Logistics Models

8/9/2019 Logistics Models

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Challenges and winningmodels in logistics

More customers are using logistics to gain a competitive advantage,opening up opportunities for providers that choose the best path to growth

By François Rousseau, François Montaville and François Videlaine


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Copyright © 2012 Bain & Company, Inc. All rights reserved.

François Rousseau is a partner in Bain & Company’s Paris office, a leaderin the rm’s Industrial Goods & Services practice and a Logistics & Transportsector leader. François Montaville is a partner in Bain’s Paris ofce and a mem-ber of the rm’s Industrial Goods & Services practice. François Videlaine is aprincipal in Bain & Company’s Paris ofce and a member of its IndustrialGoods & Services practice.


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Challenges and winning models in logistics

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1. Third-party logistics: Market structure

Corporate managers traditionally have viewed logisticsas a mandatory cost bucket. But top-performing companiesnow recognize that mastering supply chain and logis-tics can be more than that: It can be the source ofcompetitive advantage.

This strategic shift opens up signicant growth oppor-tunities for logistics providers, with winners using differentpaths and business models to foster growth. The majorchallenges for providers are aligning corporate strategywith the right organizational model and matching thatstrategy to targeted customer segments—by size, foot-print, vertical category and market. Leading logisticsproviders excel at understanding key customers’ needsand purchasing behaviors—and they know that under-standing is a key ingredient to building a solid strate-gy and dening the most efcient commercial approachand offerings. This report will examine both the marketand winning models used by providers.

Many companies now outsource all or part of theirsupply chain to logistics specialists when it’s not a core

business. For logistics providers, the value propositionrests on three key pillars: optimizing logistics costs forcustomers, shortening the length of the order comple-tion cycle and reducing the number of xed assets.

Outsourced logistics activities commonly fall into threetypes of services: contract logistics, freight forwardingand transportation. These businesses are deeply inter-connected, with some overlap (se Figur 1). Forexample, freight forwarding operations frequentlyinvolve activities associated with contract logisticsservices that are performed when goods are collectedand received, such as cross-docking and warehousing.Similarly, contract logistics providers often are responsiblefor local distribution and derived truck transportation. Thethree services are built on different business models.

1.1. Contract logistics

Moving beyond warehousing. Along with warehousingservices (picking up, packing and labeling), contractlogistics suppliers have extended their traditional core

into extra value-added services, such as postponedmanufacturing (light assembly, kitting, manufacturing

Customers’ supply chain and logistics segments

Supplier

Inbound flows

Source: Bain & Company

Supplier

Supplier

End client

End client

End client

End client

Freight forwardingContract logistics Transportation

ProductionWarehouse/distribution

centers

Warehouse,cross-docking,

customs

Warehouse,cross-docking,

customs

Figur 1: Outsourced logistics activities (contract logistics, freight forwarding and transportation)are deeply interconnected, with some overlap


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logistics market offers suppliers few opportunities todifferentiate themselves. Customers often view contractlogistics as a commodity, with a provider’s cost posi-tion serving as the main purchasing criteria.

This viewpoint has encouraged providers to developcost-effective solutions, such as shared warehousing.They also replicate winning formulas that make themost of a solid infrastructure, which may includewarehouse conguration, IT systems and skilled teams.

1.2. Air and sea freight forwarding

From “pure” freight forwarders to integrators. Air andsea freight forwarders are commissioned by companiesto manage their freight overseas and overland. Theservice includes transportation, customs brokerage,insurance and tracking.

Most freight forwarders don’t own ships, airplanes or othertransportation assets. Instead, they act as intermediariesbetween customers and cargo carrier companies. How-

ever, a few major logistics players, such as DHL, TNT andUPS, have been developing their own cargo eets and hubs,making them logistics integrators.

and quality control), and even payment and customermanagement (se Figur 2).

Still a regional and fragmented market. A few largeglobal players dominate the contract logistics market.The leader, DHL Supply Chain, with more than €13 bil-lion in relevant revenues in 2011, is nearly four timeslarger than the supply chain units of its closest competitors,Ceva Logistics and Kuehne & Nagel, the No. 2 and 3players, respectively.

Even so, contract logistics remains a local and fragmentedbusiness. Top suppliers lead the market at a national orregional level, but not globally. In the Asia-Pacic region,Hitachi’s third-party logistics, Sankyu, Mitsubishi Logisticsand Yamato are the established key players; in NorthAmerica, DHL, Penske, UPS and Ryder are the majorsuppliers; and in Europe, the main players are Wincanton,Ceva and Kuehne & Nagel. Within Europe, the com-bined local market share of these logistics suppliersdoes not exceed 30%, with a large number of small localplayers meeting the remaining demand.

