEC is that each local region should be empowered according

to its comparative advantage. In developing the leading sector of each region, both central and local

governments should focus on the core business that will be developed whether it is in agriculture,

fisheries, tourism, investments, or services.

References

Asworo, H.T. (2013), "Pendulum Nusantara: logistics competitiveness at crossroad", Bisnis Indonesia, 2

May, p. 7.

Banomyong, R. (2010), "Benchmarking economic corridors logistics performance: a GMS border

crossing observation", World Customs Journal, Vol. 4, No. 1, pp. 29-38.

26

Benny, G. and Abdullah, K. (2011), “Indonesian perceptions and attitudes toward the ASEAN

Community”, Journal of Current Southeast Asian Affairs, Vol. 30, No. 1, pp. 39-67.

Bustami, G. (2010), Indonesia Readiness Towards ASEAN Economic Community 2012, Ministry of

Trade Republic of Indonesia, Jakarta.

Christopher, M. (2010), Logistics and Supply Chain Management, 4th Edition, London, Prentice Hall.

Herliana, L. and Parsons, D. (2011), "Logistics in Indonesia", in The Impacts and Benefits of Structural

Reforms in the Transport, Energy and Telecommunications Sectors in APEC Economies, APEC

Policy Support Unit, Singapore, pp. 446-461.

Lino, R.J. (2012), "Indonesia Maritime Infrastructure", World Export Development Forum 2012, 15

October.

Investor Daily (2013), "Adopting Pendulum Nusantara concept: capacity of six ports should be

increased", 15 February, p. 6.

The Jakarta Post (2010), "RI, Japan eye economic corridor development", January 12.

27

Chapter 2

A New Collaborative Approach for Horticultural Supply Chain

Togar M. Simatupang and Yuanita Handayati School of Business and Management

Bandung Institute of Technology Indonesia

Tomy Perdana

Department of Agribusiness Faculty of Agriculture

Universitas Padjadjaran

Abstract

This paper attempts to study whether the lack of value chain are the causes of the inefficient, prodigal,

and underdeveloped agricultural logistics. A diagnosis has been made to identify issues and root causes

of underdeveloped agricultural logistics in Indonesia. Several opportunities have also been identified,

especially a collaborative model of fruit and vegetable export supply chain. This study is of benefit to the

agri-fresh produce industry and those who are interested in developing the collaborative horticultural

supply chain model further.

Keywords: agricultural logistics, Indonesia, vegetable, supply chain management, collaborative model

Introduction

The markets of agricultural products in the world have changed in the last ten years both in terms of

demand and supply (Shukla and Jharkharia, 2013). The demand for agricultural products is increasing,

and it is increasingly diverse, such as food, feed, fertilizer, fiber, fuel, and pharmacy. The increased needs

of agricultural products usually encounter obstacles on the supply side, for example uncertainty,

28

discontinuity, and finite volume. The production of agricultural products is influenced by weather

uncertainty, plant diseases, and pesticides. In addition, because of the seasonal harvest cycle and market

of agricultural products, the quality and quantity of supply do not often meet the consumers’ demand. The

supply constraints are also caused by the reduction of agricultural land for human settlements.

In addition to depending on environmental conditions, the quality and quantity of agricultural products to

consumers also depend on the logistics activities of the products, for example how the products are stored,

processed, and delivered. Logistics is an important part of the activities of the agricultural supply chain

that connects the centers of production and consumption locations (Ahumada and Villalobos, 2009). The

weaknesses in logistics systems are often the sources of risks in the agricultural supply chain that could

affect the availability, delivery time, traceability, and quality of products.

The logistics activities of agricultural products have specific characteristics that are different from the

logistics activities of other products (Chen and Feng, 2007). The characteristics are associated with high

uncertainty and product durability. Agricultural products have the uncertainties in terms of their quantity

and quality. Agricultural products depend on the growth season and the surrounding environment

(weather, crop pests, and others) while the durability of agricultural products is relatively short. The

durability depends on the type of commodity, post-harvest handling, and storage technology that is used.

The special characteristics of logistics activities of agricultural products have made them more complex

and difficult to manage than the logistic activities of product manufacturing. The collaboration of the

parties involved in agricultural logistics activities is required in order to meet the market demand at the

right time and in cost-effective way. The pattern of collaboration for agricultural supply chain also

requires a special approach in which a management should look at downstream and upstream aspects

simultaneously.

This study aims to see why collaboration is required in the application of agricultural logistics activities

and to see to what extent collaboration can benefit from changing a market structure, that is, from an

unstructured to a more structured market, in which the volume, quality, and delivery of agricultural

products can be maintained. Case studies of exporting fresh product supply chain are used to illustrate the

applications of collaboration that emphasizes both on the quality and fairness.

The paper is structured as follows. It starts with the introduction which explains the needs for research in

agricultural logistics, and it is continued with the discussion on the concept of agricultural logistics and

supply chain as a new collaborative model. The presentation of the research approach is to explain the

process of this research. Finally, the findings and conclusion are presented at the end of this paper.

29

Agricultural Logistics and Supply Chain

In general, agriculture is the cultivation of animals, plants, fungi, and other life forms, such as food, fiber,

biofuel, drugs and other products that are used to sustain and enhance human life. One of the branches of

agriculture is horticulture. According to US Department of Agriculture (USDA), horticulture is defined

as the branch of agriculture concerned with intensively cultivated plants that are used by people for food,

for medicinal purposes, and for aesthetic gratification.

Agriculture business is a business which deals with the agricultural products, including the trading of raw

materials used in agro processing industries and the activities of agro-processing industries that transform

products originating from agriculture (Higgins et al., 2010). These agricultural business activities relate to

logistics in order to meet the consumer needs. To be able to make a profit and also meet the consumer

needs, an agricultural business activity requires an effective and efficient logistics.

A council of Logistics Management defines business logistics as planning, implementing and controlling

the efficient and effective flow and storage of raw materials, process goods, finished goods from point of

origin to point of consumption for the purpose of meeting customer demand. As for agricultural logistics,

it is defined as all logistics activities that are mentioned above, and it is related to costumer fulfillment of

agricultural products.

Based on the above definition, a study that relates to the agricultural logistics may include transportation,

warehousing, design and organization of value chains and supply chains that generate buyer values for the

customer and strategic values for the firm(s), a coordination among value adding activities, a flow of

information needed to coordinate most effectively and efficiently, a network modeling to address spatial

and temporal demands, and a global logistics. In addition, the study of supply chain management needs to

be highlighted, because the activity is closely related to logistics and supply chain management (Shukla

and Jharkharia, 2013)

Oliver and Webber (1982) describes supply chain as a coordinated system of organizing people, activities,

information, and resources that are involved in moving a product or service in a physical or virtual

manner from the supplier to the customer. Agriculture supply chain involves parties that deal with the

transfer of agricultural products from agricultural land to the customer. As for value chain, it is regarded

as a value adding activity of an organization. In agriculture, a value adding activity is linked to the

activity of drying, selection, transfer, processing, packaging, and marketing of agricultural products. The

value adding activity will affect the selling price of a product.

30

Based on the relationships among the components of supply chain, the supply chain can be divided into:

1. Vertical supply chain

Vertical supply chain is the term used to describe the consecutive stages in a marketing chain

when they come under one ownership and control (Ahumada and Villalobos, (2009). This vertical

supply chain has several advantages and disadvantages. The advantages of vertical supply chain

are lower transaction costs, synchronization of supply and demand along the chain of products,

lower uncertainty, and having the ability to monopolize the markets in the chain. On the other

hand, the disadvantages of the vertical supply chain are higher monetary and organizational costs

when switching to other suppliers or buyers and unable to monopolize the markets along the

chain.

2. Horizontal supply chain

In horizontal supply chain, an alliance allows its allies to be independent companies. There are

three types of alliance mechanism that can be applied in horizontal supply chain, namely cross-

ownership of shares, cost-plus arrangements, and strategic alliances. The advantages of the

horizontal supply chain, if it is implemented, are that it may create a balance between flexibility

and loss of control, and it can generate benefits through information sharing. However, the

disadvantage of the horizontal supply chain is that it has a tendency to tempt the allies to bolt for

exists.

3. Network supply chain

The network supply chains provide linkages between horizontal networks of suppliers and

vertical supply chains. Several interdependencies can occur when implementing the network

supply chains, such as reciprocal cooperation based on mutual exchange between suppliers;

sequential delivery systems based on planning along the supply chain; and pooled

interdependencies at business level to guarantee standardization and harmonization of processes.

Supply chain management is required to deliver the right products and services to the right place, at the

right time, at the right price, and in the right condition, while at the same time making the greatest

contribution to the firm.

Limitation of local horticulture supply chain

Effective agricultural logistics system has such principles as maintaining the quality of an agricultural

product from the farm to the consumer, delivering and storing an agricultural product in an appropriate

31

manner, while maintaining its quality and quantity, to meet the rules of safe food at an efficient cost level,

and maintaining the quality of an agricultural product started from the selection of seed and the

cultivation. Developing countries often have glaring weaknesses in agricultural logistics system due to

their inability to apply the principles to their agricultural logistics system.

The performance of agricultural logistics system depends on the agricultural logistics infrastructure,

logistics services, logistics actors, and institutional framework. In relation with the West Java, its

performance of agricultural logistics system is not satisfactory. It is caused by the weaknesses in the

above-mentioned sectors. Therefore, these sectors have to be improved. The first weakness of its

agricultural logistic system is in its infrastructure sector. It is indicated by the inadequacy of its

agricultural irrigation systems, where more than 60% of its irrigated rice fields are in damaged condition.

Another weakness is that its irrigation system is designed only for rice fields, not for horticulture,

plantation, and others. Also, most of its rural farm roads are in poor condition. The last is that it lacks in

cold chain system for fresh produce in the areas of horticultural production centers. Its service sector also

has some drawbacks, such as: the unavailability of agricultural logistics services in rural areas, the lack of

services of information system on agricultural products, the urban areas (and not the rural areas) as the

location of agricultural logistics services, and the inconformity between the agricultural logistics services

and the needs of agricultural logistics in rural areas.

Some other weaknesses are also experienced by the actors of logistics services, where they have not

evolved as expected, for example they have limited understanding on the logistics management in

agricultural farm, starting from the production up to the market. For example in the production stage, the

improper handling of agricultural products takes place in the farm, product storage, and product

distribution. This improper handling has caused in a high level of damage (above 25%). The improper

handling of agriculture product also takes place at the retail distribution center, resulting in more than

a10% level of damage. The not well-run agriculture logistics system also occurs at the level of collective

rural producers. The last weakness can be seen from the institutional framework side, in which not only is

there are a specific policy for agricultural logistics system -- as a derivative or operationalization of the

"Blueprint for the National Logistics System" , but also there is no authority that coordinates the

agricultural logistics systems in West Java.

A poor agricultural logistics system directly results in high cost of logistics and in constricting the

production continuity. The indicator of the high cost of logistics in West Java can be seen from the inter-

island transportation and export of horticultural commodities, which accounts for 25%-30% of the sale,

transportation between cities about 10%, and shrinkage of the product during transport about 10%-30%.

32

In addition, the instability of an agricultural product supply will cause a high and fluctuative price of the

agricultural product.

At the operational level, farmers usually try to maximize his personal profits by adjusting their cropping

system to gain a better income. But in reality the cropping system cannot guarantee the income of the

farmers. It is because the predicted sale price of a crop made at the time it is planted may be different with

the sale price of the crop at the time it is harvested. Most sale prices of crops at the time of harvest are

lower than their predicted sale prices. In addition, sale prices of crops are determined unilaterally by

middlemen. In this case, the middlemen are the ones who reap the biggest margin of this system.

Horticultural agribusiness chain has unique trends. The first trend relates to biological production process

and complex biological types that have effects on the durability of a product in various ways. Another

trend is that small, medium, large businesses have a complex network in both their main and supporting

activities. Also, random climate changes that cannot be predicted by any decision of supply chain

components have caused the inconsistent production quality and quantity. The last trend relates to the

environmental protection and sustainable development. They are the determining factors in horticultural

agribusiness chain. Therefore, they deserve to get an attention of agribusiness stakeholders.

The logistics supply chain in global horticulture has different characteristics. Food safety and "traceability

system" have become the determining factors in the international agribusiness trade. The guarantee of

volume consistency, high-quality, punctuality, and right price of a product has become a business driving

force in the supply chain of both domestic and international agribusiness. The uniqueness of a product,

season, and trend of consumers has become the key factor in both domestic and international agribusiness

product. In addition to the above-mentioned factors, the "justice" factor has become an important issue in

developing an efficient, innovative, responsive and sustainable agribusiness supply chain.

Thus, the main issue in a supply chain is that an efficient supply chain requires not only a good

information flow but also a good communication throughout the supply chain. Overall logistic activities

are driven by demand, and not by production. Therefore, cooperation among actors is absolutely

necessary to change the system that depends on the production into the system that is driven by demand.

Without the collaboration among the actors along an agricultural supply chain may lead an actor to

behave for his own short-term profit. Relying on a traditional market with highly fluctuative prices will

make farmers unable to cope with the risk of low selling price that causes the loss. The mediocre profit-

making has given no incentive to the actors to develop a technology. The absence of both seed and

cultivation engineering coupled with the uncertain weather has caused a low production, thus adding

33

losses to the actors. Therefore, cyclical logistics activity of horticulture needs a new approach that is

based on fair collaboration.

A New Collaborative Model

This time the competition that happens in the agricultural business is no longer between companies, but it

is between supply chains. Therefore, in order to maintain business continuity, a coordination or

collaboration between members of a supply chain is required in order to be able to shift from the

unstructured to the structured market.

One thing that has become a focal point in building collaboration among the members of a supply chain

relates to information sharing. Each member of the supply chain is expected to share its information with

other members of the supply chain, due to a great number of needs of consumers, products, and sale

prices. To be able to share information, a mutual trust between members of the supply chain has to be

built. This confidence can be built by recognizing the role of each member of the supply chain and by

nurturing good communication among the members. Figure 1 shows the design elements of agricultural

supply chain development (Perdana and Kusnandar, 2012).

Figure 1 Design of Agriculture Supply Chain Development

34

From the above design, an agriculture supply chain can be divided into several sections. Each section

contains the parties involved and their activities. The sections are as follows:

1. Quality Engineering, which is related to the quality of agricultural products that are produced to meet

consumer needs. The parties that are involved in determining the quality is the supplier of seeds,

fertilizers, and many others; the farmer groups; and the sub-terminal agribusiness. The activities

related to the determination of a quality start from production-base development (production of seed,

fertilizer, etc.), selective harvest, post harvest management (sortation and grading), cold chain system

(pre-cooling and cooling), packing, and storage.

2. Hybrid production system, which is about how to match supply with demand. Based on the available

supply, planning is made on the basis of forecasted number of orders. The number of orders is made

based on the number of orders placed by the suppliers. Between supply and orders, there is a

decoupling point which is used as the safety stock to anticipate the uncertain supply and demand. This

decoupling point can be placed at production area at the exporter’s distribution center.

3. Balanced performance measurement, which is related to performance monitoring in each member of a

supply chain, includes financial monitoring, customer service level, internal business process,

innovation and learning, and value-added. Financial monitoring is related to cash cycle and profit that

is gained by a supply chain as a whole and by each member of a supply chain. Customer service level

is related to customers’ perspectives on an order fulfillment ratio. Internal business processes is

associated with productivity and the number of production outputs that is rejected or cannot be sold

because the quality does not match consumer demand. Innovation and learning is associated with

cooperation and flow of information that occur among members of a supply chain. Distribution of

value-added is associated with the addition of a value created by each member of a supply chain.

4. Institutional innovation, which is related to the relationship among members of a supply chain, such

as farmers and suppliers, could be related to a process either with a transaction or without a

transaction; a relationship between farmers and a farming group that goes without transaction; a

relationship between farmers and agribusiness sub-terminal (STA) members that occurs without a

transaction; a relationship among suppliers, farmers , STA members, and exporters through a strategic

partnership; a relationship between consolidators and partnership assistants; a relationship among

suppliers, farmers, or STA members, consolidators, and partnership assistants; a relationship between

exporters and consolidators through a strategic partnership.

5. Supply chain management consolidator, which is related with its role in a production process as a

mentor for farmers, suppliers, farmers group, and STA members. This mentoring may be about

production techniques that relate to planning, bookkeeping, SOP GAP implementation and

35

demonstration plots (demplot), harvest and post harvest techniques; managerial matters that relate to

bookkeeping and financial management, production cost determination, farmer development, and

organizational development; and bridging between producers and exporter needs.

In order that a supply chain restructurisation can be done smoothly, the contribution of each party

involved is required, for example a party must consistently perform its role, so as to create a more

structured market that can provide benefits and advantages for the other parties.

Research Approach

This research employed a case study approach, where the data were obtained from workshops, interviews

with stakeholders, and field visits. This study refers to one agribusiness actor that has implemented best

practice in production supply chain management and has gained the benefits by implementing this

production supply chain management.

To obtain a preliminary picture of both global and Indonesian scale of agricultural business, a workshop

on agriculture supply chain management was attended. In the workshop, the topics that were discussed

were the background of the importance of the application of supply chain management in the agricultural

business, the existing condition of the supply chain in agriculture, the proposed models of collaboration in

agriculture supply chain, and the barriers and challenges in implementing the supply chain collaboration.

After studying the overview of supply chain management in agriculture, the next step is to conduct

interviews with the relevant parties and to conduct field trips to see the real condition of the agricultural

businesses in the field. Alamanda Sejati Utama was chosen to be the subject of this research. The reasons

are that not only is this company categorized as one of the biggest exporters of agricultural products in

Indonesia, but also it has implemented supply chain management in its agricultural business. The

interviews with the company's s staff members, the company’s business partners, farmers were

conducted. The objectives of the interviews were to discover the information about the company’s profile,

history of applying supply chain management in its business, barriers and obstacles in implementing the

supply chain management, and future plans. Concerning the interviews with the farmers, the objectives

were to discover the obstacles and constraints encountered as well as the advantages gained from the

collaboration undertaken by both the farmers and the company.

36

Both the field trip to the company’s premise and the company’s farm were also done. The objectives of

the trips were to see firsthand the conditions and business processes in the field. The visit to the

company’s premise was to observe the processing of post-harvest products, ranging from product sorting,

washing, packaging, refrigeration storage, and delivery. As for the visit to the company’s farm was to

study the planting scheduling and harvest scheduling applied by the farmers to meet the daily demand of

the company.

Based on the workshops, interviews, and field trips, the constraints and bottlenecks encountered by the

company in implementing the supply chain collaboration can be analyzed. Also, in this study, some

inputs to overcome the obstacles and barriers are suggested so that the future collaboration could work

better, and all members of the supply chain could gain more benefits from the collaboration.

Findings

Horticultural business in Indonesia is growing. Because of the increasing market demand for horticultural

commodities for both domestic consumption and export, horticultural business has to be developed.

Horticultural business in Indonesia is also supported by the potential of its natural and human resources.

Province of West Java is one of the regions in Indonesia which has a lot of good commodities, such as

fruits, vegetables, and various plants. Although these commodities are highly competitive, they are the

advantage of this province.

Based on its geographical location, West Java Province has a strategic location to supply horticultural

crops to its surrounding areas. West Java province in its western part borders with Banten province, in its

northern part borders with the North Sea Java and DKI Jakarta Province, in its eastern part borders with

Central Java province, and in its southern part borders with the Indonesian Ocean.

The challenge for the horticultural industry in Indonesia, especially in West Java province is the

increasing demand for domestic and overseas markets. Therefore, its horticultural industry must pay

attention to several factors that can determine the sustainability of its business. The factors that need

attention are the quality of the products that are produced and the consistency of business people in

providing quality products according to the standards that consumers require. In addition, the number of

available products and the supply continuity has to be ensured in order to maintain the service level to the

customers and to maintain the stable prices. Another important factor is to offer the consumers a

competitive price. The competitive price can be achieved by applying an efficient production. Supply

37

chain management is therefore necessary to ensure that horticulture products can be distributed to the

consumers on time, at the right place, in the right condition, and at a desirable price. .

Supply chain management for horticultural products has specific characteristics that are different from the

others. The characteristics include high uncertainty and durability of agricultural products. Agricultural

products have the uncertainties in terms of their quantity and quality. Harvested crops or agricultural

products depend on their growth season and the surrounding environment, such as the weather, crop pests,

and others. The durability of agricultural product is relatively short. The durability depends on the type of

commodity, post-harvest handling, and storage technologies that are used. The characteristics of

horticultural products have made their supply chain management more complex and harder to maintain

compared with other product supply chain management.

According to its functions, horticulture supply chain management can be divided into three:

1. Supply chain management of export commodity

2. Supply chain management of modern retail commodity

3. Supply chain management of food industry commodity

These three supply chains have several characteristics, among others: collected transactions, transparency

in information flow, and contract-based product sales done by farmers. Collected transactions are

associated with the cooperation among farmers in gathering their crops to meet the quota demand.

Normally, farmers join a group of farmers and farming activities in which the transactions and their profit

sharing is done by consensus in the group. Transparency in the flow of information is needed, not only

among the farmers but also between the farmers and the other members of the supply chain, to ensure

well developed long-term cooperation. The system of horticultural product sales consists of several sub-

systems, namely: bonded system, ordinary system, and contract system.

