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1 Challenges in sea freight forwarding_fin.pptx

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Presentation to ETH Zürich, Logistics Management Zurich, 30th April 2013

SEAFREIGHT FORWARDING – BUSINESS MODEL UNDER PRESSURE?



Our logistics core team in Zurich: lateral hires paired with experienced consultants

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• 8 years of consulting experience

– Logistics – Travel and tourism – Aviation – Strategy and organization

development – Restructuring

• 3 years of experience in DHL Global Forwarding (freight forwarding, shipping, and process management)

• 2 years consulting experience

– Freight forwarding – Marine & air logistics – Supply chain – Consumer goods

Peter

Wiese

Senior Consultant

[email protected]

Dr. Matthias Hodel

Project Manager

[email protected]

Matthias Hanke

Partner

• 2 years of steel trading experience

• 4 years of line management experience in Swiss International Air Lines

• 3 years of line management experience in DHL Express

• 12 years of consulting experience

– Logistics – Travel and tourism – Network mgmt. and strategy – Aviation

[email protected]

Source: Roland Berger

mailto:[email protected]





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Roland Berger Strategy Consultants is a top management consultancy with a strong global footprint

Founded in 1967 in Germany by Roland Berger

51 offices in 36 countries, with 2,700 employees

About 250 RB Partners currently serving

~1,500 international clients

Our offices




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We support major players in the logistics industry in strategic and organizational questions

KEY PROJECTS (EXAMPLES)

> Complete strategic transformation and turn-around of global liner shipping company

> Developed new organizational structure and optimized management processes supporting a new corporate strategy for a global forwarder

> Defined a leading forwarder's Russia/Eastern Europe expansion strategy

> Conducted extensive market entry studies in various geographical areas and customer industries for a logistics service provider

> Optimized human resource management/ processes for a global forwarder

> Assessed potential for network optimization and synergy options for a global logistics group

> Conducted a strategy assessment for a global forwarder and defined recommendation for improvements


Selected clients and project examples from the logistics industry

http://www.hellmann.de/

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Today's focus will be on seafreight forwarding

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Overland Transportation

Global Forwarding

Contract Logistics

Integrators;

Express Logistics

KEY CHARACTERISTICS

> Mainly trucking; growing share of rail > Forwarders often exercise "Selbsteintrittsrecht" and "operate" > Operation consists of carriage plus terminal operation for LTL business (groupage) > "Mama and Papa business" – low USPs ... low entry hurdles

> Core business is sea and air intercontinental transportation > Asset-light/ trading business (capacity brokerage) plus value added services > Low margins (RoS; don't mix up with RoC) > Interfaces with Overland Transportation and Contract Logistics

> Coordination of parts of the supply chain on behalf of the customer > Warehousing and Distribution are elements of core business > Contract duration over a longer period (~5 years) with dedicated investments > IT integration/interfacing with customer is key

> Door-to-door service, self operated (P&D, domestic linehaul, intl. linehaul, terminals) > Standing network – given fix-cost (flight gets operated ... full or empty) > Day-definite and Time-definite delivery plus even courier-services > High-cost proposition

FO

CU

S

Source: Roland Berger analysis

Logistics Service Providers



6

Vocabulary for clarification – related to seafreight forwarding


> Forwarders are capacity brokers and 3PL logistic service providers … means: in its "archetype", forwarding is a rather asset-free business

> Seafreight forwarders work for both: for shippers (based on the INCO terms DDP or CIF) or for consignees (FOB or EXW)

> Carriers (here: shipping lines) heavily influence the business economics of the seafreight forwarding business model

Shipper Inland

logistics Customs

Carrier/ shipping

line Terminal

Inland logistics

Consignee Customs Terminal

Forwarder

VALUE CHAIN

INCO TERMS1)

DDP

CIF

FOB

Forwarder

Forwarder

EXW Forwarder

1) International Commercial Terms; define risk and cost transfer from shipper to consignee



Agenda today

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A

B … get a glance of the resulting challenges for seafreight forwarders

… understand major trends on global economy, its impact on seafreight business and respective carrier moves


In order to discuss strategic topics in seafreight forwarding, you have to…

C … the forwarding business model in seafreight is faced with substantial changes … on the other hand, several so far untapped strategic opportu-nities may be addressed

Consequently, you will recognize that…



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A. Global seafreight – Overview of the market and key trends



Chapter overview: Global seafreight – Overview of the market and key trends

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MARKET CHARACTERISTICS

> Seafreight accounts for the main share of global volume in world trade, mainly due to its price and capacity advantage over other means of transport