Cost position is triggering market competition. Despitethe development of value-added services, the contract

Production(on client site)

Inbound flows“Roof” logistics/

distribution centersOutbound

Aftermarket (after sales, reverse)

Postponed manufacturingWarehousing activities Other client-related services


• Warehousing

• Picking, packing,labeling

• Synchronous logistics(vendor inventorymanagement)

• Flows management

• Freighting(road, rail)

• Cross-docking

• Synchronous logistics• Warehousing (standard and dedicated to specific

sector requirements)• Picking, packing, labeling

• Flows management

• Freighting(road, rail)

• Transport (collection,consolidation, return)

• Warehousing

• Kitting• Light assembly• Packaging• Co-packing• Quality control

• Customs

• Kitting• Light assembly• Packaging• Co-packing• Preconfiguration

• Customs• Payment

services

• Installation − After-sales services − Repairing• Customer management• Scrapping

Contract logistics main activities along customers’ supply chain

Figur 2: Contract logistics suppliers have extended their traditional core into extra value-added services


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structure, built on extensive networks of local branches.To improve efciency and service, the industry is evolv-ing toward more centralized networks, with large plat-forms and hubs at the national and regional levels.

Despite consolidation, this new model has not yet beenfully adopted. In reality, many players still operateextensive local networks in the countries where theyoriginally were based.

1.3. Road transportation options: Full-truckload,part-load, groupage and express

Same trucks, but different businesses. Road transpor-tation typically is structured around three main segments,based on load type and weight (se Figur 3):

• Full-truckload (FTL) transportation: a single customerfor a full truck

• Part-load or less-than-truckload (LTL): severalcustomers with loads weighing more than one totwo tons each

Cargo companies still lead sea freight. Freight forwardingservices can be directly handled by cargo companies,especially when there is sufcient volume for full-con-tainer-load transportation.

Air freight and sea freight businesses are structureddifferently.

• Air forwarding: Freight forwarders (sometimesintegrators) currently handle almost all shipments

• Sea cargo: Two-thirds of all volume is handledwithout a middleman between customers and carriers

Success lies in fully utilizing trade lanes, not the over-all network size. An extensive network of trade lanesisn’t enough for sea and air freight providers to succeed.Winning requires having signicant freight capacityon a given route to obtain preferred freight rates andfully utilizing the route by pooling enough orders fromvarious customers.

The challenge of rationalizing historical networks.Freight forwarding is moving away from its original

Figur 3: The groupage business model employs a network of depots, where parcels are collected anddistributed for multiple customers

Area B

Dispatchingplatform

Area B

Full-truckloadPart-load

(about one to two tons to full-truckload)Groupage and express

(about 30 -- 50 kg to about one to two tons)

Area B

Collectingplatform

Area A

Area C

Transportation: full-truckload, part-load, groupage and expressSource: Bain & Company


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Dentressangle began in road transport. However,these players take signicantly different approaches,leading to several strategies.

Our review of the competitive environment found twomain organizational structures for implementing andpursuing distinct strategies (se Figur s 5 n 6).

2.1. Model 1: Standalone optimization of differentlogistics activities

Several major logistics providers use the standaloneoptimization model, including DSV, Norbert Dentres-sangle and UTi. The model’s organizational plan is builton three key principles:

• Dedicated business units for each activity

• Separately run and locally managed business units,spanning from strategy denition to operations

• Decentralized and streamlined structure, with thehead ofce serving as a consolidating holding

This model best serves small to midsize customers,providing them with exible, custom-made solutionsfor each activity. Synergies between businesses are notthe customers’ main commercial focus.

2.2. Model 2: Management of all logistics activities,based on geography

The second model, adopted by companies such as Kuehne& Nagel and Ceva, is more structured and designed tosupport a global network strategy. The model’s organi-zational plan is based on the following principles:

• Organized by country or region, grouping togetherdifferent activities

• Managed by and under the responsibility of bothregional VPs and country managing directors

• Matrix structure is determined by geography andactivity, with mirroring of functions—such as salesand operations—and replication of vertical marketsat all levels of the organization

• Groupage and express: parcels destined for multiplecustomers, weighing between 30 to 50 kilogramsand one to two tons

While the transportation options are similar, distinct modelshave emerged to serve different customer segments.