The sale practice that is commonly found is the bonded system. This system is a system of agricultural

product purchasing s from farmers where agricultural products are bought before they are harvested. The

buyers only estimate the likely total harvest to be obtained and pay the farmers as much as the estimation.

Such system causes loss to the farmers, because the farmers get a lower price than when they sell them at

the harvest time. The buyers will also suffer losses if the crops harvested are not in accordance with the

initial estimation. The second system is the ordinary system where the farmers sell their crops to the

buyers. The farmers who sell all of their crops to the buyers with the price that is in accordance with the

effective price in the market. By applying the system, the farmers will not have a definite profit, because

the price received by the farmers is likely to fluctuate every day. In fact, the farmers may suffer losses due

38

to the price received is too low. The last system is the contract system, where farmers have a contract

before cooperation with a buyer is made. Thus, the farmers sell their products in a certain amount for a

certain period as stated in a contract. This system ensures a profit for the farmers, because the price they

receive is not fluctuative. Among the three supply chain managements, supply chain management for

export commodity has the greatest challenge. For example, because of the far distance between countries,

the product handling, packaging, and storage system are required to provide the best quality products with

a high level of freshness. For more details of supply chain of exports commodity can be seen in Figure 2.

Figure 2. Supply Chain Management of Export Commodity

There are more than 14 companies in the province of West Java, which are engaged in the export of

horticultural product industry. One of them is PT Alamanda Sejati Utama, which is located in

Pangalengan, Bandung, and West Java. This company is the biggest fruit and vegetable exporter in West

Java. The vision of this company is to become a vegetable, fruit, and flower exporter that puts customer

satisfaction as a priority. Its missions are to work with all farmers to promote the Indonesia’s export

activities of horticultural products to the rest of the world. This company focuses its business on

providing the best services while maintaining the quality standards in the selection of materials to be

used, post-harvest handling, and delivery.

Input Supplier

Farmers group

Supplier

STA

Exporter Foreign Buyer Customer Farmers

Product flow Agro-input flow Money flow Information flow

39

The company has implemented supply chain management on its business operations. The company not

only implements supply chain management in its own company, but it also implement it across its entire

supply chain, including farmers. By implementing supply chain management, the company hopes that it

will ensure the consistent quality, quantity, continuity, and price, the cooperation commitment among

supply chain members, and the knowledge transfer to the farmers to apply the standard operating

procedure (SOP) to be GLOBAL GAP certification. This certification requires that the recipients have the

ability to demonstrate good agricultural practices, such as using production techniques that can reduce the

impact of agricultural activities on the environment, can reduce chemical use, can use natural resources

efficiently and ensure the welfare of their farm workers. With this certification, both the consumers and

retailers acquire the safety and quality assurance of agricultural products.

The company has been successfully exporting horticultural products to Asia and the Middle East. The

countries for its export horticultural products are Singapore, Thailand, Brunei Darussalam, Malaysia,

Hongkong, Taiwan, Pakistan, Bangladesh, Abu Dhabi, Jeddah, and Dubai.

The following are the horticultural products that are produced by the company:

under the category of vegetables, it includes baby fine bean, French bean, watercress, red chili,

cabbage, capsicum, petai bean, sweet corn, xiao baicai, honey sweet potato, shallot;

under the category of flowers, it includes ronche jasmine, jasmine with head, jasmine without head;

under the category of fruits, it includes Alphonso mango, mango arumanis, Salacca, pink guava,

rambutan, water melon, mangosteen, rock melon; and

under the category of mushrooms, it includes champignon mushroom and portabello mushroom.

The company realizes that in order to maintain the export quality standards of horticultural products that

suits the consumer needs, there should be cooperation between both the trained and educated suppliers

and farmers. In addition, the company provides the best seeds to the farmers and trains them so that they

can treat and manage the products well. The cooperation covers, among others: the development of

production bases, selective harvesting, post-harvest management, cold chain system, as well as packaging

and storage techniques.

To maintain the quality and freshness of its products, the company employs cold supply chain

management to ensure the standard of quality management for each product, starting from the farm where

the products are harvested to the warehouse and from the warehouse to the port; Cold supply chain is a

supply chain system that deals with temperature control. Cold chain is an uninterrupted series of storage

and distribution activities which do not experience interruptions in maintaining the stability of the

40

temperature as shown in Figure 3. It is used to help extend and ensure the durability of fresh products. In

addition to maintaining the stability of the temperature, under the cold supply chain, ensuring the air

quality level (related with levels of dioxide carbon, oxygen, moisture, and others) is required.

The company has trucks, each of which is equipped with cooling facilities and cold storage which can

hold vegetables and fruits of more than 300 tons/day. Each of the company’s cold storage area has a

different temperature. Vegetables and fruits that are stored in any storage area are in accordance with their

durability. Also, the company maintains its product quality by enforcing a strict quality checking system

at each production stage, such as seed selection, harvesting, separation, and packaging stage.

Harvest Pre-CoolingCold

StorageSale

Figure 3 Supply Chain Management of Cold activities

There are several barriers that are considered severe in the implementation of supply chain management

by the company. The first is the changing culture of the farmers who are used to applying the traditional

techniques without considering the value-added to the crops. Another is the differences in the

characteristics between the Indonesian farmers and the farmers in the developed world. The fact indicates

that the Indonesian farmers have no knowledge as to where the product will be marketed and as to what

the market actually needs. If they know who the product users are and what the expectations of the users

are, they may be able to plan their production process better and can innovate to meet the users’

expectations.

According to the company, implementing supply chain management is considered difficult to do when it

comes to farmers under the age of 40 years. They have difficulty in implementing new ways to add value

to their crops, such as selecting crops harvested in the farm and in applying selective harvest systems to

obtain good quality and increase the selling price of the crop. For an illustration, there was a farmer who

sold sour tasting strawberry crops in the local market. The strawberries had a sour taste, because they

were harvested when they were still in their young age, so their sugar level was low. This was done by the

farmer so that he could sell the products at a longer period of time. Actually, the farmer could have sold

the strawberries with higher sale price if the strawberries had been harvested at their 80% maturity level;

Harvesting Pre-Cooling Freezing Selling

41

their tastes would have been sweeter and their fruit size would have been larger. Changing the culture of

the farmer takes around 5 to 6 months.

Furthermore, there are several challenges faced by the company, which are associated with the

development of logistics system, particularly with small farmers with less strategic location. The

challenges relate to the characteristics of farmers who generally have a small capital, whose production is

below the demand, whose cost and operating system are inefficient, who have low production quality;

who have a considerable distance from the center of collection, market, and ports, who have a minimum

access to information, who have difficult areas to reach because of the terrain and inadequate

transportation, who have high freight transportation costs, and who have little knowledge and information

related to production making decisions.

Inspire of the above-mentioned challenges, the company also has some advantages by working with the

small farmers. One of the advantages is that the company has been successful in developing the

company’s logistics systems. Another is that the company is able to assist the farmers with a small farm

to control their farming operations easily and precisely, to detect problems in the field quickly, and to

give extra care to their farm.

As lessons learned from this case study is that the development of a clustered horticultural agribusiness

area may be able to serve multiple markets, i.e. domestic and export market. To ensure the success of the

above-mentioned development, the following steps should be taken. First is to conduct a mapping on the

variability of horticultural commodities based on their harvest time to determine which commodity type

to be developed that can ensure the supply availability in the local market. Second is to conduct a

mapping on the use of land for horticultural farming in a clustered horticultural agribusiness area,

including optimizing the use of land. Third is to develop farm management system based on GAP (Good

Agriculture Practices) collectively in a clustered horticultural agribusiness area. Fourth is to build the

capacity building of the management of Association of Farmer Groups (gapoktan) in providing its post-

harvest services, starting from the crop harvest time to the distribution stage, to its members. Fifth is to

implement supply chain management and hybrid production system (push-pull production system) in

order that the Association of Farmer Groups is in the position to manage the services of integrated facility

for consolidating the collection and distribution at the level of the clustered horticultural agribusinesses.

Sixth is to use protected agricultural technologies and irrigation systems for the cultivation of seasonal

horticultural that are able to eliminate the effects of climate change. Seventh is to develop food safety and

traceability from farm to consumers. Eighth is to develop a market led agricultural extension. Ninth is to

42

develop a model of integrated facilities for consolidating the collection and distribution at the level of the

clustered horticultural agribusiness area. Tenth is to develop a horticulture farming business that is based

on market contracts. Eleventh is give a value added to the marketing for the horticultural consumers in the

modern market. Twelfth is to engage various stakeholders to collaborate in building a clustered

horticultural agribusiness to serve multiple markets. Banks, in this case, has to be involved to provide a

supply chain financing scheme. The last is to conduct a further study that is aimed at examining the

reliability of other collaborative approaches for horticultural supply chains in other regions and

commodities.

Conclusions

Based on the case study of Alamanda Sejati Utama, which has implemented the collaborative approach

for horticultural supply chain in its business system, it can be concluded that to ensure the quality and

stability of supply of horticultural products, attention should be given not only to the operations

performed by the company but also to the operations performed by the farmers as the main producers of

agricultural products. As for the collaboration between a company and farmers, it could be built through a

sense of mutual trust. This mutual trust can be fostered if each member in the supply chain knows the

benefits that will be acquired. Concerning the scope of negotiations, it can cover not only about pricing

but also about the value that can be created by each member of the supply chain. In addition, the

guaranteed long-term relationship among the members of supply chain collaboration could help the

farmers focus on the production process that conforms to the standards of operational procedure. Also, in

order that a cohesive relation among the members of supply chain collaboration can be created, a sense of

trust should be built on individual basis, and not on organization basis.

In addition to building trust, providing trainings to increase the knowledge of farmers and improving their

welfare need to be attended to. These efforts to increase the farmers’ knowledge can be done, among

others: by increasing their knowledge on the system of planting and harvesting scheduling to ensure the

availability of supply; by training the them to replicate best farming practices that have benefited the

application of supply chain to business systems to enable them restructure their horticultural supply chain

to meet a market demand; and by mentoring them to build their production capacity. The supply chain

consolidator that conduct the mentoring program can also can make some institutional innovations, such

as risk reduction, learning transfer, problem solving, and communication media.

43

References

Ahumada, O. and Villalobos, J.R. (2009), "Application of planning models in the agri-food supply chain:

A review", European Journal of Operational Research, Vol. 196, No. 1, pp. 1-20.

Chen, X. and Feng, J. (2007), “Agricultural supply chain problems of information control”, Journal of

Science and Management, Vol. 11, pp. 38-42.

Higgins, A.J., Miller, C.J., Archer, A.A., Ton, T., Fletcher, C.S. and McAllister, R.R.J. (2010),

"Challenges of Operations Research Practice in Agriculture Supply Chains", Journal of the

Operational Research Society, Vol. 61, No. 6, pp. 964-973.

Oliver, K. and Webber, M. (1982), “Supply Chain Management: logistics catches up with Strategy”, in

Outlook by Booz, Allen and Hamilton.

Perdana, T. and Kusnandar (2012), “The Triple Helix Model for fruits and vegetables supply chain

management development involving small farmers in order to fulfill the global market demand: a

case study in “Value Chain Center (VCC) Universitas Padjadjaran””, Procedia - Social and

Behavioral Sciences, Vol. 52, pp. 80-89.

Shukla, M. and Jharkharia, S. (2013), "Agri-fresh produce supply chain management: a state-of-the-art

literature review", International Journal of Operations & Production Management, Vol. 33, No. 2,

pp. 114-158.

44

Chapter 3

Heavy Equipment Supply Chain in Indonesia

Togar M. Simatupang School of Business and Management

Bandung Institute of Technology Indonesia

ABSTRACT

Heavy equipments hold an important role for completing projects and production functions to deliver

predetermined outcomes. Mobilization and utilization of heavy equipment are complicated tasks.

Heavy equipment supply chain is composed of owners, manufacturers, and users which requires tight

coordination amongst actors. However, very little research has been done on the characteristics of

heavy equipment supply chain. This research is thus conducted to characterize heavy equipment

supply chain in a developing country and to identify barriers and opportunities. A special attention is

given to provide recommendations on how heavy equipment supply chain supports infrastructure

construction. Using the results of an empirical study, the paper provides a better understanding of

heavy equipment supply chain and the development of operational opportunities. It also offers a

somewhat different view of the concept of supply chain management in a developing country that will

be of significant interest to practitioners in the field.

KEY WORDS: Heavy equipment, heavy equipment supply chain, construction, infrastructure, supply

chain analysis, Indonesia

INTRODUCTION

Business opportunities of heavy equipment in Indonesia appear to become the target of heavy

equipment manufacturers to expand their markets. This is of course based on the growing macro-

economic conditions and the rapid growth of development. After more than a decade underinvested in

infrastructure, the government resumes investing in infrastructure to support economic growth. Poor

roads, crumbling bridges, delayed shipping, and inefficient bureaucracies are an expensive burden to

45

the country. Deficiencies in transport systems add unnecessary logistics costs that reduce the

productivity and competitiveness of business and households. Investment in infrastructure becomes

one of the government priorities. As a consequence, the public works in the future certainly require

more heavy equipments.

Resources availability becomes very important to support infrastructure construction for ensuring

effective and efficient deliverables. Infrastructure development generally requires three sources

including materials, manpower, and heavy equipment. Heavy equipment determines the success of the

construction and serves as a focal point to synchronize specifications and materials with the project

sites. The spectrum of construction equipment includes not only simple construction equipment used

by non-skilled workers but also large and heavy equipment which requires special skills. The use of

heavy equipment in infrastructure can be divided into three main categories, namely heavy

construction equipment, heavy road equipment, and heavy transportation equipment.

Heavy equipments are not just needed by infrastructure construction but also by other sectors in

mining, farming, forestry, and industry for the purpose of mobilization of goods and services. In

Indonesia case, limited national supply of heavy equipment manufacturers may jeopardize the

availability of heavy equipment for construction since its share is about 20% of total demand. The

production capacity of the national heavy equipment in 2011 was approximately 7,353 units, while

the national demand for heavy equipment in 2011 is expected to reach 17,360 units (Bank Mandiri,

2012). This means that demand for heavy equipment was largely met through imports. Heavy

equipment shortage situation makes the seizure of heavy equipment from various sectors such as

mining, forestry, plantation and construction.

Increased investment in infrastructure has not been balanced by the availability of heavy equipment.

The balance of the future demand and conditions of heavy construction equipment availability seems

not to be the focus of attention. On the one hand, the government was worried about not getting the

supply of heavy equipment while increasing the value of investment in infrastructure. On the other

hand heavy equipment suppliers have not been able to respond to the demand because it is not

possible to develop the production capacity of heavy equipment in a relatively short time. This

condition may hamper the development of the national construction industry as a whole.

To answer the challenge of meeting the needs of heavy equipment in support of the construction of

infrastructure in the future, there is a need to nurture a synergy among the stakeholders to manage

heavy equipment supply chain better so as to run the infrastructure in Indonesia smoothly. Therefore,

this current research intends to assess heavy equipment supply chain in support of infrastructure

investment. The results are expected to obtain depth information regarding the conditions and issues

46

of heavy equipment supply chain and build understanding among relevant stakeholders to address the

various problems faced.

The remainder of the paper is organized as follows. The next section provides a review of related

studies of heavy equipment supply chain, and the section that follows discusses the research method

of this study. The main findings are presented based on interviews and secondary sources of data.

Finally, the closing section of this paper presents some conclusions and further research.

RELATED STUDIES

Infrastructure investment is a basic necessity to ensure national and regional connectivity that

facilitates the flow of goods, people and services. The smooth flow of goods, people and services can

reduce the high cost economy and create a more competitive and cohesive region. Connectivity will

also enhance balanced growth and reduce development disparities. In spite of the importance of

infrastructure role, the current practice of infrastructure construction heavily focuses on quality, cost,

and delivery with little attention paid to supply chain management (Xue et al., 2008). Infrastructure

construction consisting of different actors from contractors, designers, investors, suppliers, and

transporters requires proper coordination to transform materials with the aid of equipments into

physical facilities to the user according to the required value. Therefore, control of the construction

supply chain must include all parties involved in the supply of resources from the upstream to the

downstream chain of events.

Construction supply chain management offers new approaches to coordinate different actors to

improve delivery time and reduce the costs of facility construction (Sullivan et al., 2010). The way to

procure materials and services determine overall efficiency and effectiveness of the project. Emphasis

on construction supply chain management makes it possible to deal with global sourcing of materials,

labour shortage, and the scarcity of construction materials and equipment. Cranes, bulldozers,

backhoes, excavators, and shovels are among the heavy equipment items used in construction. Multi-

tier construction supply chain management becomes an emerging practice used to gain advantages in

efficiency and effectiveness. The heavy equipment supply chain is the second tier starting from

equipment requirements to specific site characteristics and technical complexity to utilize reliable

heavy equipments in the construction site. Therefore, managing heavy equipment supply chain in

ensuring efficient delivery of the project appears to become a critical point in the construction supply

chain.

The use of heavy equipment provides valuable information about types of projects and procurement

of new heavy equipment. In this study, an attempt has been made to develop a supply chain

47

perspective of heavy equipment for obtaining the main characteristics of heavy equipment

procurement and utilization in supporting infrastructure construction. Heavy equipment is usually up

to the users through a series of procurement processes that may relate with rentals, distributors, and

owned and operated heavy equipment companies. On the one hand, the users or contractors for a

particular project might be different over time. They need reliable supply of heavy equipment to

improve productivity. On the other hand, the providers of heavy equipment are the same companies

that maintain the conditions of heavy equipments. This situation makes the use of heavy equipment in

construction dissimilar to other sectors in mining, plantation, and forestry. Rather than as fixed assets,

heavy equipments in construction are mobilized to different project sites and act as a means of

service.

Heavy equipment supply chain as a main object in construction is relatively new. There is specifically

little attention paid to assess heavy equipment supply chain to support the development of

infrastructure. Sullivan et al. (2010) treat heavy equipment as an input to construction supply chain.

Prasertrungruang and Hadikusumo (2007) investigate practices and problems in heavy equipment

management for highway contractors in Thailand. Specific research attempts to project sales of heavy

construction equipment and market shares of main manufacturers (Gross and Weiss, 1996; Gross, and

Hester, 2000). Other studies are related to technical, ergonomics, and engineering sides of heavy

equipments (Coburn, 2004; Legris and Poulin, 1998; Zadoks, 1997). Few researches have emerged to

study a particular production side of heavy equipment. For example Min (2009) explored Caterpillar's

supplier diversity program and Keene et al. (2006) studied a project of applying a six-sigma method

and a multi-echelon inventory optimization model in reducing and stabilizing order-to-delivery times

at the same company. Similarly, Fredriksson (2006) identifies the use of several coordination

mechanisms which are critical for the operational performance in modular assembly processes.

Most of the articles addressing heavy equipment supply chains are concerned with a single

manufacturer with inbound and outbound linkage and exclude the utilization of heavy equipment at

the user hands. Supply chain management (SCM) is viewed as the management of an interconnected

or interlinked between node businesses involved in the production of heavy equipment. Hertz et al.

(2001) found that the implementation of cost reducing reengineering projects of its distribution chain

resulted in a better business' network of suppliers and distributors. Rao et al. (2000) developed a

rapid-response supply chain that fulfils customer demand. Lonn and Stuart (2003) examined how a

heavy equipment manufacturer using dealer inventory returns policies to improve its dealer service

levels. Paper (1997) evaluated the value of creativity in business process re-engineering of a heavy

equipment distribution process. Holmqvist and Stefansson (2006) explored an innovative RFID

solution together with collaboration among supply chain actors in the heavy equipment distribution.

48

Meanwhile, the supplier relationship was studied by Versendaal and Brinkkemper (2003) to identify

benefits and success factors of procurement process by using buyer-owned electronic trading

exchanges. Still in the focus of supplier relationship, Lambrechts et al. (2010) found the HRM forum

of the suppliers teams contribute to collaborative learning.

RESEARCH METHOD

The issue of supply chain coordination among the actors related to heavy equipment supply chain is

explored in this research. Most notably, the analysis would seek the huge issue of integrating demand

and supply, the need to synchronize the supply chain with the demand chain, and the opportunity for

multi-lateral collaboration amongst actors through a shared information network. The main approach

used is supply chain analysis that assess about inputs and outputs between actors and value added

along a supply chain through agent accounts. The links between inputs and outputs can be expressed

in physical flows of material and services needed to manufacture, distribute, and utilize heavy

equipment.

The meaning of the supply chain starts from procurement through production, distribution, sales and

finally to the user. Heavy equipment supply chain is not isolated but form a certain flow of a chain of

logistics activities. The supply chain is subject to supply chain constraints, regulation, and business

practice. The members of a supply chain are linked through not only the transfer of product from

production, distribution, and users, but also associations, supporting business, training and education

institutions, standard agencies, and government agencies. The supply chain is a one-way process.

Each link in the chain is not split each other but linked through business transactions accompanied by

the flow of heavy equipments (micro logistics). Micro-logistics issues to be discussed include the flow

of the activities of manufacturers, distributors, owners, and main transport companies for production,

transfer, storage, and services for users.

Building a supply chain analysis requires to gather data to draw a flowchart showing flows of material

in physical and informational form through heavy equipment supply chain. The process of supply

chain mapping is important to obtain an overview of the chain, the equipment flows, the position of

the actors, and type of interaction between the actors. Data sought from informants is also directed to

identify obstacles in procurement, mobilization, and utilization of heavy equipment.