> The seafreight market is growing in line with growth of world trade, but trade landscape is shifting towards emerging markets

> Imbalanced trade flows lead to biased trade lanes; while capacity utilization on especially Asia Pacific export routes is higher, import routes have lower load factors

> The seafreight market has an oligopolistic structure with strong position of carriers limiting the negotiation power of forwarders and shippers

MARKET TRENDS

> Carriers are continuously expanding their fleet which leads to significant seasonal overcapacities

> Overcapacity and world trade fluctuations result into increasingly volatile freight rates and of course shipping lines are facing increasing cost pressure

> Digitalization is bringing new business models to the industry, as e-commerce platforms emerge in the seafreight value chain

2

1



10

Comparison of external costs and relative price levels

2 4 6 8 10 12 14

10

20

30

150.

000

TonKm, Trillion

Normalized freight price range

> Seafreight is the most commonly utilized and relatively cheapest mode of transportation, moving approximately 90% of world cargo

> Airfreight relatively expensive, due to low capacity of aircrafts and high operating costs

> Currently, shippers shift historic air freight capacity into seafreight

> Overland transportation dominated by truck, as rail infrastructure is not present in all regions

> Each mode of transportation has a distinctive value proposition, different market conditions and business models

Source: World Economic Forum, CEFIC, Roland Berger analysis

Seafreight is the world's principal mode of global transportation, mainly due to significant unit cost advantages

Volume and price for transportation modes

MARKET CHARACTERISTICS 1



CONTAINER TRAFFIC BY TRADELANE 2015 Million TEU (twenty-foot equivalent unit)

11

MARKET CHALLENGES

> Seafreight market fore-

casted to grow from ~175 m

TEU in 2012 to ~200 m TEU

by 2015 (+14%)

> No macro trade lanes are

expected to shrink, however,

overall trading landscape is

shifting

> Market power will shift

towards emerging

economies mainly driven by

Asia Pacific – both external

and internal trade flows

Seafreight market growth

Source: HIS Global Insight, Drewry, KN Research

Seafreight market is forecasted to grow with 14% until 2015 – Emerging markets are the main driver of global growth

67

1.8

1.7 3.7

20.4

3.9

10.2 3.8

4.4

2.2

19.5

6

2.7

10.6

10.2

Far East – Latin

America

North

America 1

Intra-Asia1

Transpacific

West bound

Transpacific

East bound

N. America –

S. America

Intra-

Europe1

Transatlantic

East bound

Transatlantic

West bound

Europe –

Latin America

Far East – Europe

Europe – Far East

Far East – Middle

East

Far East –

Australasia

Intra-S. America

1) Includes domestic volume

Note: Container flows based on forecasts excluding empties and transshipment but including domestic for intra-regional

trade; some trades excluded for display purposes

High-growth trade lanes, above 200% Low-growth trade lanes, below 200%




12

0

100

200

300

400

500

6004.5

1.0

0.5

0.0

MOL

0.5 0.1

CSCL

0.6 0.1

Hanjin

Shipping

0.6

0.2

3.5

3.0

2.5

2.0

1.5

HL +

Hamburg

Sud

1.1

0.2

CMA

CGM

1.4

0.1

MSC

2.3

0.2

APM-

Maersk

2.6

0.4

4.0

0.6

0.2

Hapag-

Lloyd

0.7

0.1

APL

0.7

0.4

COSCO

0.7

0.1

Ever-

green

Line

Ordered

Current

Vessels

> Size matters¨… allowing for economies of scale

> Oligopolistic structures in seafreight business have given negotiation power to carriers in history

> Overcapacities on the other hand lead to short terms discounts on rate and make the market volatile

Source: Alphaliner, Roland Berger analysis

mTEU # vessels

1) Top 100 shipping lines

Oligopolistic market - top 10 shipping lines have a market share of ~63% – Economies of scale is main driver for competitiveness

Top 10 seafreight carriers1) [mTEU capacity, April 2013]

15.2 3.1 13.5 4.3 4.0 3.6 3.5 3.5 8.3 6.4 4.3 Mkt.

share

[%]




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Source: Drewry, World Shipping Council, Roland Berger analysis

> Carriers are expanding capacity, by building more and larger ships

– Carriers are expected to extend vessel capacity by 27% until 2015, based on current order books

– Until 2015 the number of available containers (TEUs) is expected to increase with 47% to nearly 40 million available TEU

> Additional capacity might lead to overcapacity and resulting rate decline, distress sales and un-utilized assets