In the FTL and LTL businesses, products are carriedbetween two points. Since customers are only payingfor one-way transportation, carrier companies’ successin creating value depends on their ability to ll the truckon its return trip. The main challenge then for FTL andLTL carriers is to develop strong customer portfolioson specific routes and plan itineraries to maximizeeach load.

The groupage business is a service that consolidatesseveral small shipments to create a full load. The modelemploys a network of depots, where parcels are collectedand distributed for multiple customers. One of the mostefcient forms of groupage is the hub-and-spoke net-work. Individual shipments are hauled from regional ware-

houses to a central shipping hub, where parcels aresorted and bundled. A local operation oversees deliveryto the end customer. Prices exceed those of the FTL busi-ness, based on load, distance and delivery time.

Distinct competitive environments. The FTL businessis highly local and fragmented—the result of low bar-riers to entry. For example, in France, two-thirds ofFTL companies are small, with less than 10 full-timeemployees and just a few trucks; only 0.5% of FTLcompanies have more than 200 full-time workers. By

comparison, the groupage business requires criticalmass to develop a vast network of warehouses capableof serving a large national customer base. As a result,the market is dominated by a few national leaders thatoften are part of global logistics groups.

2. Two main models exist for global,multiactivity logistics players

Almost all of the major third-party logistics playersevolved from a core business into operations with diverseactivities (s Figur 4). For example, Kuehne &Nagel started out in freight forwarding and Norbert


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• Reduce the organization’s structure and centralizedhead ofce to a minimum

• Standardize decentralized processes and IT tostreamline operations and closely monitor costs

• Implement an aggressive incentives plan

For Model 2, geographically based management, successdepends on outstanding management and optimizationof a large-scale worldwide network:

• Develop less protable major global clients to expandthe network and saturate it with smaller but prof-itable customers

• Ensure uid processes to offset the large and complexstructure

3. Three main questions can help logisticsproviders choose the right strategy and model

How much priority is given to developing centralizedkey account management with a dedicated salesforce?

The geographically based management model helpsproviders develop a global network around targeted tradelanes and grow that network by attracting a broad rangeof customers. It enables providers to take advantage ofcross-selling opportunities, as well as win over globalcustomers in search of solutions that integrate differentlogistics activities.

The two organizational models create different competitiveadvantages, but they both require a well-aligned businessstrategy to deliver sustained growth (se Figur 7). Forexample, logistics leaders DSV and Kuehne & Nagelhave different organizational structures: DSV employsModel 1, standalone optimization, while Kuehne & Nageluses Model 2, geographically based management. Thesecompanies have achieved high and sustained prot-ability, with an EBITDA margin of more than 6% and5%, respectively, between 2007 and 2010.

Each model presents unique challenges for companies.

We’ve identied the main success factors for Model 1,standalone optimization:

Figur 4: Almost all the major third-party logistics players evolved from a historical core business into

operations with diverse activities

0

20

40

60

80

100%

14.0

13.0

10.9

37.9

3.1

9.4

2.0

14.7

7.1

5.9

1.314.3 7.0

3.4

3.4

6.8

2.4

2.4

0.9

1.0

6.6

2.7

2.4

0.65.7 5.2

4.5

0.65.2

4.5

4.54.2

3.8

1.1

2.3

0.33.7

0.6

2.2

0.3

0.4

3.4

1.6

1.2

2.82.5

Worldwide logistics main players (sales by business)

Total sales(2010, €B)

Allocationof sales by business(2010)

Sources: Company annual reports; Bain & Company

Freight forwardingContract logistics Transportation Other Revenue allocation by business not available

D H L

e x c l . M

a i l

K u e h n e

& N a g e l

D B S c h e n k e r

L o g i s t i c s

C . H .

R o b i n s o n

C e v a

G e o

d i s

D S V

T o l l

P a n a

l p i n a

W i n c a n t o n

N . D

e n t r e s s a n g l e

U T i

C o n - w

a y

D a c h s e r

A g i

l i t y

E x p e

d i t o r s


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Figur 6: Model 2 is the management of all logistics activities based on geography

Figur 5: Model 1 is a standalone optimization of different logistics activities

Group

Localbusinessunits

Area


Sales teams transverse to allbusiness lines

Mirroring of all functionsat regional level (business linedirectors, vertical market leaders)with transverse coordination