Research method employed in this study is descriptive in nature. There are three main questions,

namely to what extend the map of heavy equipment supply chain in Indonesia, what problems are

faced by supply chain heavy equipment, and to what extent the government provides support to heavy

equipment supply chain. The objectives of analysis are two fold. First, the achievement of the

49

fulfilment of heavy construction equipment is reflected in the availability of sufficient and good

quality of heavy equipment. Second, the identification of several initiatives is obtained to encourage

different actors along the supply chain in helping the government in infrastructure development.

The original contribution of this research is developing effective and streamlined supply chain system

to avoid a crisis of heavy equipment in the future. The benefit of this research for research community

is the contribution in the area of construction supply chain. For business and government, this

research contributes as a reference of knowledge in defining strategy and program in heavy

construction equipment in supporting infrastructure.

There are several steps conducted in this research starting from supply chain mapping of heavy

equipment, identification of supply chain issues, SWOT analysis, and identification of strategic

initiatives of heavy equipment fulfilments. The variables used in the research include heavy

equipment definition, life cycle of heavy equipment, equipment catalogue, indicator of availability,

demand indicator, matching demand with supply, problems faced by actors, and trading terms of

heavy equipments.

Data sources were stemmed from secondary and primary data. Secondary data from research reports

and the internet such as heavy equipment (www.alatberat.org), HINABI (www.hinabi.org),

information on heavy equipment (alatberat.info), Portal of Equipment (www.alatberat.web.id),

Looking for Heavy Equipment (www.carialatberat.com), Tender Indonesia (www.tender-

indonesia.com), Indonesia Finance Today (en.indonesiafinancetoday.com), Center for Equipment

(pusat-alatberat.indonetwork.co.id), Credit information Centre (kredit-ku.com), Rental of Equipment

Indonesia (www.rentalalatberat.net), and training centre for investment resources

(investasikonstruksi.net).

Primary data were collected through interviews with the actors to focus on the problems faced by

heavy equipment supply chain. The list of questions regarding heavy equipment supply chain in

support of infrastructure construction includes identification of stakeholders and their concerns,

current issues, and trading terms amongst actors. The strength of heavy equipment supply chain is

about advantages of the service of heavy equipment and why. About drawback consists of what is bad

in practice, what needs to be fixed, and that needs to be prevented. About the opportunities are related

to the good opportunities facing in heavy equipment supply chain, national issues, government

regulation, local developments, and some interesting trends happening in heavy equipment supply

chain. About threats are regarding obstacles in this area, national issues, government regulation, and

local developments. Questionnaires and interviews were conducted with associations, manufacturers,

users (e.g., Hutama Karya), agents, owners, Ministry of Agriculture, Ministry of Public Works,

customs, and experts. Data from interview were categorized to identify common theme. The results

50

were verified in three focused group discussions attended by representatives from related associations

and experts.

FINDINGS

Heavy equipment is often defined as equipment and/or machinery used as a production tool to

complete the work or produce something. The types of heavy equipment include lifting equipment,

material handling equipment, transfer equipment, power tools, all of which are not operated on the

road. In international terminology, heavy equipment is always categorized into machinery or

equipment, not classified into vehicle. Heavy equipment operators are listed in the Standard

Classification of Occupation Indonesia. They consist of 833 farm machinery operators and other

moving machinery. The current product catalogue refers to producers of heavy equipment, such as:

Caterpillar, Komatsu, Kato, Hitachi, Hyundai, and Volvo and Kobelco. They are dominant producers

for heavy equipment.

Heavy equipment and construction tools are generally grouped according to their usage per sector.

They are then grouped into other categories that are based on their type and function. They can further

be subdivided according to their size and weight. The examples of categories according to usage per

sector are agriculture machinery, construction equipment, mining equipment, forestry equipment,

general purpose equipment. Other categories are according to their function. For example, heavy

equipment for road construction includes bulldozers, excavators, compactors, motor graders, and

asphalt paving; equipment for building includes pile hammer, bore piling, tower cranes, generators,

and passenger elevator; equipment for bridge construction includes launching beam and concrete

paving; equipment for transporting materials includes dump trucks, mixer trucks, tanker trucks, and

crane trucks; equipment for special purposes includes rock breaker, water pump, and drilling

equipment. There are also categories according to the size and weight of tools, for example heavy

duty equipment, medium duty equipment, and light duty equipment.

Heavy equipment is a capital good to support production activities in mining, agriculture, forestry,

construction, infrastructure, and so on. An example of heavy equipment is the production machinery

that is used in a manufacturing industry. Table 1 shows the main characteristics of heavy equipment

supply chain. The availability of heavy equipment is insufficient for supporting different market

segments. The nature of heavy equipment is inter-changeable for different sectors. For example,

excavator and bulldozer can be used in both mining and construction sectors. The situation of

equipment supply chain was characterized by domestic heavy equipment for industry that was only

able to meet 45 percent of national demand or 20,000 units in 2011 (PAABI). On the other hand,

51

pusbinsdi.net data showed good condition in terms of the number of heavy equipment, which are

around 83,653 units or 87.3% of the total national equipment availability that was listed in Jakarta.

Table 1. Characteristics of heavy equipment supply chain

Characteristics Current condition

Commodity type Capital Good

Availability Shortage

Actors Users, owners, services (financing, rental, auction, repair, maintenance, recondition), distributors, producers, importers, vendors

Dominant Actor Producers and distributors

Market Segmentation Mining (55%), Agro (15%), Forestry (10%), Construction (20%)

Trading Terms • Price and sales according to market dynamics. • Permits: producers, vendors, agents, services,

recondition, financing, and importer • No regulation: registration • Affirmative action: none

The availability of heavy equipment in Indonesia has grown from year to year. This is caused by the

increasing trends of additional heavy equipment annually that makes the accumulation of heavy

equipment availability in the country increases. According to APPAKSI, the accumulation of heavy

equipment availability in 2012 was as many as 38.315. In relation with the current availability of

heavy equipment, mining sector is the sector with the largest operation of heavy equipment, with the

amount of 20.69%; followed by plantation, with the amount of 9.18%; the construction sector, with

the amount of 5.36%; and the agricultural sector, with the amount of 3.065%.

The number of heavy equipment cannot be accurately identified because there is no rule of equipment

registration. The strength of local owners is their ability in determining the economical tariff and in

controlling targets to attain definite results. Other problems of heavy equipment in Indonesia are its

procurement procedure; its terms, which vary from one tender to another tender; its demand is not

fixed or temporal, small in volume, and highly varied; its information investment plans are segmented

by location; its treatment from autonomous regions, for example there is one region that treats the

procurement of heavy equipment with minimum purchase cost, not on lifecycle of heavy equipment.

Stakeholders of heavy equipment supply chain

The term of a supply chain is used to refer to the overall group of actors or persons, such as a

producer, a distributor, a user, as well as a legal entity. Heavy equipment supply chain encompasses

the sequence of operations which starts from heavy equipment suppliers, producers, distributors to

purchasers and users of heavy equipment at the level of the service. Stakeholders in a heavy

equipment supply chain consist of upstream and downstream actors. The processes occurring in the

52

chain of heavy equipment between actors is shown in Figure 1. The map is based on the identification

of all of the major links in the heavy equipment chain. It distinguishes which are located domestically

and externally, including business services participating in the chain to flow heavy equipment to be

available for use.

Infrastructure

ConstructionComponent

Supplier

Domestic

Producer

DOWNSTREAM

Owner

UPSTREAM

Sole

AgentNon-

Infrastructure

Construction

Part Trader,

Maintenance

Supplier Distributor Owner Services UsersProducer

Rentals

Recondition

Auction and

Leasing

Contractors

ImporterImported

Component

Second Hand

Importer

Mining,

Forestry,

Agro, etc.

Figure 1. Map of heavy equipment supply chain

The upstream side of the supply chain produces and sells heavy equipment to downstream actors. The

upstream members include suppliers, manufacturers, and distributors. The flow of upstream supply

chain is started from part and component suppliers. The production element of supply chain begins

when a manufacturing innovates to create a heavy equipment product.

Manufacturers act as producers of heavy equipment that is made of raw materials and other

components supplied by the suppliers. Most of producers are located overseas. The producers directly

send the products to local dealers where buyers are able to purchase them. In the case of no existence

of local producers, the dealers import heavy equipment from the overseas producers. Most producers

guarantee the availability of heavy equipment to be sold. With this system, importers and distributors

are more secure to have stock.

The heavy equipment industry in Indonesia is highly competitive and concentrated. Indonesia has four

main producers of heavy equipment accounting for around 96% of total production volume with

products including excavators, bulldozers, motor graders, and dump trucks. The four top market

shares are PT Komatsu Indonesia producing heavy equipment with the brand of Komatsu (43%), PT

53

Hitachi Construction Machinery (HCMI) with the brand of Hitachi (21%), PT Caterpillar Indonesia

(previously PT Natra Raya) with the brand of Caterpillar (19%), and Kobelco with 13% market share

(Popp, 2013). There is another producer PT United Tractors Pandu Engineering which produces

forklifts with the brand of Patria. Komatsu's production capacity is 3,600 units a year of heavy

equipment including 240 units of dump trucks. PT Caterpillar Indonesia is 80% owned by Caterpillar

from the United States and the rest is owned by PT Marga Tiara Trakindo. The sole agent of

Caterpillar in Indonesia is PT Trakindo Nusantara. HCMI produces excavators, the types of heavy

equipment with the largest market in the country.

There are two associations related to the upstream side of heavy equipment supply chain, namely:

Heavy Equipment Manufacturer Association of Indonesia (HINABI) and the Indonesian Association

of Heavy Equipment Companies (PAABI). HINABI is an association of Heavy Equipment

manufacturers of Indonesia. It was established in 1983, along with the initiation of local production in

Indonesia. HINABI consist of various industries in the field of heavy equipment manufacturing, such

as: for construction, mining, road construction, handling equipment and components as well as

attachment for manufacturers.

The missions of HINABI are to develop the national heavy equipment industry supported by reliable

local industries and reliable human resources. The main objectives of HINABI are to facilitate

communication and exchange information among members with regard to any kind of common issue

for the benefit of each member and to become a strategic partner to government and other related

institutions or organizations in setting up a favourable business and industrial environment for the

development of heavy equipment industry in Indonesia.

The Indonesian Association of Heavy Equipment Companies (PAABI) is one of sole agent

associations of heavy equipment which is subordinate to the Ministry of Commerce. PAABI has

twenty-three members, all of which are brand-holding sole agents. Ten members with the highest

sales are PT Trakindo (Catterpilar), PT United Tractor (Komatsu), PT Hexindo Perkasa (Hitachi), PT

Daya Kobelco (Kobelco), PT Traktor Nusantara (Sumitomo), PT Intraco Penta (Volvo), PT Tantindo

Sumitomo (Sumitomo), PT Gaya Makmur (XMG/ Santui), PT Oscar Mas (Hyundai), and PT

Kobexindo (Daewoo). The types of machine that are the most widely marketed are excavator, dozer,

wheel dozer, back hoe loader, compactor, articulated dump truck, asphalt finisher, motor grader,

crane, and forklift.

The downstream members are owners, services, and users that directly own, use, and maintain heavy

equipments. Owners are entities that buy equipment. Users are individuals, contractors, miners,

government agencies, and planters that use equipment. Owners and users might be the same entity in

a particular sector such as mining and agriculture that uses the equipment until its lifecycle ends. In

54

the construction sector, the contractors often rent when there is a need to deploy heavy equipment for

specific products. The construction sector requires a large variety of heavy equipment types but with

small volume of work.

The other actors in the downstream side are reconditioning companies and re-manufacturers that

import and modify second-hand equipment from overseas. The needs of used heavy equipment that

have been reconditioned are continuously increasing, particularly for the project under Rp.10 billion.

Reconditioned heavy equipment sales in 2012 were estimated at 5,000 units. The estimated demand

for reconditioned heavy equipment will grow by 10% over the implementation of various

infrastructure projects in the local regions as well as upon the improvement of the performance of the

plantation and mining sector.

One of the dominant associations in the downstream side of the supply chain is the Association

Management Company Heavy Equipment / Construction Equipment Indonesia (APPAKSI) or the

Association of Indonesian Construction Equipment Hire and Rent. APPAKSI was founded in 1987,

which was originally a partner of Public Works Department (PU) in Indonesia’s development

program, especially in the provision of heavy equipment and construction tools. APPAKSI members

generally lease heavy equipment or construction equipment to projects on an hourly, a daily, or a

periodically basis although some also lease equipment on a long-term contract basis. The projects

undertaken vary, such as projects in the field of construction, infrastructure, forestry, agriculture, and

mining.

Heavy equipment financing is one of the services that support the purchase of heavy equipment.

Seeing the increasing of heavy equipment market, financing heavy equipment business is still quite

large. Currently, the business opportunities that are potential and still promising are the heavy

equipment sales in coal mining and plantation sectors. Thus, business people are optimistic that heavy

equipment industry will continue to grow. Low and stable interest rates have encouraged the growth

of leasing businesses (heavy equipment leasing). Approximately 90% of the sales of heavy equipment

are made through multi-finance services. Although the size is still about one-third of the total multi-

financing, the growth of multi-finance services is relatively high, or higher than that of consumptive

financing business, which is mostly automotive financing. In 2011, the leasing financing business

grew 40%, much higher than consumptive financing, which grew by 27%. Currently, the interest rate

in leasing business is in the range between 14% and 15%. In the future, the trend of interest rate in

leasing business is estimated to remain stable due to the low interest rate policy that will still be

applied through the year 2013.

The entry of domestic and foreign investors in the era of free markets results in positive impact for the

heavy equipment financing business. Interesting issue is the financing/leasing of heavy equipment,

55

which so far has been handled by the leasing companies owned by several large companies. There has

been no leasing company that finances the leasing of heavy equipment with no attention to the brand

of heavy equipment. Some heavy equipment financing companies that are affiliated with major

companies are, among others: PT Chandra Sakti Utama Leasing, which is one subsidiaries of the Grup

Trakindo Utama, which finances the purchase of heavy equipment with Caterpillar trademark, and

other heavy equipment are sold by Grup Trakindo Utama; PT Komatsu Astra finance, as corporate

finance/leasing heavy equipment jointly control the entity (50:50) between Astra and PT Komatsu

Indonesia, with a focus on the business of financing Komatsu heavy equipment for customers in the

mining industry; and PT Arthaasia Finance as corporate finance/leasing of heavy equipment, which is

under Hitachi Capital Corporation.

Demand of heavy equipment

The characteristics of heavy equipment for production have made the equipment depend on the

development of other sectors, including the regulatory. The sales of Komatsu branded heavy

equipment mostly come from the mining sector, reaching 62% of the total sales. In general, when the

economy is growing, the sector such as industry, construction, and plantation will also grow, which

then will create a new growth in heavy equipment needs. Demand for heavy equipment could rise if

commodity prices, particularly from the mining sector, are projected to improve. If there is a

contraction, then the demand for heavy equipment will decrease. However, in general, demand for

heavy equipment experiences fluctuative trends of growth. One thing that makes the trends are

increasing is the growing needs of energy such as oil palm, oil, and gas in the country. For example,

the steadily annual sale growth of more than 40 percent has been booked over the past five years by

PT Intraco Penta, the main distributor of Volvo heavy equipment. This example shows the dynamic of

the Indonesian market.

Demand for heavy equipment in Indonesia is predicted to continuously increase if the growth of the

construction, forestry, agriculture and mining sector increases. The main buyers of heavy equipment

are the mining sector accounting for 55%, the agro industry for 15%, the forestry sector for 10%, and

the construction sector for 20% of the total sales. The demand of heavy equipment and capacity of

production over the period of 2008-2015 is shown in Figure 2. According to HINABI, domestic data,

regarding the production of heavy equipment and the level of sales, indicate that the previous sales of

heavy equipment in 2012 is projected to increase by 10% to 15% to reach 17,000 units, much higher

than the projected figure in the range of 15,000 units in 2011. While the capacity of national heavy

equipment industry only reached 9,500 units, the gap shows the number of 15,658 units. This means

nearly 62% of the national heavy equipment demand is met by imported production. This is

reinforced by the high level of competition in the global market that is caused not only by heavy

excess capacity in developed countries (global excess capacity) but also by weak demand (especially

56

Europe and China). It is expected that more imported equipments that will enter the Indonesian

market when the imposition of tariffs is at zero level.

Figure 2. Demand versus capacity and production trends of construction and mining heavy equipment

However, demand in 2012 experienced a decline. PT United Tractors Tbk (UNTR) feels there is

sluggish in the heavy equipment business. During 2012, the supplier of Komatsu heavy equipment

only sold 6,202 units of heavy equipment. In fact in 2011, a subsidiary of PT Astra International Tbk

is able to sell as many as 8,467 units of heavy equipment. In fact, when turned into years, demand for

heavy equipment from UNTR has not improved. The number of sales during January 2013 was only

409 units. However, in the same month in 2012, UNTR was able to sell 617 units. Indeed, UNTR

sales recorded in January 2013 was the highest since October 2012. The rising sales of heavy

equipment in January are because there were consumers who plan to purchase a new product at the

end of last year. During the period from October 2012 to December 2012, they were only able to sell

747 units or an average of 249 units per month.

There are at least three factors that caused heavy equipment sales drop significantly in 2012. First was

that commodity prices weakened and was not as bright as the previous period. Consumers were more

careful with weakening commodity prices that occurred. This made customers reduce ordering heavy

equipment. Then the policy of restrictions on exports of minerals that make many miners could not

sell products directly to overseas. Slow contribution in the field of mining equipment sales began,

dropping to 15%. In addition, the competition in the heavy equipment industry was also higher. There

57

were more players or distributors of heavy equipment that were able to offer competitive prices,

especially in small machine type with the size of 20 tons.

Seeing the business prospects, players have prepared strategies to take advantage of every opportunity

for expansion such as by expanding their types of products, opening new branches, launching

innovation and improving after sales services. A number of world class heavy equipment producers

began to see the potential market in Indonesia. According to the Indonesian Association of Heavy

Equipment Companies (PAABI), imported products have a 45% share of heavy equipment market in

the country. Locally assembled products still have the majority share of 55%. The association

predicted that next year’s imported products will likely increase its market share to 50%. An official

of the Directorate General of Transport and Telecommunications and Informatics equipment said

there are a number of world’s large heavy equipment companies that have built their factories in

Indonesia, such as: Sumitomo Group of Japan, Doosan Group of South Korea, and Sany Group of

China). There are also other Japanese investors that plan to relocate their heavy equipment factories

from abroad to Indonesia.

The growing market of heavy equipment has been utilized by business players in the heavy equipment

industry, such as: PT Kobexindo Tractors, PT United Tractor Indonesia, and PT Trakindo Utama, PT

Hexindo Adiperkasa, and distributors of heavy equipment. Currently, the biggest consumer of heavy

equipment in the country is the mining sector, especially coal mining companies. The business players

also see potential market in the sector construction and other agricultural industries, which are

predicted to expand in the coming years.

In the near future, the potential demand of heavy equipment stems from the construction sector.

According to Danang Parikesit, special assistant to the minister, Indonesian’s demand for heavy

equipment for mining, plantation and construction, will increase from about 42,000 units in 2012 to

50,500 in 2013 (The Jakarta Post, 2013). The value of construction contracts in the country is

projected to increase to $40.3 billion in 2013. International suppliers remain upbeat about the future of

the market, especially as demand from the construction sector has started heating up after the launch

of the acceleration and expansion of Indonesian economic development (MP3EI) last year, which

needs more than US$460 billion investment in infrastructure alone within the next 10 years. The

master plan has been complemented with President Regulation Number 26 Year 2012 about Blue

Print of National Logistics System (Sislognas).

Supply of heavy equipment

There are various types of heavy equipment produced in Indonesia. The first category is related to

construction and mining equipment, such as: hydraulic excavator, dumb truck (off high way), and

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bulldozer. Second, equipments for road construction are vibrating roller compactor, and static

pneumatic tire roller. Others include special equipment (towing tractor), engineering product (special

attachment, mining, and oil applications), component (fabrication component, casting component,

forging component), and remanufacturing components of heavy equipment. Komatsu has the largest

types of products, such as: excavators, bulldozers, motor graders and dump trucks. The type of

bulldozer mainly weighs 20 tons although the factory could produce a 45-tons excavator and a 28-tons

bulldozer. A new product of a 20 ton excavator, PC 200, was offered wit a price of US$ 111,000 or

around IDR 1 billion. The excavators have been equipped with KOMTRAX (Komatsu Machine

Tracking System), which has website, which could be monitored at any time and any place. Natra

Raya, the brand holder of Caterpillar, produces excavators, bulldozers and motor graders. The

Caterpillar’s excavator of 320C type is the competitor of Komatsu’s 20 ton excavator of PC-200 type

in the market.

Due to the sensitivity in demand condition of other sectors, production volume of heavy equipment

has a high fluctuation from time to time. HINABI monitored the total production of four main

construction and mining equipment, namely: hydraulic excavator, motor grader, wheel loader,

bulldozer, and dump truck as shown in Figure 3. Among the types of heavy equipment assembled in

the country are excavators, bulldozers, motor graders, dump trucks, and forklifts. Excavators

dominate the country's production of heavy equipment. In the first half of 2010, the production of

excavators totalled 1,324 units or 53% of the country's total production of heavy equipment.

Bulldozer production was 23% of the country's total production of heavy equipment or 2,495 units.