> Significant challenges for carriers to manage their capacity allocations with economies of scale, in order to generate profit

0

5

10

15

20

25

30

35

40

45

50

2016 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994

+47%

+27%

Seafreight capacity development until 2015 [million TEU]

COMMENTS CAPACITY DEVELOPMENT

Containers

Vessels

Strong capacity growth leads to danger of overcapacity in the industry, results in rate declines and falling profitability

FO

RE

CA

ST

m TEU

2 MARKET TRENDS



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Source: WTO, OECD, IHS, Roland Berger analysis

TRADE GROWTH CORRELATED WITH GDP GROWTH

> Historically there has been a rather constant multiplier between absolute growth in GDP and world trade – world trade reacting strongly to changes in GDP growth

> Recent developments might have altered traditional trade dynamics – World trade declined -22% during the crisis, significantly more than

GDP – Subsequent recovery has not followed historic patterns – Leading to increased volatility for players in the seafreight sector

Yearly volume growth rates [YoY % growth]

-30

-20

-10

0

10

20

30

1985 1990 1995 2000 2005 2010 2015

World trade

GDP

World trade development has been linked to GDP growth – Historical interdependence however is changing towards stronger volatility

% YoY change

MARKET TRENDS 2

OUTLOOK

> World trade has grown with a CAGR of 6% during the last 20 years and is forecasted to grow further – however

– 2012 only saw a ~2% growth of world trade

– Recent forecasts foresee a mere ~3% growth of world trade in 2013

> Volatility of world trade can be expected to remain high or even increase



Seafreight market is highly cyclical with rate hikes of over 200% during a yearly cycle – European rates currently below slot cost?

15

Source: SCFI

Rate volatility on key tradelanes [SCFI rates in USD/TEU ]

Carrier slot cost ~USD 800-900/TEU1)

> Volatility of seafreight rates is affected by two main parameters – Capacity utilization respectively

demanded volume – Bunker price

> Demanded volumes are highly sensitive to economic developments and fluctuates around cyclical events such as vacation, Christmas, Chinese New Year etc.

> Carriers forward fluctuations in bunker price directly to FWD/shippers with BAF surcharges

> Carriers sometimes even sell below "slot cost"

> SCFI average above SCFI EBP rate

1) Thereof Bunker: ~USD 500, Port & Channel ~USD 250, Vessel Rate ~USD 200

MARKET TRENDS 2



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Container shipping profitability

-9%

9%

1%

22%

3%

2009

2010

2011 2007

2008

Source: PWC, Roland Berger analysis

> Seafreight carriers' profitability has dropped significantly since the beginning of the financial crises

> Carriers did not expect the econo-mic downturn – huge investments made in vessels that were under- or unutilized on delivery

> Low profitability, causes intense competition – impedes increasing rates to profitable levels, even as volume are above pre-crisis level

> Profitability of the industry in the next 2 years, is directly dependent on general macro economic development

Shipping lines have seen a strong decline of profitability in recent years – Size is no guarantee for profitability

Industry Return On Equity Profitability of top carriers Comments

2 MARKET TRENDS

0

5

10

15

20

25

30

-200 -150 -100 -50 0 50

Evergreen

CMA CGM

Hapag-Lloyd APL

Hanjin

CSCL

MOL

APM-Maersk

Revenue [USD bn]

Profit % change 2007-11

Note: MSC and COSCO excluded due to lack of data



Digitalization is a key trend shaping the current seafreight landscape – New business models emerge at the horizont

17

Electronic customs

declarations

E-communication

shipper/origin and

consignee

/destination

E-communication

between forwarder,

shipping line, road

carrier and terminal

KEY ELEMENTS


IMPACT ON INDUSTRY

> Digitalization is a relatively new phenomenon in seafreight and the industry is still finding its direction

> Seafreight especially underlies a digitalization of its operating landscape over the last years, mainly driven by carriers modernizing their IT systems

> Key elements for digitalization are

efficiency increase (through EDI) focusing on shipping info (shipping instructions, booking requests and master data) as well as invoicing and documents (customs, etc.)

enabling IT driven solutions (e.g. track & trace)

> One of the key future fields for digitalization is the emergence of shipping e-commerce platforms, enabling real-time bookings and rate comparisons

2 MARKET TRENDS



Three seafreight e-commerce platforms currently "on stage", so far with a rather pre-mature value proposition for the industry

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SHIPPING PLATFORMS KEY FUNCTIONALITIES

Source: INTTRA, GT NEXUS, CargoSmart, Roland Berger analysis

2

> See schedule data online

> Request "online" quotes (but not real-time, neither linked to the revenue management system of a carrier)

> Conduct "online" booking of seafreight, partly also corresponding road feeder services (but rather designed on a hybrid set-up)

> Set-up online profile including master data and framework agreements e.g. with road feeder service providers

> …

Huge additional impact can be expected with a view to value chain efficiency and the role of the various players along the value chain

MARKET TRENDS



Platforms provide an online solution for booking shipments – Integrated rate management necessary for full automation

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Select voyage

Request booking

Provide quote

Confirm booking

Provide shipping instructions

Execute shipment

Arrange in-land transport etc.