Sales transverse or dedicated to business lines

Separate business line operations

Local vertical markets relays

VP FF VP CL VP RoadVPs vertical markets

Head office

Country

Ops. FFOps. CL

Ops. Transportation

SalesCountry

Ops. FFOps. CL

Ops. Transportation

Sales

Vertical markets

RegionHead office

Dir. FFDir. CL

Dir. TransporationVertical markets

Sales

RegionHead office

Dir. FFDir. CL


Sales

RegionHead office

Dir. FFDir. CL


Sales

Businessline

Group Head officeVP FF VP TransportationVP CL

Local management of salesand operations, withindependent business units

Business line head office leveldoes not always exist VP of business line sometimesin group head office, managinglocal business units directly

Region/Country

SalesOperations

Region/CountrySales

Operations

Localbusinessunits


Contract logistics

Head office

Transportation

Head office

Freight forwarding

Head office


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In the retail sector, for example, logistics are primarilylocal, with less demand for value-added services suchas warehousing and trucks. Cost is a primary consid-eration, limiting opportunities for logistics providers tosell services that combine multiple activities such asfreight, logistics and trucks.

However, high tech and automotive are two sectorsthat benet from a commercially integrated approachand value-added services.

• High tech requires more complex, global logistics,with faster lead times and increased security andsafety for products. Offerings are evolving fromstandard logistics with warehouses to ows logisticswith cross docks, a technique that speeds shippingwhile reducing the cost.

• In the automotive sector, customers increasinglyneed a single logistics provider to consolidate pro-duction centers with synchronous logistics and vendormanagement inventory, including parts manage-ment, delivery to original equipment manufacturerproduction sites and minor assembly work.

Creating a centralized key accounts structure is crucialfor becoming a leading logistics provider and for sell-ing global integrated solutions.

In our view, that can be difficult to achieve with thestandalone optimization model. Conflicts may arisewhen attempting a coordinated commercial approachwith independent business units. Another potentialissue: the challenge of profit and loss (P&L) hostingbetween individual units and headquarters. However,the geographically based management model facili-tates communication and coordination among thebusiness units that are managing a single customer’sdifferent activities.

Is approaching the market by vertical category a conditionfor success?

A vertical approach allows a provider to effectivelyassess and meet a customer’s logistics needs. Depend-ing on the complexity and specics of the client’s sup-ply chain, its logistics requirements can vary greatly,creating different sales opportunities (se Figur 8).

Figur 7: The two organizational models create different competitive advantages, but both require a

well-aligned strategy to deliver sustained growth

Integratedoffers

Cross-selling

Best model to develop competitive advantage

Mono-business


Local flows Intercontinental flows

Model 2

Model 1


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integration process as well as the necessary tools, suchas training and IT, to quickly expand their footprint.

From an investor perspective, building a geographicallybased management organization requires a much longertime line. For example, based on the experience of providerssuch as Kuehne & Nagel, it can take several decades todevelop a mature, global network with sustained growth.

Conclusion

In the evolving logistics marketplace, winners understandthat there is no single path to success. They overtakecompetitors by selecting an organizational model thatbest supports their corporate strategy. They also ensurethat the strategy matches their targeted customer seg-ments. To increase their competitive edge, leadersdevelop insights into customers’ needs and purchas-ing behaviors. The end result is a highly focused orga-nization with a well-dened business strategy, designedto deliver sustained growth and protability.

The match between a logistics provider’s customerfocus and its internal organization can be critical forsustainable growth. Is a focus on cost-sensitive seg-ments, such as retail or fast-moving consumer goods,sustainable in a scenario where the provider has a com-plex global structure, as in Model 2?

What pace of development can investors expect fromlogistics providers?

A provider’s organizational model can determine itsdevelopment and growth opportunities.

The standalone organization model is attractive tocompanies in search of faster growth through acquisi-tions. The simplied structure and locally managed,autonomous business units make it easier to integratenew business operations, with limited disruptions ofday-to-day operations. To create a winning and repeat-able growth formula, leading providers enhance theircapabilities. They develop a simple, clearly defined

Figur 8: Model 2 is the management of all logistics activities based on geography

Specifics of logistics needs by market sectorClients’ market sectors

Highpotential

forintegrated

needs

Mainlymono-

businessneeds

Type of flows

Needs andpurchasingschemes

Retail

Consumer goods(clothing, toys,

alcoholic beverages)

Automotive(excluding transportof finished vehicles) High tech

Industry *(*dependenton industrialsub-segment)

Defense

AerospaceConsumer goods(soft drinks,

home furnishings,apppliances,

beauty)

Local Regional Intercontinental

Healthcare(chemical

drugs)

Healthcare(medicaldevices,biotech,generics)

Competitive advantage area of Model 2Competitive advantage area of Model 1



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