Figure 3. Construction and mining equipment production

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148

246

282

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864

1222

1680

114

1430

1853

1506

17116

112

126

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11

0

1000

2000

3000

4000

5000

6000

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2004 2005 2006 2007 2008 2009 2010 2011 2012 (3Q)

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Hydraulic Excavator Motor Grader Wheel Loader Bulldozer Dump Truck

59

For the period 2004 - 2008, production volume of heavy equipment was steadily increased. However,

heavy equipment industry was badly hurt by the global financial crisis resulting in a sharp fall in the

country's production of heavy equipment to 1,814 units in 2009 from 5,914 units in 2008. The main

producers of heavy equipment in Indonesia, such as: Komatsu, Caterpillar, and Hitachi suffered a

setback. Many orders were cancelled since the projects, mainly construction and property, that needed

the equipment were also cancelled. The main problem was difficulty in securing funds from lenders

which tended to be more cautious and selective.

The condition, however, changed for the better in entering 2010. In the first half of 2010, the country's

production of heavy equipment reached 2,495 units exceeding the production of 1,814 units

throughout 2009. The demand for heavy equipment surged again to become 4,691 in 2010. Indonesia

was among the few countries recording a positive growth in 2009 with a sustainable growth that was

driven mainly by the consumption sector of the domestic market. In addition, the demand for coal

rose again, especially from China and India, which recorded high economic growth amid the global

depression. The price of crude palm oil also rose, causing the expansion of oil palm plantations that

will need heavy equipment.

HINABI noted that production of heavy equipment in 2012 reached 7.947 units. This volume

increased by 8.6% compared to 2011, whose volume was 7.350 units. However, the production target

of 10,000 units was not materialized in 2012. Most of the sale contribution came from the mining

sector. Manufacturers of heavy equipment sales declined due to the weakening of coal prices. Many

corporate clients terminated the contract on fleet tractor equipment production because the mining

companies cut their production. For example, the sales of heavy equipment of United Tractors in

October 2012 fell as many as 19.6% to 5,704 units compared to the same period in 2011, whose sales

were as many as 7,097 units. Heavy equipment sale contribution of the mining sector reached 55% of

the total sales by the end of October 2012. This figure is down from the same period the previous

year, in which the heavy equipment of the sector contributed 68% of total sales. The increase in heavy

equipment sales contributed only to two sectors, namely: construction and agricultural sectors. The

contribution of the agricultural sector rose from 8% to 24% by the end of October 2012, while the

construction sector rose from 5% to 15%. On the other hand, the contribution of heavy equipment in

the forestry sector remained at 6% of the total sales.

The basic materials for heavy equipment imported by the country include centre brackets, monitor

panels, engines and hydraulic parts. The heavy equipment components, such as: cutting plates, tires,

batteries, and under carriage parts have been produced domestically. The products of heavy

equipment industry in the country had a local content ratio of 30%-50% in 2009. In 2010, the local

content ratio is to be increased to 50%-60%. In 2011, excavators had a local content of 50%, dump

trucks 30%, bulldozer 45%, motor graders 40%, and forklift 40%.

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Ministry of Industry plays a key role to support the upstream supply chain of heavy equipment. Heavy

Equipment Industry Development Policy and the components associated with the development policy

of the national heavy equipment industry, firstly, have to improve the industrial components and sub-

components of heavy equipment in the country, to increase the local content, to improve workforce

skills and competencies, and to develop local raw materials to meet the required specifications. The

second policy relates to the nationwide program of heavy equipment industry to facilitate the

provision of incentives, such as government borne import duties (BMDTP) for the import of raw

materials in order to improve competitiveness, cooperation in the field of technology among

academics, R & D Centers and technical assistance from abroad for the heavy equipment and

component sector, and running training in the field of welding and fabrication to industrial

components and sub-components. The next policy relates to the program of coaching sub contractors

(particularly the SMEs), periodically conducting meetings between the subcontractors and Hinabi

members, conducting an exhibition of components that will be localized, conducting various meetings

with small and medium industries while acting as a facilitator between the sub-contractors of raw

materials, being active in conducting meetings between suppliers and banks, and being a facilitator

between the sub-contractors and banks.

ANALYSIS

One of the highlights is the issue of supply chain readiness of Indonesia to support its infrastructure

development. As we know it, Indonesia has lagged far behind in the infrastructure since the economic

crisis of 1998. Indonesian infrastructure spending perched in the range of 3-4%, whereas to maintain

6% economic growth, the infrastructure investment required minimum of 5% of gross domestic

product. Lately, attention to infrastructure sector has improved. Three ministries are responsible to get

a better budget allocation for the infrastructure. They are Ministry of Public Works, Ministry of

Transportation, and Ministry of State Owned Enterprises. As an example, in 2013 the budget

allocation for infrastructure development of Ministry of Public Works is about IDR 79.55 trillion or

increased 21.43% compared to IDR 62.5 trillion in the previous year of 2012.

Focused group discussions and interviews were conducted to get the issues related to the readiness of

the supply chain for heavy equipment in the construction of infrastructure. The issues collected were

then analyzed to know the level of interest and their priorities. After that in the FGD, TOWS were

analyzed, including the determination of the strategy for preparing the supply chain of heavy

equipment to support the infrastructure construction sector.

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Table 2 describes the diagram of Strength, Weaknesses, Opportunities, and Threats Analysis. This

diagram explains how Strength, Weaknesses, Opportunities, and Threats analysis can be applied to

key planning areas in heavy equipment supply chain. The objective of heavy equipment supply chain

in the construction of infrastructure is expected to increase construction productivity, efficiency,

safety, and reduce negative impacts on the environment (eco-operations). The main concerns of heavy

equipment supply chain are about the concept of utility through mobility and rejuvenation (new

equipment investments).

Table 2. TOWS Analysis

Components of TOWS Analysis

Opportunities (+) O1: Increase in infrastructure investment O2: Government reformation on infrastructure regulation

Treats (-) T1: Insufficient heavy equipment T2: Short term demand T3: Burdensome import procedure of special equipment

Strengths (+) S1: Owners with local knowledge S2: Associations of actors

S1O1: Develop network amongst actors (S1)

S1T1: Provide incentive for dedicated construction equipment (S6) S2T3: Develop import procedure of special equipment (S7)

Weaknesses (-) W1: Limited financing scheme W2: Limited demand and equipment availability information W3: No standards in quality, catalogue, and technology W4: Lack of competent operators and mechanics

W1O1: Develop effective financing scheme (S2) W2O2: Develop monitoring system of equipment state (S3) W3O2: Specify standards of equipment (S4) W4O2: Develop cooperation with education and certification institutions (S5)

W1T2: Promote multiyear projects (S8) W2T2: Develop monitoring of incoming and ongoing projects (S9) W2T1: Develop cooperation with suppliers of energy, parts, and tires (S10)

By using TOWS analysis of internal factors, there are several strengths in the heavy equipment

industry. The first is that in general the machinery owners are specialized in the construction field

(S1) in addition to the supply chain actors that have heavy equipment associations (S2). The tool

owners have a good knowledge of the work area in Indonesia. They can do better tool mobilization

and planning with more efficient ways of working in accordance with field conditions. Other strengths

are the presence of the association of heavy equipment owners in fighting the availability of heavy

equipment that is economical and safe.

Meanwhile, there are still some weaknesses, namely: financing pattern (W1) and information about

the availability of heavy equipment is still limited (W2); standards of technology, safety,

environmental and catalogue still do not exist (W3), and lack of competence and composition

operators and mechanics (W4). The problems of financing/leasing heavy equipment, so far are

handled by the leasing company owned by several large companies, so the financing / leasing is only

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done on a few specific heavy equipment, with a tendency to prioritize heavy equipment with the

trademarks belong to the large company themselves. The decline in sales in the mining and plantation

sectors is mainly caused by the difficulties in securing loan funds from banks, which have become

more cautious in providing loans. Lenders are more cautious after the huge traumatic experience of

non performing loans following the 1998 monetary crisis.

The other drawback is the difficulty to detect the information request on the use of heavy equipment

in the construction sector. Certainty on usage needs cannot be planned in the long term because it

depends on the time of tender. Meanwhile, the buyers of new tools in the construction sector are likely

to wait for a new stable state than make a purchase commitment. The absence of standards is also a

weakness in the heavy equipment supply chain. The life span of a machine is usually five years,

during which the machine may be used for other purposes, such as agriculture and plantations (agro)

before it is used for construction purpose. For example, there is no standard in the use of second hand

heavy equipment as far as the technical, safety, or gas emissions are concerned. The weakness in

standardization also includes the lack of understanding on green infrastructure requirements. Europe’

and China's economic slowdown has resulted in the rush of promotions and offers on heavy

equipment from abroad. This raises the potential harm to consumers when there is no after-sale

guarantee, and there is a circulation of substandard products. The last downside is the lack of

operators who have competence in the operation and the scarcity of certified mechanics for the

maintenance of heavy equipment.

From the external factors, there are several opportunities that have increased investment growth (O1)

and the emerging regulations that facilitate the planning, implementation and financing construction

projects (O2). But there are also threats such as: lack of heavy equipment to infrastructure

construction activities (T1); demand for construction is not fixed, short-term, and the criteria of tender

are not transparent (T2); multiple taxation (T3); and the troublesome of specific import procedures of

heavy equipment (T4). The first threat will hinder construction work when the machine is not

available. The amount of heavy equipment can be sufficient, but at a peak period such as the last

quarter of the year at the end of the project, they often have to wait for the heavy equipment that is

being used in another project. In addition, the construction sector only uses 20% of national heavy

equipment, and the types of the heavy equipment are highly variable. Heavy equipment in the

construction sector has less attention than that in other sectors, such as in the mining sector, forestry,

and agriculture. In the field, mobilizing specific tools is not an easy matter because of the limitations

of Indonesia’s ports or the places to perform disassembly or assembly. Poor road infrastructure to the

project site is a high cost economy. The threat of inadequacy in heavy equipment also occur in the

preparedness of managing heavy equipment for handling a major disaster considering Indonesia lies

in the ring of fire, which is vulnerable to disasters.

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The second threat is a matter of uncertainty and lack of continuity of the project that results in low

utilization of heavy equipment. The prediction of demand for each type of equipment is even more

difficult. This will be detrimental to owners who do not earn enough revenue to cover the equipment

purchasing and operating cost. According to the Ministry of Public Works, 87% of Construction

Services Agency (BUJK) is qualified as small and general ones. The ability to have its own heavy

equipment is very limited. Likewise, the number of BUJKs, which is specialized in heavy equipment,

is still rare. Heavy equipment rental business is also underdeveloped. Moreover, the guarantee of

heavy equipment supply from subcontractors or leasing has not yet been included to be one of the

assessment factors in the construction bidding process.

The third threat is considered to be the biggest blow for the owners of heavy equipment because they

are required to pay a double tax. In the normal course of business, the owners of heavy equipment are

mandatory tax payers of import duty of their heavy equipment and of the income they earn from

leasing their heavy equipment. Tenants or project owners, unlike the owners of heavy equipment, pay

value added tax. However, since the issuance of Law No. 34 Year 2000 on Regional Taxes and

Regional Retributions, heavy equipment and large tools are classified as "Vehicles". Consequently,

some local governments then issued a law on the imposition of road tax for heavy equipment.

Lampung province is the first one that implemented such a law in 2002. Billing road tax for heavy

equipment has also been implemented by the Government of East Kalimantan in early 2005. Not all

heavy equipment is in operation and settled in one project, especially for short-term rental of

construction heavy equipment. Such heavy equipment always moves from one region to another

region. Hence, the imposition of local taxes will be overlapping and multiple.

The fourth threat relates to project postponement because there are no tools for specific jobs, such as

dredging for beach and underground construction. This certainly will raise an expense if purchasing a

new machine is made because the purchased tools will be taxed. On the other hand, a large project is

required to have qualified tools to do its work. Therefore, it is expected that a tax-free for a specific

type of heavy equipment is given.

Based on TOWS analysis, the strategic initiatives can be divided into four groups: SO strategy (to tap

opportunities with existing strength), ST strategy (to avoid treat with existing strength), WO strategy

(to tap opportunities by reducing weaknesses), and WT strategy (to avoid treat by dealing with current

weaknesses). First, ST strategies develop a network of cooperation among supply chain actors of

heavy equipment (S1O1): construction supply chain membership requirements; facility consolidation

(WEB or cloud computing) that leads to auction, lease, sale and purchase; bid documents on the basis

of supply chain support for heavy equipment.

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Second, ST strategies provide incentives for heavy equipment for construction (S1T1): duty-free

mobilization, fuel subsidies (subsidized diesel fuel, as long as the project goes according to hours

worked), the distribution facility to the site of work (assembly between the harbours); and develop

procedures for the import of specialized heavy equipment, ease of importing specialized equipment

(S2T3).

Third, WO strategies develop effective financing scheme (W1O1): terms, interest rates, credit,

insurance, right to use, underwriting; develop a system of monitoring the status of construction

equipment (W2O2): Registration tool (registered), the use of GPS that is connected to the internet

portal; applying the standards of using the tools (W3O2): warrant of fitness (WOF), operators, safety,

environment, security maintenance (asset management), the catalogue of equipments, technical

standards for work (kind of tools that should be used for a specific job); developing partnerships with

educational and certification institutions (W4O2) such as upgrading competent operators and

mechanics, facilities and asset management, heavy equipment operator and mechanic training

facilities, safety and health training facilities.

Fourth, WT strategies apply a multiyear project scheme (W1T2); develop a project plan and monitor

the project (W2T2): certainty of information on the infrastructure of construction project (schedule,

location, and absorption); cooperating with energy suppliers, parts, and tires (W2T1).

There are ten initiatives to develop heavy equipment supply chain to support infrastructure

construction. They are outlined as follows: The first initiative is to develop a cooperation network

among supply chain actors of heavy equipment: membership requirements for construction supply

chain; facility consolidation (WEB or cloud computing) that leads to the auction, lease, sale and

purchase; bid documents on the basis of supply chain support of heavy equipment. One idea that

needs to be developed is a Smart Mobility, which is divided into three components, namely:

information tools, transporters, and the integration between the users and the owner of the machine

(e.g., Dudek and Stadtler, 2005; Liu et al., 2007).

Second, effective financing schemes (terms, interest rates, credit, insurance, right to use,

underwriting) are proposed to support the smooth procurement of new heavy equipment. This

initiative requires massive support from manufacturers and suppliers of heavy equipment so that

specialist and leasing business can attract more support from financing and warranty system.

The third initiative is related to the development of monitoring system on the status of construction

equipment: registration tool, database of heavy equipment supply, and the use of GPS should be

connected to the internet portal. Suppliers, both manufacturers and distributors, can provide

information related to the potential, the availability, the amount of sales and other related operational

65

construction equipment. Data base is also useful for heavy equipment mobilization in the event of a

natural disaster. The importance of such data base was proved when mitigating the disaster in Aceh in

2005.

The next initiative is to apply industrial standards of heavy equipment such as warrant of fitness

(WOF), certification of operators and mechanics, safety, environment, asset management, equipment

catalogue, technical work (equipment types that should be used for a specific job). Further

applications of this initiative includes eligibility of "green" heavy equipment for production,

improvement of operating efficiency (fuel saving and productivity improvement), improvement of

mobilization efficiency, and a reconditioning industrial development that meets the standards. Catalog

development of demand is also needed for the references on the use and development. In practice, the

capacity and the role of associations as well as a synergy in promoting standardization need to be

improved.

The fifth initiative is to develop partnerships with educational institutions and certification bodies in

terms of training operators and mechanics to be competent, developing training facilities for asset

management upgrades, developing training facilities for heavy equipment operators and mechanics,

and conducting safety and health training.

Sixth, providing incentives for construction heavy equipment, such as duty-free mobilization between

districts, fuel subsidies (subsidized diesel fuel, as long as the project goes according to hours worked),

providing work site facilities (assembly between the harbours), and tender terms that consider total

cost of ownership. These incentives are also intended to encourage the development of local capacity

in anticipating the increased demand and the improvements on the heavy equipment procurement

system. The strategic value of specialized subcontractors and rental businesses also needs to be

fostered by stakeholders. Nowadays, heavy equipment is used solely as a means of production in the

area of business and is not using subsidized fuel, but using industrial tariff fuel. Taxation should be

seen from the multiplier effect it creates, whereas in the production side, it is the products that should

be taxed, not the production equipment. The reason is that it will inhibit the production activity, which

in turn reducing the potential revenue from the economic activity. The elimination of double taxation

on the heavy equipment by more than one region can create a more conducive investment climate to

support economic growth in the region.

The seventh initiative is to develop procedures for the import of specialized heavy equipment by

simplifying the procedure of importing specialized equipment. The next important initiative is to

promote multiyear project schemes and disseminate best practices of multi year project schemes that

include the effective procurement and utilization of heavy equipment.

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The ninth initiative is to develop a project plan and project monitoring plan. The government is

expected to provide the information about its medium and long term needs of heavy construction

equipment that are in line with its plan to increase investment in infrastructure development. Demand

analysis can be performed based on the sale data and the data of the use of heavy construction

equipment which are obtained from the data base development. Again, cooperation between

stakeholders is necessary to formulate the needs of heavy equipment. The last initiative is the

promotion of cooperation among the energy, spare parts, and tires suppliers for ensuring highly

reliable equipments.

CONCLUSIONS

In this study, an attempt has been made to develop a supply chain perspective of heavy equipment for

obtaining the main characteristics of heavy equipment procurement and utilization in supporting

infrastructure construction. There are two cycles of heavy equipment supply chain, namely:

procurement cycle and utilization cycle. The procurement cycle occurs when a company purchases

equipment. The utilization cycle is directly related to the use of heavy equipment by the users from

different sectors. Demand of heavy equipment is still dominated by the mining sector. The producers

of heavy equipment are sensitive to any changes in the mining sector. The fluctuative demand of

heavy equipment depends on the economic condition of the sectors that require heavy equipment. The

local supply of heavy equipment is still low compared to imported heavy equipment.

For the construction sector, future projection shows that there will be increased infrastructure

development to accelerate and expand the economic and social development. This implies that

effective and efficient construction supply chain is the key to infrastructure development. This

research indicates that heavy equipment supply chain determines the success of the infrastructure

construction. If ensuring reliable and efficient heavy equipment cannot be done, it can delay

infrastructure construction, thus incurring unnecessary costs. Supply chain analysis in this context is

relevant since this method is able to capture characteristics of heavy equipment supply chain and to

identify a policy scenario that covers a number of supply activities of heavy equipment services to

support infrastructure construction. Management of heavy equipment supply chain aims to achieve the

fulfilment of the required conditions for construction heavy equipment which is reflected in the

availability of sufficient, effective, efficient, and good quality of the equipment.

There are ten proposed policy development strategic initiatives to develop heavy equipment supply

chain for construction purpose. The initiatives still need to be verified in terms of their importance,

usefulness, and acceptance. To be good regulations or guidelines, the initiatives need to be drafted

67

with detailed explanation. The results of supply chain analysis show the importance of networking

amongst actors of heavy equipment provision, information system for monitoring the condition of

heavy equipment, and incentives for heavy equipment dedicated to support construction. Also, several

programs need to be implemented in the near future, including a pilot project related to heavy

equipment for infrastructure construction on certain economic corridor. The study on heavy

equipment registration and the accuracy of available heavy equipment, including the mobility of the

heavy equipment needs to be addressed. It also relates to communications system for the actors

involved that includes the incorporation of the concept of supply chain systems with energy supplies

and spare parts that are greener, cheaper, more efficient, and safer. The concept of supply chain heavy

equipment cannot be seen only as one sector. It must be seen as an ecosystem that is closely related to

the wider construction supply chain.

This paper is the first step towards a description of heavy equipment supply chain in Indonesia. This

relates to the discussion of supply chain management as a mapping of inter-organizational links in

facilitating ownership transfers and service transactions. Further research should be conducted. It

should explore collaborative systems that unify the supply chain members in providing excellent

service to the next sector, the role of government, the effect of the ASEAN Economic Community

(AEC) that creates free flows of construction services, and conflict resolution of different actors to

attain more efficient, effective, and fair relationships. This will eventually lead to the possibility of

achieving specific conditions that shape willingness to cooperate, of obtaining instruments for

sustaining collaborative efforts in matching demand with supply, and consequently of knowing more

on experimenting with the collaborative models.

ACKNOWLEDGEMENTS

This work was supported by the Ministry of Public Works Republic of Indonesia. The author would

like to acknowledge the following individuals for their contributions to this report: Tonny

Notosetyanto, Gatot Sudjito, Pratjojo Dewo, Mochammad Natsir, Yaya Supriyatna, Rusli, Suwanto,

Andias Mintoharjo, Achmad Fajar Hendarman, and others that participated in the key informant

interviews.

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Chapter 4

The Formulation of Sourcing Strategy Model at Telkom Indonesia

Togar M. Simatupang and Ega Nugraha Putra School of Business and Management

Bandung Institute of Technology Indonesia

Abstract

Telkom is a state owned company that provides services in telecommunication, infotainment,

multimedia, and edutailment. Nowadays, the development of telco industry is increasing rapidly as a

result of the price war that has been created by several celuler operators. This condition has made

Telkom improve its approach to provide products and services so as to satisfy its customers. One

potential approach is to examine its procurement system that supports the customer services. The

main problem faced by Telkom is the uniformity of its procurement processes that tends to produce

undesired effects, such as less consolidation, inefficient procurement, unavilable performance

indicators, difficulty in terminating or continuing decision, and no coordination with the investment

committee. The purpose of this research is to offer sourcing strategy model that differentiates services

or technologies. The basic model is based on a portfolio approach that have two axes, i.e stratgic

impact and supply risk. Each service or technology can be identified in one of four quadrants,

namely: strategic items, leverage items, bottleneck items, and non-critical items. Each quadrant has

its own strategy. In the implementation (action) plan, several initiatives that need to be applied

include establishing a sourcing committee, preparing procerement system and procedure, and

implementation schedule.

Keywords: Sourcing strategy, Kraljic matrix, telco industry, procurement process, Telkom

Introduction

The rapid technological developments in this era have made technologies keep changing.

Consequently, both the consumers and entrepreneurs have to adapt to the changing technology

quickly. The rapid technological developments also require Telco industry to shape its future

71

customer services based on the advancement of technology in order to provide better services to its

customers. Therefore, effective and efficient procurement of new technology needs to be conducted to

ensure customer satisfaction.

Today many businesses are starting to enter the telecommunication business. It is proved by the fact

that many mobile operators appear, such as xl, Indosat, Esia, Axis, and many others. This business

situation has resulted in a "price war" that causes consumers more confused. For that reason, the Telco

industry needs a sourcing strategy to ensure an efficient procurement process of technologies or

services. In relation with the procurement processes of technologies/services, the Telco industry has

challenges in how to provide relevant services to the needs of the community. These challenges are

mainly concerned with rapidly changing technologies, uncertain consumer demands,

application/technology acquisition, unstable economic levels, and many others. When there are fewer

competitors in the telecommunication market, the revenue will continue to increase because the

market share is still large. Consequently, when income increases, both the cost and margin business

will also increase. Implementing a sourcing strategy may result in efficiency by way of lowering the

expenditure costs of procurement of goods/services, thus widening the proft margin.

Under the supply chain management cycle, it can be seen that the market identification, business

planning, planning and engineering design, and the sale are initially conducted before they are used

for funding the market identification itself. Under this cycle, there is the procurement stage, which is

important (Holcomb and Hitt, 2007). Therefore, an efficient and effective procurement system should

be conducted so that the cost, which is in accordance with the company’s budget allocation, can be

controlled by the company. However, a uniformed procurement process of goods or services is often

performed by Telco companies. Along with the becoming more complicated technological

developments, Telco companies no longer use the uniformed procurement process of goods and

services. Because of this fact, this research is conducted with the aims are not only to specify a

sourcing strategy model that is able to classify different items, such as services and technology, to be

procured but also to develop appropriate strategies for different categories.

A case study conducted by a national telecommunication company known as Telkom Indonesia was

chosen. In this case study, the importance of formulating a sourcing strategy was emphasized.

Nowadays, Telkom is conducting procurement processes for its capital and operational expenditures.

In doing so, it requires a sourcing strategy model that streamlines its procurement processes to

achieve cost effective services to its customers. The model is expected to enable Telkom in creating

its better competitive advantage compared to its competitors, thus keeping its leading position in the

Telco business in Indonesia.

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PT Telkom Indonesia

PT Telekomunikasi Indonesia, Tbk. (TELKOM) is the largest provider of network services and

telecommunications in Indonesia. Telkom is a semi-privatized, majority state owned company.

Telkom is now serving millions of customers nationwide and providing a strong portfolio of

information and communication services - including fixed line, fixed wireless phone, cellular phone,

data and internet, and network and interconnection services - directly or through its subsidiaries.

At the end of 2012, Telkom's customer base has grown to 16.6% compared with the same period last

year to become 121.5 million subscribers. Significant increase of number of subscribers also recorded

on broadband service. Number of broadband service subscribers increases 42.5% to be 15.9 millions

meaning Telkom have the largest broadband subscribers in Indonesia. While fixed telephone also

increases 4.0% to be 8.8 millions. Recorded also growth of BlackBerry subscribers to 68.7% to be

5.1 millions. Flash subscribers also grow fast at 45.6 % to be 8.6 millions and Speedy subscribers

become 2.1 millions. To meet the increasing demand for seamless connectivity and mobility, Telkom

has expanded its business portfolio that includes TIMES - Telecommunications, Information, Media,

Edutainment, and Services (Hernady, 2010) and the development of Indonesia Digital Network

(IdNet).

The number of employees of Telkom is currently about 25,683 people. Telkom also initiated Telkom

Corporate University to develop Telco human resources in order to compete at international markets.

The net profit of Telkom was IDR 12.85 trillion in 2012 increased by 17.24% from IDR 10.96 trillion

in 2011. The total revenue of this company was about IDR 41.39 trillion in 2012 or grows 2.91%

compared with IDR 40.22 trillion in the same period in 2011. Such a revenue increase is caused

mainly by additional number of cellular subscribers and high sales in data service, internet and

Information Technology (IT) reaching IDR 27.62 trillion and revenue interconnection reaching IDR

4.27 trillions. The main revenue was composed of 53.65% from fixed-line cable subscribers.

Telkom has been adapting itself to the increasing development of technology in order to satisfy its

customers. Today, telecom operators are arising, which create a "price war" that makes consumers

confused in choosing a telecom operator. Telkom, therefore, must be able to perform the effective

procurement process so as to widen its profit margins, thus creating a competitive price with the best

quality (competitive advantage).

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Vision and Mission of Telkom

The vision of Telkom is "To become a leading Telecommunication, Information, Media, Edutainment

& Services (TIMES) Player in the Region". Telkom is trying penetrate the market of the Southeast

Asian, Asia, and the Asia Pacific region so that it becomes a leading InfoCom company.

Telkom has two missions. The missions are to provide TIME Services with an excellent quality and a

competitive price and to be a role model as the best managed Indonesian corporation. Telkom will

provide the best service to satisfy its consumers by providing competitive prices so as to become the

best company in serving the needs of its customers. The company has five Corporate Values (5C).

They are Commitment to Long Term, Customer First, Caring Meritocracy, Co-creation of win-win

partnership, and Collaborative Innovation.

Business Coverage

Telkom has developed innovative services in the fields of Telco, such as Information, Media,

Edutainment, and Services or TIMES. Telkom’s focus on delivering TIMES services are as follows.

First, Telecommunication is Telkom’s legacy business. Telkom has built its reputation on delivering

fixed wire line services, such as ‗Plain Ordinary Telephone Services’ (“POTS”), fixed wireless

telephony, data communication services, broadband, satellite, leased networks and interconnection

services, and cellular telephone services through its subsidiaries, Telkomsel. Telkom’s

telecommunication services have reached all market segments: individual customers, small and

medium enterprises (“SME”), and corporate customers. Second, Information services are being

developed by Telkom as one of its New Economy Business (“NEB”) models. These integrated

services are aimed at facilitating business processes and transactions, including Value-Added Services

(“VAS”) and Managed Application/IT Outsourcing (“ITO”), e-Payment, and IT enabler Services

(“ITeS”).

Third, Media is another Telkom business model that is developed as a part of NEB. The services

offered include Free To Air (“FTA”) and Pay TV to suit modern digital lifestyles. Fourth,

Edutainment is one of the core business models in Telkom’s NEB, targeting the younger user market

segment. Telkom offers a broad range of services, including Ring Back Tones (RBT), SMS Content

and portals among many others. Lastly, providing services is one of the Telkom business models,

which is oriented to customers. The services include Telkom Customer Portfolio to Personal,

Consumer/Home, SME, Enterprise, Wholesale, and International Customer.

Business Situation

Currently, the role of the procurement of a technology/service is no longer under the authority of

Chief Purchasing Officer (CPO). It has undergone a transformation, where the role of procurement

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has been transferred to the supply management. At this time, industry competition is very tight, so the

industrialists is focusing not only on the cost reduction but also on offering the highest quality

products. Therefore, a supplier with a good quality product, a good delivery time, and many others are

required. Telkom, as a company that has various products, also requires the procurement process that

have a competitive edge.

Position of Telkom in the spectrum of world class supply chain management

Currently, PT Telkom is one of the biggest players in the telecommunication industry, not only

engaged in the industry but also engaged in the information, media, and edutainment (TIME). It is

therefore necessary to supply management strategies to make Telkom move towards a better

development (IT & Supply Directorate., 2010).

Figure 1. The spectrum of world class supply chain management Source: Telkom Master Plan 2011-2015

In Figure 1, it can be seen that supply chain management moves from the traditional to the integrated

management. Telkom wants its technology procurement systems/services to be able to move toward

the integrated management so that it can become a world’s leading telecommunication, information,

media, and Edutainment company. Supply management is a series of events, starting from the market

identification to the product reaches the consumers. Therefore, the supply management process plays

a very important role from the initial stage to the income earning stage. Teltkom in maintaining its

INTEGRATI VE SUPPORTIVE INDEPENDENT PASSIVE

No strategy, only responding to the requests from other functions.

Adopting a new technique, although it is not in line with the corporate strategy.

Supporting the company's strategy by implementing new strategies

Full integration with the company's strategies, and becoming part of a cross-functional team that develops the strategies

• The strategic role • The effectiveness of cross-functional teams • A strategic contribution to the business as the basis for performance measurement • The involvement of supply management team in the development of corporate strategy

• In line functional strategies • Moderate strategic role • Purchasing function as part of the sales team • Carefully selected and motivation driven suppliers as strategic assets Continuously

monitored and analyzed. markets, products, and suppliers

• No functional strategies. • Dominated by the administration activity • Focused on cost reduction • Decentralization of the purchasing process • Limited opportunities for human resource development • Limited in the use of IT • No model of continuous improvement

• Owning a functional strategy, but not aligned with the corporate strategy. • Little strategic role • cost reduction – related Performance • Relying on the working of cross function • Awareness of top management on the procurement contribution to profit. • Awareness of top management on HR needs.

75

existence and in increasing its competitiveness should also consider its capability on good/service

procurement so that a more effective cost can be achieved.

The Telkom models of supply chain strategy

In the model of supply management strategy, a well reformulated strategy is required in which it

reflects the company's strategy and desire to achieve a strategic contribution toward the company’s

competitiveness. In Figure 2, it can be seen that the supply management model requires three major

infrastructures, namely:

• the organization with well-defined and integrated structures and functions either within or outside

the organization itself,

• the competent human resources to manage the supply chain processes,

• the sufficient information technology to support the execution of supply chain processes.

ACTORS RESULTS

Figure 2. Generic model of Telkom supply chain strategy

Source: Telkom Master Plan 2011-2015 The main processes of supply management in Telkom consist of:

the supply Management, which includes how suppliers are managed to contribute value-added

to Telkom’s businesses in the long run,

the procurement strategy, which includes both procurement models and relationships with

suppliers, all of which are determined based on differences in the characteristics of the

technology/services required by Telkom,

the supply planning, which includes procurement planning process of technologies/services to

meet users’ needs,

Continuous Improvement

SUPPLY CHAIN

STRATEGY

PROCESS

Supply

Management

Procurement

Strategy

Supply Planning

Supply Delivery

Supply Chain

Performance

ORGANIZATION

HUMAN

RESOURCES

INFORMATION

TECHNOLOGY

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the supply delivery, which includes procurement execution, the technology/services ready for

use by the users, and the process of construction projects undertaken by suppliers.

The final result of the above-mentioned processes is the creation of measurable and communicable

supply management performance on a regular basis. All processes in Figure 2 above require a

mechanism to perform a continuous improvement to keep a superior supply management

performance so as to create Telkom’s competitiveness. The process of supply management strategies,

especially the sourcing strategy, greatly affects the efficiency of the company. Therefore, procurement

of technologies/services should be adjusted to the needs of Telkom.

Research Method

In conducting the improvement of procurement of technologies/services, the following things must be

done. The first step is to perform a search for alternative models of procurement of

technology/services that are able to provide solutions to the problems faced by Telkom. There are

many models that have been developed, among of which are Kraljic model (1983), Olsen and Ellram

model (1997), Elliott-Shircore and Steele model (1985), Hadeler and Evans model (1994), Gelderman

and Van Weele model (2003). Of the several alternative models, the Kraljic matrix is chosen in this

study because it best meets the needs of Telkom.

The reasons of choosing the Kraljic model are as follows. Telkom requires a model to classify

technologies/services so that strategies for technologies/services that are not merely based on value

can be made. Kraljic matrix has a model to classify technologies/services. The matrix has two

dimensions (risk and impact) that are in line with the needs of Telkom. Other models have different

goals from Telkom’s needs, especially in sourcing strategy. Olsen and Ellram model (1997)

emphasizes on managing the relationships with suppliers, Elliott-Shircore and Steele model (1985)

emphasizes on classifying the financial value, and Hadeler Evans model emphasizes on the

complexity and value (Hadeler and Evans, 1994). All models are based on the Kraljic matrix, which is,

by far, the most dominant in the procurement strategy and is used by various companies in various

sectors (Caniëls and Gelderman, 2005; Carter and Narasimhan, 1996; Gelderman and Semeijn, 2006;

Gelderman and Van Weele, 2003; Lee and Drake, 2010). Kraljic matrix has an advanced matrix

containing the dimension of corporate power and supply market power with which the relationship

between the company and the market supply can be managed. Kraljic matrix is the foundation of the

strategy model developed by Gelderman and Van Weele (2003; 2005). Thus, by using Kraljic matrix,

Telkom can also develop a strategy from each technology/ service model that is developed by

Gelderman and Van Weele (2005) and Caniëls and Gelderman (2005).

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Based on the dimensions of the strategic impact and supply risk impact, the hierarchy of the factors

that can influence each dimension can be made. Next step is to perform a verification test on the

hierarchy to the three respondents and four technologies/services in Telkom. If the hierarchy of

factors does not pass the verification test, the factors that influence the dimension of strategic impact

and supply risk have to be changed. However, if the hierarchy of factors passes the verification test, a

set of questionnaire of these factors shall be made to test the validity of the eleven

technologies/services, namely: Consultant, Licensing, Insurance, IPTV, Metro E, Speedy, OSP

Jarakses, Tera Router, Stationery (ATK), Satellite, and MSAN.

A validation test towards the result of the questionnaire to the eleven technologies/services shall be

performed by comparing the questionnaire against the initial hypothesis of the expertise of Telkom.

If it does not pass the validation test, the factors that influence both the dimension of strategic

impact and supply risk have to be changed. However, when it passes the validation test, the

procurement strategy (sourcing) that adopts the Gelderman and Van Weele model (2005), consisting

of nine strategies, can then be made. This strategy shall be applied to the eleven technologies/services

that have been classified and have passed the validation test.

Furthermore, a follow-up action can be done towards each available strategy so that it can be

developed and can resolve any problem that exists in Telkom. A comparative study needs to be done

to determine how the competitors use certain models to conduct the procurement of goods /services

from which Telkom can obtain meaningful inputs.

Findings

Root Cause Identification

Currently in Telkom, a uniformed procurement process of all technologies/services is employed,

which has caused the following things:

1. The absence of consolidated procurement. In the absence of consolidation on any procurement,

any technology/service procurement budget is made uniformed, thus technolog/service

classification is not conducted. This will lead to inefficient procurement costs, because any

technology/service shall be generalized regardless of whether it gives big or little strategic impact.

2. Inefficient procurement processes. Applying the uniformed procurement of all

technologies/services has resulted in inefficiency, because it cannot reduce the cost of

technology/service procurement, moreover if the procurement does not give enough big impact.

78

3. The absence of performance measurement. By applying uniformity, the efforts made to any

technology/service will be considered the same regardless whether it has given either big or little

impact, thus making the performance measurement on the technology/service unfair.

4. Unable to determine which technology/service to be terminated or exploited. Telkom will have

difficulty in determining which technology/service must be terminated or developed. Technology

that must be terminated is the one that requires a big procurement cost or a substantial risk and

does not have strategic impact. Conversely, technology/service that must be developed is the one

that incurs little cost, causes a small risk, and have considerable strategic impact.

5. Lack of coordination with the investment committee. The Investment Committee is in charge

of directing the team and overseeing the investment management team in applying investment

policies and day-to-day investment strategy. In Telkom, the Investment Committee will not

consider the aspects of technology/service procurement in its assessment, criteria setting, and

evaluation towards the implementation of any investment. Therefore, coordination from the

Sourcing Committee is needed so that the parties involved in the investment know the classified

procurement.

The root of the above-mentioned problem is caused by the uniformity of the technology/service

procurement that is employed by Telkom, resulting in the requirement of sourcing strategy that can

classify any procurement of technologies/services. This root problem gives negative symptoms. The

solution to this root problem is to find a method to classify the technology/service.

Portfolio Approach

The portfolio approach used in this study employs Kraljic matrix model. As for the basis of the

modified strategy or the recommendation, Gelderman and Van Weele approach (2005) is used. The

reason for using the approach of Gelderman and Van Weele (2005) is that it is because the Kraljic

matrix can be developed to determine the specific purchasing strategies for each quadrant. To identify

the impact of the factors of both the strategic impact and the supply risk dimension on the matrix,

three stages have to be undergone. The stages are the identification of the library (Lin, 1995; Roose

and Rydman, 2005), the identification of the first round, and the identification of the second round.

The verification of stage two and three was done to the four respondents, namely: the Assistant Vice

President Systems & Control (respondent 1), Manager Supply Management (respondent 2), Assistant

Manager Program & Schedule Review (respondent 3), and Assistant Vice President Supply Analysis

(respondent 4). Figures 3 and 4 are the final results of criteria development of the strategic impact and

procurement risks, including their hierarchical structure (Saaty, 1994).

79

Strategic Impact

Competence Factors

Economic Factors

Image Factors

The influence of procurement of technologies/

services on the total of

purchasing value (CAPEX /or

OPEX)

The influence of technology/

service procurement on the increase of value-added

services of PT Telkom

The influence of procurement of technologies/

services on the increase of the

excellence of PT Telkom over its

competitors

The influence of procurement of technologies/

services on the increase of service

diversification of PT Telkom

The influence of brand image in

the purchasing of technologies/

services

The influence of procurement on the increase of the current revenue or on the potential

revenue in the future

Figure 3. Hierarchy of Factors of Strategic Impact Dimension

In Figure 4, it can be seen that the factors that influence the strategic impact dimension are as follows:

1. the economic factors (A), which is influenced by such sub-factors as:

• the proportional level of procurement technologies/services to the total value of CAPEX

purchasing (A1),

• the extent of the influence of the procurement of technologies/services over the increase

of PT Telkom’s revenue (A2), and

• the extent of the influence of the procurement of technologies/services over the increase

of value-added services of PT Telkom (A3).

2. the competence factor (B), which is influenced by such sub-factors as:

• how important the excellence of procurement of technologies/services over the excellence

of the competitors’ procurement of technologies/services (B1), and

• how big the procurement of technologies/services over the control of technologies

(diversifying Services) of PT Telkom (B2).

3. the image factor (C), which is influenced by such sub factors as:

• how important the factor of the brand (brand image) in the procurement of

technologies/services is (C1).

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Supply Risk

Technology Characteristics

Environment Characteristics

Technological Innovations

Technology Complexity

Product Life Cycle

Supply Market Characteristics

Substitution degree of supplier

Importance of technical capability

Supplier Bargaining

PowerOn-time and

budget completion

The substitution

degreeLong term

commitment of supplier

Compliance to regulation

Figure 4 Hierarchy of Factors of Risk Supply Dimension In Figure 4, it can be seen that the factors influencing the supply risk dimension are as follows.

1. the characteristics of the technologies/ services (D), which include:

• the degree of importance of considering technological innovations (D1),

• the degree of purchasing complexity (D2),

• the speed of changing of technology (product life cycle) (D3), and

• the substitution degree of technologies/similar services (D4).

2. The supply market characteristics (E), which include:

• the size of the bargaining power of suppliers (E1),

• the substitution degree of similar suppliers (E2),

• the existence of long-term supplier (E3),

• the degree of technical and commercial competence of suppliers (E4), and

• the ability of suppliers in completing an on time and in the right amount of budget (E5).

3. The environmental characteristics (F), which include: the degree of requirements for the

compliance with the government regulatory (F1).

Examples of Outsourcing Items The eleven technologies/services that are tested are Consultant, License, Insurance, IPTV, Metro E,

Speedy, OSP Jarakses, Tera Router, Stationery (ATK), Satellite, and MSAN. Each item is described

as follows.

• Stationery, which includes: the use of office stationery such as paper, pens, and others; the

objective is to support the activities of PT Telkom; OPEX: -; and having no direct revenue.

• Satellite, which includes: buying a satellite of Russia /America /Europe; the objective, which is to

provide telecommunication infrastructures and secure voice services, data, and broadband;

CAPEX, which is trillion rupiahs; and having direct revenue in trillion rupiahs.

81

• MSAN,which includes: buying service access node (MSAN) to respond the needs of Telkom’s

broadband subscribers; the objective, which is to provide and secure Telkom’s broadband

services; CAPEX, which is from tens of billion rupiahs to hundreds of billion rupiahs; and having

direct revenue in hundreds of billion rupiahs.

• Consultant, which includes: providing consultancy for various needs, such as organizational

transformation; consulting, financial consulting, marketing consulting, and others; the objective,

which is to assist Telkom in addressing a specific matter which requires expertise; CAPEX,

which is from tens of billion rupiahs to hundreds of billion rupiahs; and having no direct revenue.

• Insurance, which includes: the procurement of insurance of Telkom’s asset, Satellite, Directors,

Employees, etc.; the objective, which is to protect Telkom’s assets; CAPEX, which is in hundreds

of billion rupiahs; and having no direct revenue.

• IPTV, which includes: the procurement of IP-based TV service payment; the objective, which is

to diversify services in the market; CAPEX, which is, at present, it is several billion rupiahs, and

it is predicted to be in hundreds of billion rupiahs in the future; and the current direct revenue is

zero rupiahs and is predicted to be in hundreds of billion of rupiahs in the future.

• License, which includes: the procurement of license for Telkom’s devices that have been

purchased; the objective, which is to secure the operation of devices that have been purchased;

CAPEX, which is from tens of billion rupiahs to hundreds of billion rupiahs; and having direct

revenue in hundreds of billion rupiahs although it has a potential lost opportunity.

• Metro E, which includes: the procurement of infrastructure (service node) of Broadband for an

area; the objective which is to secure data and Broadband services; CAPEX, which is from tens

of billion rupiah to hundreds of billion rupiahs; and having direct revenue from tens of billion

rupiahs to hundreds of billion rupiahs.

• OSP Jarakses, which includes: providing Telkom’s network to either FO or Copper customers; the

objective, which is to secure Telkom’s voice and broadband services; CAPEX, which is in tens of

billion rupiahs; and having direct revenue that relates to the RK or DLC in tens of billion of

rupiahs.

• Speedy, which includes: providing Radius, BRAS, DSLAM, RDSLAM to support Speedy; the

objective, which is to secure Speedy services (Broadband Telkom); CAPEX, which is in hundreds

of billion rupiahs; and having direct revenue from hundreds of billion rupiahs to trillions rupiahs.

• Tera Router /IP Backbonne, which includes: providing IP transport (remotely transmisis Telkom);

the objective, which is to provide and secure safe path/highway for Telkom’s traffic; CAPEX,

which is in hundreds of billion rupiahs, and having direct revenue from hundreds of billion

rupiahs to trillions of rupiahs.

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Results of Aggregated Weights

The weighting and assessment were done based on interviews with the four respondents. Each

respondent’s weighting was aggregated to obtain a weight as many as one. This weight will then be

used in processing the classification data of technologies/services. The results of the aggregated

weights are as follows.

Table 1. Weights of aggregated AHP on Strategic Impact Dimension

A B C Geometric Mean Weight

A 1 3.873 7 3.004 0.575

B 0.258 1 3.873 1.886 0.361

C 0.143 0.258 1 0.333 0.064

Total 5.223

Economic dimension

A1 A2 A3 Geometric Mean Weight

A1 1 0.333 3.409 1.043 0.264

A2 3 1 5.439 2.536 0.641

A3 0.293 0.184 1 0.378 0.095 Total 3.958

Competence Dimension

B1 B2 Geometric Mean

Weight

B1 1 5.664 2.380 0.850

B2 0.177 1 0.420 0.150

Total 2.800

Image Dimension C1 Geometric Mean Weight

C1 1 1 1 Total 1

The description of A, B, C, A1, A2, A3, B1, B2, C1 can be seen in the hierarchy shown in Figure 4.

The calculation example is labeled A (Economic Factors).

Geometric mean = 9004,37*3.873*1C*B*A 33

Weight = Geometric mean A / Geometric mean (A + B + C) = 3,004/5,223 = 0,575

83

Table 2. Weights of Aggregated AHP on Supply Risk Dimension (2.1) D E F Geometric mean Weight

D 1 4.583 6.708 3.133 0.717

E 0.218 1 3 0.868 0.199

F 0.149 0.333 1 0.368 0.084

Total 4.369

Characteristics of Technological/service Dimension (2.2.)

D1 D2 D3 D4 Geometric mean Weight

D1 1 9 7 3 3.708 0.592

D2 0.111 1 0.333 0.126 0.261 0.042

D3 0.143 3 1 0.333 0.615 0.098

D4 0.333 7.937 3 1 1.678 0.268

Total 6.262

Characteristics of Market Supply Dimension (2.3)

E1 E2 E3 E4 E5

Geometric mean

Weight

E1 1 0.333 0.333 0.258 0.111 0.317 0.041

E2 3 1 0.333 0.258 0.111 0.492 0.063

E3 3 3 1 0.333 0.143 0.844 0.108

E4 3.873 3.873 3 1 0.333 1.719 0.220

E5 9 9 7 3 1 4.427 0.568

Total 7.798

Characteristics of Environmental Dimension (2.4)

F1 Geometric mean Weight

F1 1 1 1 Total 1

The description of D, E, F, D1, D2, D3, D4, E1, E2, E3, E4, E5, and F1 can be seen in the hierarchy

shown in Figure 5. The calculation example is labeled D (Economic Factors).

Geometric mean = 133,36.708*4.583*1F*E*D 33

Weight = Geometric mean A /Geometric mean (A + B + C) = 3,133/4,369 = 0,717

Consistency test

From the results of aggregated weights, the consistency test is then performed to see how consistent

the weighting is done by the respondents. The results of weight consistency test are presented in

Tables 3-8 as follows.

84

Table 3. Consistency of Strategic Impact Test Dimension

A B C Raw Average

Consistency Measure

A 1 3.873 7 3.958 4.349 B 0.258 1 3.873 1.710 3.193 C 0.143 0.258 1 0.467 3.277 Average Consistency Measure = (4.349 + 3.193 + 3.277)/3 = 3.104

CI = Average-3

2 = (3.104-3)/2 = 0.052

RI = 0.58 (from table)

CR = CI/RI = 0.052/0.58 = 0.089

CR < 0.1 = Consistent

Table 4. Consistency of Economic Test Dimension

A1 A2 A3

Raw Average

Consistency Measure

A1 1 0.333 3.409 1.581 2.725

A2 3.000 1 5.439 3.146 3.358

A3 0.293 0.184 1 0.492 3.117 Average Consistency Measure = (2.725 + 3.358 + 3.117)/3 = 3.067

CI = Average-3

2 = (3.067-3)/2 = 0.033

RI = 0.58 (from table)

CR = CI/RI = 0.027/0.58 = 0.057

CR < 0.1 = Consistent

Table 5. Consistency of Competency Test Dimension

B1 B2

Raw Average

Consistency Measure

B1 1 5.664 3.332 2.000

B2 0.177 1 0.588 2.000 Average Consistency Measure = (2 + 2)/2 = 2

CI = Average-2

1 = (2-2)/1 = 0

RI = 0 (from table)

CR = CI/RI = 0/0 =

CR < 0.1 = Consistent

The image dimension is consistent because its matrix is one multiplied by one.

85

Table 6. Consistency Test of Supply Risk Dimension

D E F Raw Average

Consistency Measure

D 1 4.583 6.708 4.097 3.382 E 0.218 1 3 1.406 2.690 F 0.149 0.333 1 0.494 3.184 Average Consistency Measure = (3.382 + 2.690 + 3.184)/3 = 3.085

CI = Average-3

2 = (3.085-3)/2 = 0.042

RI = 0.58 (from table)

CR = CI/RI = 0.042/0.58 = 0.073

CR < 0.1 = Consistent

Table 7. Consistency Test of Characteristics of Technologies/services

D1 D2 D3 D4 Raw Average

Consistency Measure

D1 1 9 7 3 5 5.114

D2 0.111 1 0.333 0.126 0.393 4.350

D3 0.143 3 1 0.333 1.119 3.605

D4 0.333 7.937 3 1 3.068 3.654 Average Consistency Measure = (5.114 + 4.350 + 3.605 + 3.654)/4 = 4.180

CI = Average-4

3 = (4.180-4)/3 = 0.060

RI = 0.9 (from table)

CR = CI/RI = 0.060/0.9 = 0.066

CR < 0.1 = Consistent

Table 8. Consistency Test f Characteristics of Supply Market

E1 E2 E3 E4 E5

Raw Average

Consistency Measure

E1 1 0.333 0.333 0.258 0.111 0.407 6.108

E2 3 1 0.333 0.258 0.111 0.941 4.177

E3 3 3 1 0.333 0.143 1.495 4.797

E4 3.873 3.873 3 1 0.333 2.416 5.818

E5 9 9 7 3 1 5.800 6.145 Average Consistency Measure = (6.108 + 4.177 + 4.797 + 5.818 + 6.145)/5 = 5.409

CI = Average-5

4 = (5.409-5)/4 = 0.102

RI = 1.12 (from table)

CR = CI/RI = 0.102/1.12 = 0.091

CR < 0.1 = Consistent

86

The characteristics of environmental dimension are consistent for the one-multiplied-one matrix. The

results shows that all dimensions are consistent because they are below the 10% level, so the results of

the aggregated weights can be used for processing the data of each respondent.

The Results of Aggregated Classification of Technologies/Services of the Four Respondents

Table 9 illustrates the combined results of the classifications of the four respondents, whose results

are then averaged. The averaged results subsequently become a reference in strategy making.

Table 9. The Results of Aggregated Classification of the Eleven Technologies/Services

X Y X Y X Y X Y X Y1 Stationery (ATK) 1,000 1,000 1,131 1,000 1,134 1,000 1,537 1,0001,200 1,0002 Satelite 3,771 3,458 3,787 3,945 3,084 3,784 3,260 3,3313,475 3,6303 MSAN 2,405 2,936 1,985 2,903 2,049 3,240 2,112 2,9342,138 3,0034 Consultant 3,101 1,641 3,182 1,858 2,618 2,064 2,887 1,7932,947 1,8395 Insurance 2,553 1,216 2,871 1,431 2,714 1,216 3,139 1,5132,819 1,3446 IPTV 3,204 2,848 2,799 3,307 3,036 2,808 3,209 3,0003,062 2,9917 Licence 3,211 2,064 2,643 1,946 2,591 1,064 2,765 1,8482,803 1,7318 Metro E 2,262 2,784 2,112 2,936 2,049 2,775 2,445 2,4142,217 2,7279 OSP Jarakses 1,999 2,000 2,110 1,882 1,859 2,304 2,225 1,9912,049 2,04410 Speedy 2,282 2,784 2,028 3,675 2,112 3,153 2,304 3,1462,181 3,19011 TeraRouter 2,070 2,936 2,207 3,307 2,282 2,848 2,134 2,5792,173 2,917

No.MeanMr. Dody

Technology/ServiceMr. Mulyadi Mr. Dhinta Mr. Seno

Based on the averaged results of the four respondents regarding the classification results of the eleven

technologies/services, no different results are found. In other words, they are consistent with the

hypothesis of the Telkom’s experts. Figure 5 shows the classifications based on an averaged results of

the four respondents. They are as follows:

• Technologies/services which are classified as Leverage Items are MSAN, Tera Router,

Speedy, and Metro E;

• Technologies/services which are classified as Strategic Items are Satellite, IPTV;

• Technologies/services which are classified as Non-Critical Items are Stationery (ATK), OSP

Jarakses; and

• Technologies/services which are classified as Bottleneck Items are License, Insurance, and

Consultant.

87

Figure 5. The Results of Aggregated Classification of Technologies/Services

Sourcing Strategy

After classifying each technology/service which has been tested against the Kraljic matrix, the

procurement strategy is then developed for each technology/service by adopting the model of

Gelderman and Van Weele (2005) and Caniëls and Gelderman (2005), whose strategy is more

dynamic. Table 10 is the summary of the sourcing strategy for several technologies/services that are

classified based on the four categories.

Benchmarking

A comparative study between Telkom and a local Telco company, PT Exelcomindo (XL), was

conducted. The purpose of the customer department is in accordance with the overall mission of the

company, that is to create products/services that can produce high business value. The company has

been trying to offer products that have good functionality at competitive prices in the market. The

relationship between the purchasing department and other divisions of the company are aligned. The

purchasing department functions to provide value-added to the company. The purchasing department

is under the Directorate of Finance because not only it is a policy of the board of directors, but also

the purchasing department is closely related with financial matters, so it is natural that this department

is under the Directorate of Finance.

00,5

11,5

22,5

33,5

44,5

5

0 1 2 3 4 5

Str

ateg

ic Im

pact

Supply Riks

Kraljic Matrix (PT Telkom)Risiko Pasokan

Dampak Strategis

ATK

Satelit

MSAN

Konsultan

Asuransi

IPTV

Lisensi

Metro E

OSP Jarakses

Speedy

Tera Router

Linear (Satelit)

LEVERAGE ITEMS STRATEGIC ITEMS

NON CRITICAL ITEMS BOTTLENECK ITEMS

88

Table 10. Sourcing Strategy Recommendations

No. Category Technology/ services Proposed Strategies

1.

Strategic Items

Satelite Keeping the partnership strategy

IPTV Receiving locked partnership

2.

Bottleneck Items

Insurance Receiving the dependency and reducing the negative consequences

Consultant Looking for new suppliers

License Receiving the dependency and reducing the negative consequences

3. Leverage Items

Metro E Developing strategic partnerships

MSAN Developing strategic partnerships

Speedy Developing strategic partnerships

Tera Router Developing strategic partnerships

4. Non Critical Items

Stationery (ATK)

Gathering the needs of customers

OSP Jarakases

Gathering the needs of customers

The purchasing of goods is arranged through a consolidation, where all needs are collected in a

purchasing department—as the central purchasing unit-- and is arranged on the basis of the value of

goods. The method used to classify technologies/services in relation with a purchasing/procurement is

by dividing the technologies/services into 2 categories: network and non-network. Then, each

category is put into the Kraljic matrix. The matrix that is used by the company consists of two axes,

namely: the availability of goods and prices. The quadrants of the matrix have different identities,

such as leverage, strategic, bottleneck, and non-critical.

The method that was used in dealing with suppliers is close tender. In other words, the tender was not

done openly. Only players who were eligible to take part in the tender process were invited. This

technique has been used to deal with all suppliers. The methods that were used in designing the

sourcing strategy are leverage Items (maintaining partnerships, developing partnership strategy),

Strategic Items (maintaining partnership strategy, receiving locked partnerships, deciding partnerships

and finding new suppliers), Non-critical Items (individual reservations, needs collecting), and

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bottleneck items (receiving dependency and reducing the negative consequences, providing many

products, and finding new suppliers).

The close partnership/ partnership maintaining strategy is characterized by a relationship that not only

happens during the project but also happens under a long-term scheme. This partnership also includes

the making of work planning for the future, such as purchasing planning and many others. This work

planning is made for the next one year, in which its review is performed in every three months. To

make the work plan and allocate the budget of the company is generally started with a budget that is

set by the company before a project is created, and its procurement plan is made.

Conclusions

Telkom within the spectrum of world-class chain management is in a position where it is between the

interdependent and supportive position, so it is in the middle of creating a strategy that supports the

company's performance in order to have a good competitiveness. However, the problem is that

Telkom does not have a procurement strategy. So far, its procurement process is conducted without

classifying technologies/services, thus resulting in inefficiency in the process. Therefore, it is

necessary for the company to have a procurement strategy that can classify its technologies/services.

In this study, the model of the Kraljic matrix is chosen. The reason is that this model has two

dimensions in its portfolio matrix. They are strategic dimension and supply risk dimension.

In this study, a comparison between the company and PT Exelcomindo was conducted. The results of

the comparison show that there are some similarities and differences between them as follows:

• Similarities: Both the matrix used in Telkom and in XL has the same identity labels, such as

leverage, strategic, bottleneck, and critical. Both Telkom and PT Exelcomindo use the same

strategy for each position.

• Differences: The axes in XL’s matrix are different from those used by Telkom. The two axes

in XL’s matrix are focused on the availability of goods and prices, while the two axes in

Telkom’s matrix are focused on the strategic impact and supply risk. The purchasing

department in XL is under the Finance Directorate, while in Telkom, the purchasing

department or supply chain management is under the directorate of IT and Supply, which is

also directly under the BOD/Commissioners. In XL, the arrangement of purchasing goods is

based on the value of the goods, but in Telkom, the arrangement of purchasing goods is based

on the classification. In XL, the Sourcing Committee plays its role on project basis or on

specific condition only, while in Telkom, the Sourcing Committee plays its role from the

initial procurement process to the construction stage.

90

Thus, based on this comparative study, it can be concluded that the XL is still trying to improve its

procurement process of technologies/services by using the classification. However, the improvement

has not been done thoroughly, and for that Telkom may have potential competitive advantages

because it has applied the classification process in its procurement of technologies/services, which is

continuously improved. In addition, the continuous improvement on the sourcing committee is also

conducted to make it more effective and efficient so as to provide added value for the company.

Following the classification of the eleven technologies/services of Telkom company, an action plan

for the strategy that has been made has to be implemented to achieve the objective of the company: to

streamline the procurement process of goods/services. The action plan contains the following things.

First, the procurement strategy is not a mere concept, but it can be applied solve the problems faced

by Telkom. The classification of several technologies/services has been performed, and also the

strategy for each of these technologies has been made. Therefore, it is expected that both the

classification and the strategy may become a model of a real benchmark in the procurement process of

technologies/services.

Second, in the implementation, there should be parties that are in charge of matters relating to the

implementation. The parties that are responsible are as follows:

• the Investment Committee, which shall analyze the feasibility of an investment plan issued by

the relevant units;

• the IT & Supply, particularly SPC (Supply Planning Center), has to coordinate with relevant

units to implement the LOP (list of projects) that has been approved by the BOD; and

• the Sourcing Committee is responsible for the implementation of the classification process of

technologies/services that can give value-added to the company.

Third, the scope of implementation includes the following matters. Establishing the function of

sourcing strategy is proposed. This sourcing committee is formed by the department of IT & Supply

because the committee is responsible for the procurement of goods/services. Therefore, a body is

required to examine the issues of procurement of goods/services. The next step is to disseminate

information to the relevant units. The socialization activities that should be done by IT & Supply

department are as follows: distribution of brochures or flyers, installation of banners about the

planned procurement strategy, installation of Telkom official information on the web about the

planned procurement strategy (conducted by IT Telkom), and delivery of Telkom’s implementation

plan via emails.

The procurement unit needs to conduct a FGD (Focus Group Discussion) by involving relevant units

and top management. In the FGD, the issues discussed, which are based on the results of previous

91

brainstorming, should be prepared by a dedicated team. The discussion on every issue in the FGD

should be focused so that a conclusive decision for each issue can be made. If necessary, various

methods can be used here, for example SAST (Strategic Assumption Surfacing and Testing) to bring

up the assumption, or ANP (Analytical Network Process) to set priorities, make decisions, and design

various management frameworks for organizations, such as the balanced scorecard template, Malcolm

Baldridge, and many others. Both brainstorming ideas and FGD have different characteristics.

Brainstorming ideas are spreading, because we have to elaborate on things and try to capture the big

picture of a problem. On the other hand, FGD is tapering, where we focus the discussion of the issues

arising in the brainstorming stage to reach a solution.

• Performing tests using various procurement strategies of technologies/services (pilot projects).

Conducting trials on five technologies/services so that the classifications can be done, and the

results of these trials can be seen when compared with Telkom’s expertise.

• Performing improvement on the results of the trials. In this stage, some improvement may be

made towards the trial results. Based on the improvement, some actions to overcome things that

are not in line with the expectations can then be done.

• Go Live. In this stage, the model that has been created can be applied to all technologies/services

that are available in Telkom, so the efficiency can be achieved.

References

Caniëls, M.C.J. and Gelderman, C.J. (2005), "Purchasing strategies in the Kraljic matrix—A power

and dependence perspective", Journal of Purchasing and Supply Management, Vol. 11, No. 1-2,

pp. 141–155.

Carter, J.R. and Narasimhan, R. (1996), "Is purchasing really strategic?", International Journal of

Purchasing and Materials Management, Vol. 32, No. 1, pp. 20-28.

Gelderman, C.J. and Semeijn, J. (2006), "Managing the global supply base through purchasing

portfolio management", Journal of Purchasing and Supply Management, Vol. 12, No. 4, pp. 209-

217.

Gelderman, C.J. and Van Weele, A.J. (2003), “Handling measurement issues and strategic directions

in Kraljic’s purchasing portfolio model”, Journal of Purchasing and Supply Management, Vol. 9,

No. 6, pp. 207-216.

Gelderman, C.J. and Van Weele, A.J. (2005), “Purchasing portfolio models: a critique and update”,

Journal of Supply Chain Management, Vol. 41, No. 3, pp. 19-28.

Elliott-Shircore, T.I. and Steele, P.T. (1985), "Procurement positioning overview", Purchasing and

Supply Management, pp. 23-26.

92

Hadeler, B.J. and Evans, J.R. (1994), "Supply strategy: capturing the value", Industrial Management,

Vol. 36, No. 4, pp. 3–4.

Hernady, J. (2010), “Telkom initiative on TIME”, Presentation at BizTech Summit 2010, Bandung.

IT & Supply Directorate (2010), Master Plan Supply Management PT Telekomunikasi Indonesia,

Rolling Document 2011-2015, PT Telkom , Bandung, Indonesia.

Kraljic, P. (1983), “Purchasing must become supply management”, Harvard Business Review, Vol. 61,

No. (5), pp. 109-117.

Lee, D.M. and Drake, P.R. (2010), "A portfolio model for component purchasing strategy and the

case study of two South Korean elevator manufacturers", International Journal of Production

Research, Vol. 48, No. 22, pp. 6651-6682.

Lin, R. (1995), “Purchasing strategies for electronic components: a case study of Delta with a

portfolio model”, Unpublished Master Thesis, National Central University, Taiwan.

Olsen, R.F. and Ellram, L.M. (1997), "A portfolio approach to supplier relationships", Industrial

Marketing Management, Vol. 26, No. 2, pp. 101–113.

Roos, M. and Rydman, L. (2005), “Portfolio Model Supporting Development of Purchasing Strategies

- A case study concerning raw material at Casco Adhesives”, Unpublished Master Thesis,

Linköping Institute of Technology, Swedia.

Saaty, T.L. (1994), “How to make a decision: the Analytic Hierarchy Process”, Journal of Accounting

Literature, Vol. 13, No. 4, pp. 212-237.

Holcomb, T.R. and Hitt, M.A. (2007), “Toward a model of strategic outsourcing”, Journal of

Operations Management, Vol. 25, No. 2, pp. 464-481.

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Chapter 5

The Alignment of Strategy, Business Model, and Operating System in Logistics Enterprises

Rizky Yoga Pratama and Togar M. Simatupang School of Business and Management

Bandung Institute of Technology Indonesia

Abstract

Companies need to devise their strategies to reach their goals. Besides strategies, companies need to

define their business model based on strategy to create, deliver and capture values. The business

model then should be implemented through an operating system to realize a value proposition.

However, in real business there are problems coming from the alignment of strategy, business model

and operating system. Misalignment of a strategy, a business model, and an operating system affect

the sustainability of companies. The objective of this research is to examine the alignment of strategy,

business model and operating system. There are two logistics companies surveyed to assess the

implementation of the alignment concept. The first company is the logistic company with its core

business is express delivery, while the other company’s core business is warehouse rent-services. It

was found that a strategy, a business model and an operating system have already been implemented

in both companies. However, several misalignments have been identified between the business model

and operating system interactions. Therefore, a concept to overcome these misalignments is offered.

This proposed alignment concept is useful to identify the misalignment of the strategy, business

model, and operating system.

Keywords: alignment, strategy, business model, operating system, logistics, third party logistics

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Introduction

Logistics is vital for every company in the world. It is essential for the company’s competitive

strategy and survival. Logistics has been described as getting the right products to the right place at

the right time and in the right condition (Chartered Institute of Logistics and Transport, 2005).

Logistics touches every aspect of the company’s daily operations and has grown into a business

specialty of its own. However, logistics is largely ignored and mostly misunderstood because it is not

very interested. As a business specialty, the explosion of globalism has promulgated the practice of

logistics. Most people want to ship their packages on time and immediately.

Despite challenging business conditions, aggregate global revenues for the third party logistics sector

continue to rise, and far more shippers are increasing their third party logistics services than returning

into insourcing (Langley, 2012). Prospects for third party logistics market in 2013 look promising

(Berman, 2013). Smaller companies newly entering global business are beginning to recognize the

importance of logistics. Instead of its potentials, there are also threats for third party logistics

providers whether from the existing competitors or from new entrants.

Third party logistics providers need to create a sustainable strategy that fits their activities – doing

many things well, not only few, and integrating among them (Porter, 1996). The activity that is done

by a company is intended to generate, deliver, and capture value for their customers. Through a

business model, company can describe how to do it (Osterwalder and Pigneur, 2010). Osterwalder and

Pigneur (2010) describe that a business model can be used as a blueprint for companies to implement

their strategy through company structures, processes, and systems. Osterwalder and Pigneur (2010)

also describe that a company’s operating system is the way how a company achieves its goal.

However, the alignment of strategy, business model and operating system in companies has not been

established yet. Misalignment of strategy, business model and operating system might cause problems

to companies in doing their business. Companies might do their business costly and inefficiently. This

research aims to develop the alignment of strategy, business model and operating system concept

which can help us to figure out the alignment of strategy, business model, and operating system in a

company. In addition, this research also attempts to apply this alignment concept in real companies.

The paper is structured as follows. The introductory section consists of research background and

problem statement, as the basis for this research objective and as the structure to achieve this research

objective. Literature review is presented to give information about the gaps in the existing research.

The next section proposes a conceptual model which is used to complement the research method. The

findings of this research are outlined, which is then followed by the discussion about the findings. The

last section provides the conclusion of this research.

95

Literature Review

Business model is a company’s method for making money in the current business environment

(Wheelen, 2010). While Slywotsky, cited from Morris et al. (2005), perceives business model is the

way a company select its customers, defines and differentiates its offerings, defines the tasks it will

perform and those that will be outsourced, configures its resources, goes to market, creates utility for

customers and captures profits. It is similar with the proposed business model of Osterwalder and

Pigneur (2010), which is represented by their business model canvas building blocks. It is segmented

into several categories which are the value creation, value delivery, and value capture. Also, business

model elucidates how an organization is linked to external stakeholder, and how it engages in

economic exchanges with them to create for all exchange partners (Zottet al., 2011).

There are a lot of definitions about business model. However, all studies proposed different

definitions for business model. Although different researcher proposed different definition, the

essence of each definition can be found. The essence of each definition is value creation, value

deliver, and value capture – revenue generation. After finding the essence of each definition, it can be

proposed that business model is as an organization method in doing business by creating, delivering

and capturing value for its customers. Pijpers and Gordijn (2007) define value as anything that can

satisfy a need or use for transfer with another object. From those definitions, value can be found in

any offered services and products. Thus, the dimensions of business model are value creation, value

delivers, and value capture.

Each dimension has its own element. Value creation elements are the key resources, key partnerships,

and key activities; value delivery elements are the customer segments, customer relationships, and

channels; and value capture elements are the revenue streams and cost structures. Osterwalder and

Pigneur (2010) include these elements in their business model canvas elements. The value proposition

of the business model canvas is the intersection between each dimension. The value proposition

concerns the reason a company creates value, the decision on what to offer and how it will be offered

to the customer, and the decision on selecting which value will generate profit to company.

Strategy is a unique position, making clear trade-offs, and tightening fit. It involves the continual

search for ways to reinforce and extend company’s position (Porter, 1996). While, Farjoun (2002)

proposed strategy as the planned or actual coordination of the firm’s goals and actions that

continuously adapt the firm to its environment. Kates and Galbraith (2007) explain that strategy sets

company’s direction and encompasses the company’s vision and mission as well as its short-term and

long-term goals. While Hambrick and Fredrickson (2005) define strategy as an integrated,

96

overarching concept on how the business will achieve its objectives. In addition, they also proposed

strategy parts, which are arenas, vehicles, differentiators, staging & pacing, and economic logic.

Next step is to define the interaction between business model and strategy. Casadesus-Masanell and

Ricart (2010) argue that that a business model refers to the logic of the firm, i.e. the way it operates

and how it creates value for its stakeholders. On the other hand, they stated that strategy referred to

the choice of a business model through which a firm competed in the marketplace (a business model

can be seen as a reflection of the realized strategy). It means a business model is a choice that being

implemented by companies. Even Stefanovic and Milosevic (2010) argue the conceptual integration

between strategy and a business model can be traced along one dimension, which is the time

dimension. The temporal dimension represents a strategy that includes a set of different business

models if they are changing over time or a strategy that consists of a single business model if it has

not been subjected to any kind of changes. The difference between strategy and business model is in

its focus. Strategies focus on competition and reaching objectives, while business models focus on the

action taken to satisfy customers.

Next interaction is the interaction between business model and operating system. Osterwalder and

Pigneur (2010) state that business model acts as a blueprint for a company to implement its strategy

through the company’s structures, processes, and systems. The way a company implements its

strategy is regarded as the company’s operating system. While Casadesus-Masanell and Ricart (2010)

define operating system as the residual choices open to a firm based on the business model that it

employs, concrete actions that are selected within predefined domain which is defined by the chosen

business model. In other words, operating system is how a company creates, delivers and captures a

value. It involves the interaction among actors, activity, and value. (Pijpers and Gordijn, 2007).

Research Method

The explanation above can give a conclusion about the alignment of a strategy, a business model, and

an operating system. The difference between strategy and business model is that strategy is more

concerned with competition, while the business model is more concerned with the value creation for a

company’s stakeholders. In other words, business model is the translation of the strategy that doesn’t

include the competition perspective. Therefore, if a business environment changes, the competition

perspective must be included to the changes or adapting the business model to the changes. as for

operating system, it is a concept that occurs when a business model has already been selected.

Operating system is directed by a business model into who, how, and what will be involved in

creating, delivering and capturing a value. The “who” is represented by an actor, the “how” is

97

represented by an activity, and the “what” is represented by a value. Operating system is then directed

to achieve the value that is offered to customers. The alignment model will be shown in Figure 1.

Arenas

Vehicles

Differentiators

Staging&

Pacing

Economic Logic

Business Model

Value Creation Value Delivery

Value Capture

Arenas

Vehicles

Differentiators

Staging&

Pacing

Economic Logic

Arenas

Vehicles

Differentiators

Staging&

Pacing

Economic Logic

Business Model

Value Creation Value Delivery

Value Capture

Business Model

Value Creation Value Delivery

Value Capture

Stage 1

Stage 2

Stage n

Inform and Evaluate

Inform and Evaluate

Translate

Translate

Translate

Direct

Direct

Direct

Inform and Evaluate

Figure 1. The alignment framework

The alignment framework then can be modified into the intersection model in the alignment of a

strategy, a business model, and an operating system. As it has been described in the previous

section, almost every dimension of strategy is translated into a business model except the staging

and pacing. The same thing is also applied in the alignment of both a business model and an

operating system, where in every dimension of both a business model and an operating system,

actors, activities and value exchanged will be identified. However, the detail on doing the activities

will not be intersected with a business model. The intersection model can be seen in Figure 2.

As a case study, the research design of this study is to apply a theoretical alignment concept in a real

business situation. By collecting data and analysis through the theory given, the research will draw a

conclusion or present an example of how the theory is applied and translated in a particular case.

Various definitions on strategy, business model, operating system as well as the dimensions and

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alignment of strategy, business model and operating system are presented. It is done to map a

strategy, a business model, and an operating system in a real company. After mapping the strategy,

business model, and operating system in a real company, a concept is made. The concept is then

analyzed to see whether the strategy, business model, and operating system have already been

aligned to one another or not. After analyzing the alignment is done, the solution is then proposed.

Staging

and

Pacing

Business Model

Value Creation Value Delivery

Value Capture

Staging

and

Pacing

Business Model

Value Creation Value Delivery

Value Capture

Adaptive

Factor

A

o

V

A

i

A

o

V

A

i

A

o

V

A

i

A

o

V

A

i

A

o

V

A

i

A

o

V

A

i

The Alignment of Strategy, Business Model and Operating System Intersection Model

Detail

Activities

Procedures

Detail

Activities

Procedures

Inform and evaluate

Figure 2. The alignment intersection model

For empirical evidence, this case study was conducted based on two disguised logistics companies in

Indonesia, namely: Express Delivery Indonesia (EDI) and Warehouse Logistics Indonesia (WLI).

Both companies are top ten companies in the logistics sector. JNE is the leader in the market with

50% of market share and turnover around 1.4 trillion rupiahs. EDI’s turnover in 2012 was around 500

billion rupiahs, while WLI’s turnover was around 1 trillion rupiahs in 2012.

Indonesian logistics industry prospect is very large. This is because there are many companies use the

third party services to handle their logistics activities. They are conducting this in order to increase

their focus on their core business. Logistics services in Indonesia are categorized into shipping,

cargoes, trucking, freight forwarding, warehousing and distribution, express delivery, and distributor.

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This categorization can be seen when a company is first established and provides services to its

customers.

Even though there are no exact market values of logistics services in Indonesia, it can be seen from

the logistics cost in Indonesia that reach 24.64% of Indonesian GDP. This number is really big

compared to other countries, for example USA (9.9%), Japan (10.6%), and South Korea (16.4%)

(SWA Magazine). This suggests that the prospect for logistics service providers is really big.

According to SWA Magazine, the big players in Indonesian logistics industry can be divided into their

types of services. In shipping company, there are PT Berlian Laju Tanker Tbk. (BLT), PT Samudera

Indonesia, and Tempuran Emas. In freight forwarding, there are Mitra Intertrans Forwarding,

Kamadjaja, and Fin Logistics. In Trucking/Transportation, there are Dunia Express, Go Trans, and

Puninar. In Express Delivery/ Courier, there are DHL/Birotika Semesta, TNT Indonesia/Skypak

International, and Pandu Logistics. In Warehouse and Distribution, there are Ceva, DHL Exel, GAC

Samudera Logistics, and PT Bhanda Ghara Reksa. Finally, in Distributor, there are Tigaraksa,

Wiralogitama, and Enseval Megatrading.

However, the Indonesia logistics industry is mainly dominated by foreign companies, e.g.: FedEx,

DHL, UPS, CEVA Logistics, TNT, Pantos Logistics, and Maersk, which take more than 60% of

market share. Those foreign companies can dominate because of their experiences and technologies.

Indonesian logistics companies are mainly still using paper-based systems. This might become

weakness for local logistics companies to compete with foreign companies. In addition, in 2015,

ACFTA will be implemented. There will be more competition come from foreign companies in this

sector.

Besides the companies’ internal problems, logistics companies in Indonesia also face external

problems. One of the external problems faced by Indonesian logistics companies is insufficient

infrastructure in Indonesia. It is not only about the road and traffic jam problem, but it is also ports,

airports, and many other infrastructure problems. In addition, there are still many illegal levies in

every sector in Indonesia.

The primary data gathered by conducting interviews to the heads of area development in EDI and

CEO of WLI. The interviews were conducted for three hours. The interviews were conducted to

identify those organization’s strategy, business model, and operating system. After the identification

of their strategy, business model, and operating system were finished, the data gathered were then

analyzed to check whether the strategy, business model, and operating system in each company align

to one another or not.

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Findings

A. Express Delivery Indonesia (EDI)

The identification was conducted by using Hambrick and Fredrickson's strategy diamond, to map the

strategy summarized. The arenas in which Express Delivery Indonesia operates are well defined: the

company provides express delivery for companies around Jakarta such as telecommunication, bank,

pharmacist, and FMCG industries. In contrast, currently they are not providing product delivery; it is

more to deliver spare part and heavy equipment. EDI can deliver goods to the rural areas, from Aceh

until Papua because their branches can be found in every city in Indonesia. If talking about EDI, it is

talking about air freight delivery as its primary vehicles are organic expansion. Their differentiators

are focus on their employees; strong domestic network; same day services; customized services

through logistics contract; “EDI is Air Freight Specialist” motto.

As for staging, or EDI’ speed and sequence of moves, its first move is to spread its network around

Indonesian archipelago. EDI plans to do some research to find the effective road to deliver goods.

After finding the effective road to deliver, the company expands its business into warehousing

management. It is done because EDI’s current customers need higher capacity of warehouses and it

looks promising to develop its business to warehousing service provider. The economic logic of EDI’s

mainly comes from the competitive price for providing services. Besides service fees, EDI also

generates its revenue from outsourcing its man power and rent its warehouses to other company. The

cost structure is mainly about the “SMU” or ticket for goods to deliver via air freight. These EDI’s

strategies can be seen in Figure 3.

Some of the actions fit together, for example, considering the strong alignment between its arenas,

vehicles, and differentiators. To be able to do the express delivery to any place in Indonesia, EDI does

the organic expansion to build their network throughout Indonesia. EDI conducts some research for

locations, effective routing method, and also for ICT. Before it developed its own ICT, EDI uses the

ICT of its partners although it did not obtain the benefit as promised. EDI’s ICT is now used for

integrating its communication system throughout its branches. Also, to increase its customer

satisfaction, EDI provides the same day services. The customers that need to deliver their documents

or goods can use this service. However, currently, their constraint for this service is that they only can

deliver to big cities in Indonesia that have an airport.

After defining EDI’s strategies, now we can define its business model. The key activities that are

conducted by EDI are not only the logistics services, but also acquiring and nurturing their customers.

The logistics services activities that are conducted by EDI are warehousing, courier services, air and

sea freight, land transportation, contract logistics, and outsourcing man power. Other activities to

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acquire and nurture customers that are conducted by EDI are customer services – to handle customers’

complain and give report about their shipment status – and salesmanship services – to visit the

prospect customers and give some presentation for them.

Arenas

Vehicles

Differentiators

Staging&

Pacing

Economic Logic

Arenas

Express Delivery to any place in Indonesia

For Company

Banking, FMCG, Pharmacist, and Telecommunication Industry

Vehicles

Organic expansion

Internal Development

Differentiators

Focus on employee

Strong domestic network

Same day services

Air freight, ONS, Regular, SDS, Sea Freight

Staging and Pacing

First stage: network expansion through

research around Indonesian archipelago

Second stage: Business expansion

Economic Logic

Competitive price

Service fees

Rent fees

Outsource fees

さ“MUざ cost

さEDI is Aiヴ Fヴeight “pecialistざContract Logistics

Using own and partner resources

Delivers document and spare part

Operational cost

Maintenance cost

Delivery cost

Training cost

Figure 3. Express Delivery Indonesia Strategy Diamond

The resources that are used by EDI are not only of their own but also of their partners’. EDI’s own

resources are warehouses, sales point or branches, motorcycles, medium size trucks, 2 and 4 cubic

volume containers, forklifts, and human resources that are competent in logistics activities

(dispatcher, salesman, finance, customer service). For resources that it obtains from its partners are

trucks, IT services, and warehouses.

The partnership that is implemented by EDI aims solely to satisfy its customers, for example in

delivering its customers’ goods to destination, storing its customers’ goods, and supporting its

customers’ activities. Its partnership is conducted with Airlines Company, Shipment Company, truck

owner, warehouse owner, and IT Company. The partnership with IT Company is conducted to support

any activities in EDI. It is more to do computer and system maintenance in EDI. The values that are

offered to its customers are on-time delivery, safe delivery, and negotiable price, ensuring its

customers that EDI is a specialist corporate and an air freight specialist, having a strong domestic

network, a specialist in delivering spare parts and documents, and focusing on its internal

stakeholders, which is its employees.

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EDI conducts its delivery value process through customer relationships and channels. From customer

relationships, EDI delivers its value by visiting the prospect costumers. EDI also doing some

promotion to the magazine (Islamic magazines such as Insaniyah, Hikmah), newspapers (e.g.,

Republika), and through its own sales point network. The targeted customers which are the reason

EDI creates its own value and deliver the value to its customers. The main EDI’s customers are

corporate customers. EDI’s more specific targets are the telecommunication, banking, pharmacist, and

FMCG Company. However, EDI does not deliver their products but just delivers their spare parts.

After creating and delivering its own values to the customers, EDI also has a capture value. Its capture

value is composed of cost structure and revenue streams. For the cost structure, it is mainly composed

of the “SMU” cost and the others such as delivery cost, training cost, maintenance cost, and other

cost. The “SMU” is the ticket for boarding to the airplane. The reason why this ticket is the main

composition in the cost structure is because EDI services are mainly related to air freight. For revenue

streams, EDI obtains its income from the service fees; warehouse rent fees; and man power

outsourcing fees. Every price from each source of revenue is negotiable. This business model part is

concluded in the business model canvas as shown in Figure 4.

Business Model

Value CreationValue Delivery

Value Capture

Key Partnerships Key Activities

Key Resources

Value Propositions Customer Relationships

Channels

Customer Segments

Cost Structure Revenue Streams

Zyrex for IT Partner

Garuda Indonesia

Pelni

Lyon Air

NAF to Support

Financing Activities

Truck owner

Warehouse owner

Warehousing

Contract LogisticsExpress Delivery

Air Freight

Land TransportationSea Freight

Outsourcing Man Power

Motorcycle

Warehouse

Sales point or Branches

Container 2 and 4 cubic

Medium size truck

Man power (dispatcher,

warehouse supervisor,

salesman, finance, customer

service, IT)

On-time delivery

Safe delivery

Negotiable price

さEDI is Air Freight “pecialistざ

Strong domestic

network

Company visit

Report shipment status

Promotion

- Newspaper

- Islamic Magazine

- Internet

Sales point scattered

throughout Indonesian

archipelago

Company (B2B)

Telecommunication

Company

Banking

Pharmacist Company

FMCG Company

Few Individual

Customers

さ“MUざ cost Delivery cost

Training costMaintenance cost

Services fees Lending and Renting fees

Man power outsourcing fees

Express Delivery

Personalized

Customer Service

Same day services

Focus on employee

Network expansion through

intensive research

Figure 4. Express Delivery Indonesia Business Model Canvas

For operating system, it can be captured from EDI’s business process. It will be grouped into actors,

activities, and values. The actors that contribute to create, deliver, and capture values are drivers,

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dispatchers, salesmen, customer services, warehouse supervisors, customers, and partners. The

activities that are conducted in create, deliver, and capture values are visiting customers, picking up

goods, document creation, bagging, transporting, purchasing “SMU”, storage, and delivering goods to

destinations. The values that are involved in satisfying customer process are money, document, proof,

and goods. This process can be captured using the e3value as shown in Figure 5.

Customer

Approve

Contract

EDI Origin

Salesman

Visit Customers and

Promotion

Negotiate Contract

Dispatcher

Pick up shipment

Transport to airport

Warehouse Supervisor

Bagging

Finance Division

Puヴchase さ“MUざ

Collect Payment

Airlines Company

Provide Cargo

Service

[Presentation]

[Attracted to service]

[Contract]

[Agreement]

[Pick up]

[Goods]

[さ“MUざ]

[Goods]

[Money]

[さ“MUざ Fees]

EDI Destination

Dispatcher

Pick up shipment

Warehouse Supervisor

Temporary Storage

Deliver to destination

address

[Delivery shipment proof]

[Money]

[Go

od

s]

Destination Address

Acquired Goods

[Go

od

s]

[De

live

ry s

hip

me

nt

pro

of]

[Ownership Right of Goods]

[De

live

ry s

hip

me

nt

pro

of]

Send Proof[R

eq

ue

st P

roo

f]

Customer Service

Report Shipment Status[Shipment Status]

Need Report [Request]

Payment

Customer Service

Report Shipment Status

[Re

qu

est

Sh

ipm

en

t S

tatu

s]

[Sh

ipm

en

t S

tatu

s]

Send Goods

Need Delivery

Services

“end さ“MUざ Info

Reケuiヴedさ“MUざ Info

[さ“M

Uざ

Info

]

[Reケ

uest

さ“M

Uざ

Info

]

[さ“M

Uざ

Info

]

[Pic

k u

p]

Arrive to

Destination Area

Figure 5. Express Delivery Indonesia Operating System

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After mapping strategy, business model, and operating system of EDI’s into each framework, next

step is to analyze the alignment of its strategy, business model and operating system. As shown in

Figures 4 and 5, it can be seen that each part of strategy is captured again in the business model part.

It proves that a business model is a translation from strategy into value logic. To see the alignment or

the translation of a strategy into a business model, we need to zoom in the business model’s

dimension into the sub-dimensions. The alignment matrix from strategy, business model, and

operating system is shown in Figure 6. It is proved from this mapping process.

Translate

Direct

Figure 6. The Alignment Matrix

The alignment between a business model and an operating system is direction. A business model will

direct an operating system to create, deliver, and capture value. In each dimension of a business

model, there are value, activity, and actor as shown in Figure 5. The orange line means the value

creation process, the green line means the value delivery process, and the blue line means the value

capturing process. To look at the relationship between a business model and an operating system can

be done by zooming out the dimension of business model. Therefore, a business model from the value

logic can direct an operating system. Value creation, delivery, and capture process have its own actor,

activity, and value involved.

From Figure 4, we can see one of the value propositions proposed by EDI, that is, express and safety

delivery. In other words, EDI concerns the time to deliver and quality of its own customer’s goods.

Moreover, EDI also provides report shipment status to its customers. The safety delivery that is

proposed by EDI is realized through the bagging process in EDI’s “origin”. This process also provides

other adding-value processes, which is aggregating its destination into the same bag.

As said in the interviews, the common problem that occurs in the process delivery is about the late

delivery. It can occur because of two things, namely the misdirection of delivery and the routing

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problem. Misdirection of delivery occurs because of the wrong code translation. For example, when

there is a shipment to Semarang, it will be written down SOQ in the shipment goods. Sometimes, it

sends to Sorong because the people in the warehouse do not concentrate fully when they do the

bagging process. Routing problem occurs when a shipment faces the sorting goods in the

“destination” area, which is done in the temporary storage process.

The problem that occurs can be prevented by conducting another technique. Rather than using the

three-code that is usually used, it can also use color-code for sorting area shipments. It can be done

both in “origin” and “destination” warehouse sorting. In “origin” misdirection of delivery can be

prevented. In “destination” warehouse, color-code sorting technique can be used for routing areas.

EDI has already conducted some research for network expansion and for finding effective ways.

However, EDI’s research only focuses on finding which way need to be taken, and not for the routing

technique.

For reporting shipment status, sending “SMU” info and proof delivery are still done manually.

Reporting shipment status from each process – picking up, bagging, transporting, and arriving to

EDI’s “destination” – and sending “SMU” info from EDI’s “origin” to EDI’s “destination” is still

done by email or facsimile. For sending a proof delivery from EDI “destination” to EDI “origin”, it is

still done by facsimile. These processes can be done efficiently if EDI develops technology for

tracking and tracing. This recommendation has already been proposed to EDI, and they agree with

that recommendation. Moreover, by implementing this technology, EDI’s operating system can be

done more efficiently. Several processes can be reduced by the technology, which is the customer

service’s activity (reporting a shipment status, sending a delivery proof, and sending a “SMU” info).

Other technologies that can be developed by EDI are the warehouse management system. EDI needs a

system that can support its warehousing activity.

B. Warehouse Logistics Indonesia (WLI)

The identification is done by using Hambrick and Fredrickson's diamond strategy. It is done to map

the summarized strategy. The arenas in which Warehouse Logistics Indonesia or WLI operates are

well defined. For example, the company provides a warehouse and distribution services for industry,

agriculture, bank, and other services. Its core business is warehousing. WLI provides logistic

management services, such as warehousing rent-services, distribution, record management system,

and collateral management services. For distribution, it uses a common land transportation and sea

freight. WLI is based in Jakarta and operates 9 branch offices and 14 sub branch offices all over

Indonesia. WLI is also supported by 150 units of self-owned warehouse, 179 units of rented

warehouses, and 129 management warehouses across Indonesia. Speed and accuracy of delivery,

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competitive price, safety and quality management, and wide network as well as scattered across

Indonesia are the value added that are proposed to customers.

Its primary vehicles are organic expansion and acquisition. WLI differentiators are as follows. First is

that their customers are commonly corporate, so the prospect customers can be reached through

visiting them, or the customers come to WLI’s offices. Second, WLI focuses on their employee’s

welfare by providing several activities that can increase their work productivity. Third is that WLI has

a huge capacity of warehouses. Finally is that they have experience in warehouse providing services.

They provide warehouse rent and warehouse management services.

As for staging, or WLI’s speed and sequence of moves, the company currently is improving its

network into Papua province. The next stage from WLI is that it is going to provide courier services.

When its warehousing system has already been established it can support its courier service better.

The economic logic of WLI mainly comes from the competitive price in providing warehouses. Not

only does it earn its revenue from warehouse rent, but WLI also generates its revenue from

distribution fees of company’s goods. WLI’s cost structure mainly comes from the operational cost

that is composed of the transportation cost and storage maintenance cost. These WLI’s strategy part

can be seen in Figure 7.

Arenas

Vehicles

Differentiators

Staging&

Pacing

Economic Logic

Arenas

Warehouse and Distribution

For industry, agriculture, bank, and other companies

Vehicles

Organic expansion

Acquisition

Differentiators

Focus on employee

Huge warehouse capacity

Warehousing rent-services, distribution, record

management system, and CMS

Staging and Pacing

First stage: network expansion to Papua

Second stage: Business expansion,

provide new service – courier service

Economic Logic

Competitive price

Warehouse management services

Warehouse: own and rent

9 branch, 14 sub branch offices

Operational cost

Maintenance cost

Delivery cost

さWLI is waヴehousing specialistざSafe and Accurate

Figure 7. Warehouse Logistics Indonesia Strategy Diamond

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Some of the actions fit together because it has a strong alignment among its arenas, vehicles, and

differentiators. To provide warehouse for industry and agriculture companies, WLI owns a huge

capacity of warehouses in scattered area in Indonesia. WLI also improves its network to Papua

province to grab customers in that area.

After defining WLI’s strategy, now we can define its business model. In value creation, there are key

activities, key resources, and key partnerships. Key activities that are conducted in WLI are logistics

services as well as acquiring and nurturing its customers. The logistics services activities that are

conducted by WLI are mainly based on warehouse rent-services, warehouse management, and

distribution for supporting activities. Other activities to acquire and nurture its customers that are

conducted by WLI are customer services – to handle customers’ complaints and to give a report about

its shipment status – and marketing or salesmanship services – visiting the prospect customers and

giving some presentation for them.

To do these activities, WLI is supported by reliable resources. These resources are not only owned by

WLI themselves, but they are also obtained from its partners. WLI owns 150 warehouses, 9 branch

offices, 14 sub-branch offices, container trucks, box trucks, forklifts, and human resources that are

competent in Logistics activities (dispatcher, marketing or salesman, finance, customer service). For

resources that are obtained from its partners are 179 warehouses and some air and sea freight services.

The partnerships are carried to deliver its customers’ goods to a destination, to store their goods, and

to support their activities. The partnership is also conducted with airlines companies, shipment

companies, and other companies. Another partnership that is done by WLI is with warehouse owners

in several areas scattered around Indonesia. The partnership with IT Company is conducted to do the

computer and website maintenance in WLI.

The values that are offered to its customers are safe storage and competitive price. WLI also offers its

customers such values as a corporate specialist, WLI is warehouse specialist, and a strong domestic

network. Besides the values that are offered to the external stakeholders, WLI also focuses on their

internal stakeholders, i.e. their employees.

WLI conducts their delivery value process through customer relationships and channels. From

customer relationships, WLI delivers their value by visiting the prospect costumers. WLI is also doing

some promotion to the magazine, newspaper, and through its branches that are scattered around

Indonesia. To nurture its existing customers, WLI delivers its value through the marketing/ sales

division. This division’s duty is to report delivery status. The targeted customers are the reason WLI

creates its value and deliver that value to. The main WLI’s target customer is corporate. Its specific

targets are the industry, agriculture, banking, and FMCG Company.

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Capture value is composed of cost structure and revenue streams. For cost structure, it is mainly

composed of the operational cost such as delivery cost, maintenance cost, and other costs. For revenue

streams, WLI obtains its income from the warehouse rent fees and services fees. This business model

part is concluded in the business model canvas as shown in Figure 8.

Business Model

Value CreationValue Delivery

Value Capture

Key Partnerships Key Activities

Key Resources

Value Propositions Customer Relationships

Channels

Customer Segments

Cost Structure Revenue Streams

Garuda Indonesia

Pelni

Lyon Air

Warehouse owner

Warehousing and

Distribution

Air Freight

Land TransportationSea Freight

Report status

Company Visit

Warehouse, own and rent

Branches and sub-branches

Box Trucks

Man power (dispatcher,

warehouse supervisor,

salesman, finance, customer

service, IT)

Safe and Accurate

Competitive price

さWLI is Warehouse “pecialistざ

Strong domestic

network

Company visit

Report status

Promotion

- Newspaper

- Magazine

- Internet

Branch and sub-branch

scattered around Indonesian

archipelago

Company (B2B)

Agricultural

Banking

Industrial

FMCG Company

Delivery costMaintenance cost

Services fees Lending and Renting fees

Focus on employee

Container Trucks

Airlines Company

Sriwijaya Air

Operational Cost

Figure 8. Warehouse Logistics Indonesia Business Model Canvas

For operating system, it can be captured from WLI’s business process. It will be grouped into actors,

activities, and values. The actors that contribute to create, deliver, and capture values are drivers,

dispatchers, marketing, customer services, warehouse supervisor, and customers. The activities that

are conducted in create, deliver, and capture values are visiting customers, inbound and outbound

logistics. Values that are involved in satisfying the customer process are money, proof, SI, DN, and

goods. This process can be captured using the e3value that can be seen in Figure 9.

After mapping the strategy, business model and operating system of WLI’s into each framework, next

step is to analyze the relationship between each concept. As shown in Figure 5 and Figure 6, it can be

seen that each part of strategy is captured again in the business model part. It is proved that business

model is a translation from a strategy into value logic. To see the relationship or the translation from a

strategy into a business model, we need to zoom in the business model dimension into its sub-

dimensions.

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WLI

OFFICE

Customer

Need Warehouse

Marketing Division

Visit and Promotion

WAREHOUSE

Warehouse Supervisor

Receive SI

[Presentation]

[Attracted]

Negotiate ContractApprove Contract

[Agreement]

[Contract]

Distribute SI

Send shipment

instruction (SI)

[Approve]

[SI]

[SI]

Send Goods

Receive Shipment

[Ownership right of report]

[Goods]

Staging and

Checking

Putaway

Reporting

Pick Goods

Send Delivery Notes

(DN) Distribute DN

[Approve]

[DN]

[Report]

Receive DN

Picking

Scaning and Packing

Dispatcher

Deliver Goods

Finance

Collect Payment

Payment

Report Status

[Report]

[DN]

[Goods]

[Pro

of]

[Proof]

[mo

ne

y]

Figure 9. Warehouse Logistics Indonesia Operating System

A business model will direct an operating system to create, deliver, and capture a value. In each

dimension of a business model, there are value, activity, and actor as shown in Figure 8. The orange

line means the value creation process, the green line means the value delivery process, and the blue

line means the value capturing process. To look at relationship between a business model and an

operating system, it can be done by zooming out the dimension of the business model. Therefore, a

business model from value logic can direct an operating system. Value creation, delivery, and capture

process have its own actor, activity, and value involved. Figure 9 shows the alignment between

business model and operating system.

In Figure 8, we can see one of the WLI’s value propositions: safe and accurate. In other words, WLI

concerns the quality of its customer’s goods. Moreover, WLI also provides report status services to its

customers. In the operating system, we can see that there are several activities that are still done

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manually, for example the putting away goods and picking goods. A warehouse supervisor just relies

on his memory about the location for the goods that want to be put and the location of goods that want

to be picked up before they are delivered. Several errors might be found from this process, such as

from wrong goods picking to deliver until the inefficient process putting away goods. To achieve the

accuracy, WLI can implement a simple warehouse management system, i.e. by using a sensor with a

lamp indicator which is connected to the computer in a location. Another review of operating system

is the distribution that is proposed by WLI. To improve the accuracy as its proposed value, WLI can

implement the tracking and tracing device. This process also provides another adding-value process,

i.e. giving an exact location of distribution to customers.

C. Comparison

From the findings in each company, in this session the findings in those two companies will be

compared one another. The comparison will be shown in Table 1. As it has already been explained in

the previous section, the alignment between a strategy and a business model is the translation from a

goal focus into value logic to satisfy customers. In the table below, we can see the comparison

between alignment of strategy and business model from EDI and WLI.

It has been shown in Table 1 that both companies have several similarities for their strategy aspects.

However, there are also differences, such as their key activities in the arenas part, value propositions,

staging and pacing, and their economic logic. From Table 1, we can see that the value proposition

from EDI and WLI is different. EDI proposes express delivery for its customers, while WLI proposes

safety and accuracy. Because of the difference in the value propositions, the operating system in EDI

and WLI will also be differently conducted. EDI concerns more with the customers’ packages

delivery time, while WLI concern more with the accuracy in storing the customers’ packages.

The alignment of business model and operating system in both companies can be seen in Figures 4

and 8. As it has been explained before, the alignment between business model and operating system is

the direction to the actors in doing their activity to reach a value proposition as the target. However, it

can be seen that the misalignment between a business model and an operating system is identified in

the value creation process. As shown in Table 1, the value proposition of both EDI’s and WLI’s is

different. Therefore, their operating system will also be different from one another.

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Table 1. Comparison for Findings in Express Delivery Indonesia and Warehouse Logistics Indonesia S

trat

egy

Business Model Express Delivery Indonesia (EDI)

Warehouse Logistics Indonesia (WLI)

Arenas

Customer Segments Company Company

Key Activities Express Delivery for

Documents and Spare Parts Warehousing and Distribution

Key Resources Truck, Motorcycle, Man power,

warehouse (5000 m2), container, branches

Huge Capacity of Warehouse (Total 1 million ton), truck, man power,

branches Channels Strong Domestic Network Strong Domestic Network

Vehicles Key Activities

Organic expansion; branch and technology

Organic expansion: Branch expansion, Acquisition: Warehouse

from partner

Key Partnerships air freight activities Warehouse, freight services (air and

sea)

Differentiators

Value Propositions

Customer: Express Delivery, On-time Delivery, "Air Freight

Specialist"; Employee: Focus on Employee

Customer: Safe and Accurate, "warehouse specialist"; Employee:

Focus on Employee

Key Activities Delivery services: same day services, over night services,

regular services Warehousing and Distribution

Channels 175 branches across Indonesian

archipelago

9 branch offices, 14 sub-branch. 150 self-owned warehouse, 179 rented warehouse, and 129 management

warehouse across Indonesia Customer

Relationships Customer service and Salesman

Visit customers and salesman to report status

Revenue Streams Competitive price Competitive price

Staging and Pacing

Adaptive

First step is EDI spread their network. Next step is business expansion into warehousing

activities

First step is, WLI improves their network to Papua. Next step

business expansion into express delivery services

Economic Logic

Revenue Streams Mainly from providing services,

other revenue from rent warehouse and man power fees

Mainly from warehouse rent fees and distribution fees

Cost Structures Mainly from "SMU" cost, other

cost from maintenance and operational cost

Mainly from operational cost (transportation and warehouse

maintenance cost)

Discussion

From this case study, the framework enables both companies to determine their strategy, business

model, and operating system. The main objectives of the framework are determining the alignment

between the operating system in the companies with their proposed business model. Alignment

between their strategy and business model are well-defined because as it has been mentioned in this

paper that strategy is translated to value logic – business model. Both companies lack in some of their

alignment between business model and operating system. The lack of alignment occurs in the

supporting activities done by the companies. For EDI, the lack of alignment occurs in warehouse

activities, while in WLI, the lack of alignment occurs in distribution activities. Even though both

companies declare that their companies are logistics companies, in fact, their existing business model

and operating system show that both of them are part of logistics firms and not the total logistics. EDI

still focuses in courier services, while WLI still focuses on warehousing services. In the interviews,

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concerning how to determine their strategy, both company plans to do business expansion.EDI plans

to do business expansion in warehouse rent-services, while WLI plans to do business expansion in

courier services. Both activities need a huge amount of investment. Both activities have become core

business for another company. If both companies perform a joint venture, it will improve their

economic logic.

This recommendation has already been proposed to both companies, but one of the companies

declined the recommendation. They argued that their “black box” could be taken by another company

if they perform a joint venture. They give an example like Samsung and Apple. Apple has the idea,

while Samsung has the man power and manufacture. They performed a joint venture to develop

iPhone. The fact shows now Samsung has become Apple’s main competitor. Another

recommendation is about developing a simple technique for EDI’s warehousing problem, which is the

color sorting and routing technique. As for WLI, the recommendation offered to them is either

implementing an automatic warehouse management system or using the ERP. Another

recommendation for WLI is to develop its tracking and tracing technology, particularly for its

premium customers only.

Cassadesus–Masanell and Ricart (2012) in their research describe that a business model is the

reflection of a realized strategy. They argue that a strategy and a business model are in same

dimension, which is called the strategic level, while Stefanovic and Milosevic (2011) argue the

integration between a strategy and a business model can be traced along one dimension. It is the

adaptive choice by a company according to the business environmental changes. They overlook the

staging part of the strategy that is proposed by Hambrick and Fredrickson (2005). Staging part

explains about the company’s plan for future development. However, in reality the most affecting

factor for future development is not the business plan or business environment changes, but it is the

fulfillment of customers demand. The difference between a strategy and a business model is on their

focus. The strategy focuses on the competition and reaching objectives, while the business model

focuses on the process to satisfying the customers. To align a strategy and a business model,

organization needs to translate their way to reach their goal into the value logic.

For operating system, it occurs after strategic level is decided. Therefore, operating system is in

tactical level. An operating system is directed by the previous level to achieve the proposed value

made by an organization. To see whether an operating system has already been aligned with a

strategic level, first thing to do is to find the company’s value proposition. Casadesus–Masanell and

Ricart (2012) argue that tactical level is the residual choice open to a firm; it is not entirely true.

Tactical level can be designed. However, it must be designed according to the decided strategic level.

If it is just a residual choice, then it can be assumed that everything can be done without constraints,

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and the activity result is costly and inefficient in reaching the target. The target and constraint factor

are overlooked by Casadesus-Masanell and Ricart (2012). However, these factors are explained in this

paper under the topic of alignment framework.

This alignment framework that is proposed in this paper can be said better than Solaimani and

Bouwman (2012) who proposes VIP framework. VIP framework overlooks the adaptive factors which

are needed to create sustainability in a company’s business. They only focus on the business model

and business process alignment. VIP framework also does not look at the alignment between a

strategy and a business model.

This research also contributes to the existing research since it shows the alignment between a strategy,

a business model, and an operating system. This research certainly gives another insight about the

alignment between a strategy, a business model, and an operating system. However, future studies are

welcomed to be conducted to find a framework to capture those three concepts in one map. Also,

another study that can be conducted is to determine the performance indicators for the alignment

framework. Besides in logistics company, this research can also be applied in any other kinds of

business: profit or non-profit business.

Conclusions

The result of this research leads to three main conclusion. First, both companies, WLI and EDI have

already implemented a strategy, a business model, and an operating system. However, both companies

do not realize that everything they have done is categorized as part of a strategy, a business model, or

an operating system. Each informant learned it after the interviews was finished. It can be inferred that

in Indonesia, companies naturally do their business without firstly planning their business.

Second, the alignment of a strategy, a business model, and an operating system model can be used to

see a strategy from value logic scope and direct actors to do the activities to reach a value proposition.

It is directing who will create, deliver and capture value; how will value be created, delivered, or

captured; and what are involved (the object, information, or money) in creating, delivering and

capturing value. The alignment between a business model and an operating system is the alignment

between strategic levels to tactical levels that are categorized into actors, activities, and values.

Finally, the existing strategy, business model, and operating system that are implemented in both

discussed companies have already aligned some of their activities. The alignment identified is mainly

in the core business of the companies. For supporting activities, the misalignment is identified. In

EDI, the misalignment between its business model and its operating system is identified in its

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warehousing activities. However, in WLI, the identified misalignment between its business model and

its operating system is in its distribution activities. The misalignment that is identified can be reduced

by an internal development program or through a partnership. As the supporting activities are not their

core business, they can create a partnership with other companies that have those activities as their

core business.

Acknowledgements

The authors would like to thank Azhar Rohman and Jimmi Krismiardhi from EDI and Mulyanto from

WLI through their willingness to provide real business data.

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