Provide sailing schedule

Calculate rate for shipment

Sh

ipp

er C

arrier

Provide booking number

Generic e-commerce shipping platform process

Handled through shipping platforms Handled through other systems, not automated Input

PLATFORM SHIPMENT PROCESS ELABORATION

> Shipping platforms automate and standardize the majority of the booking process,

> Rate calculation is the key part of the booking process that is not automated through the shipping platforms

> Carriers determine rate and conditions for the shipment based on the booking request – rates are not integrated on the platforms

> Fully automated e-commerce solution, would require that carriers /forwarders integrate rate management between systems and the platforms


2 MARKET TRENDS

Invoicing

HYBRID/OFFLINE SOLUTION



Platforms are still in early stage of development – Overall direction rather heterogeneous

20

> Seafreight shipping platform

> Facilitates e-commerce in seafreight

> Largest platform, connected to over 40 leading shipping lines

> Cloud based supply chain platform

> Covers door to door flows of goods

> Second largest seafreight platform

> Global logistics platform

> Has "real time" sailing schedule info

> Mainly connected to Asian shipping lines

SHIPPING PLATFORMS MAJOR PARTNERS

Source: INTTRA, GT NEXUS, CargoSmart, Roland Berger analysis

2

> INTTRA was founded by a group of shipping lines – incl. Maersk, MSC and CMA CGM

> Forwarders support the platform, with K+N as an investor and all major forwarders as operational partners

BENEFITS

Key benefits provided by the shipping platforms are:

> Cost savings, reduce processing costs and eliminate costs of connecting systems to multiple carriers/forwarders/shippers

> Reduced complexity, shipping platforms create one single connection for each carrier, forwarder and shipper

> Faster processing times, reduce paper, faxes, phone calls, etc.

> Higher data quality, by automated processes and reduced manual keying of data

> Increased visibility of the supply chain

> No direct transportation partners

> Major carriers uses GTN for booking requests and shipping instructions

> Most large forwarders integrated – DHL controls all seafreight transactions through GTN

> No direct transportation partners, but several technology partners e.g. Cisco and HP

> Working with especially Asian carriers – Main forwarder client is Panalpina

MARKET TRENDS



INTTRA is the largest shipping platform – Focus is on combining integrated sailing schedule and container booking functionality

21

> Search across 30 carriers amongst complete sailing schedules

> Full visibility on some 10 million voyages worldwide, though only planned schedules

Source: INTTRA, Roland Berger analysis

SAILING SCHEDULES

> Electronic booking with 24 of the leading carriers – 18% of global container bookings1)

> Instant bookings if shipper/forwarder has an agreement with carriers

> No direct rate comparison across carriers

CONTAINER BOOKING

1) According to INTTRA

> Platform aims to offer functionality enabling a full e-commerce solution for shippers, carriers and forwarders through

– Electronic invoicing

– Track & trace

– Bill of Lading amendment and approval

– Submission of shipping instructions

– Performance measurement

> INTTRA has recently entered a partnership with CargoSphere aiming to integrate a rate management tool, delivering real-time rate information for participating carriers

Key functionality

OTHER FUNCTIONALITY

2 MARKET TRENDS



GT NEXUS takes the functionality one step further – Full seafreight management process handled by the platform

22


Key functionality (focus seafreight)

> GT Nexus covers a broader scope than INTTRA, with the full seafreight management process

> Allows for direct comparison of rates between providers – however, only through spot-rate bids

> Full e-commerce spectrum, e.g. freight audit and invoicing etc.

> Platform covers seafreight, airfreight and land freight, as well as, shipper/consignee and banks

PLATFORM FREIGHT PROCUREMENT

> Standardized platform and template to procure capacity – both global bids and spot rate procurement

> Focus on creating transparent comparability between offers from various providers

> Reflects information needed for global frame agreements, including volume forecast, tradelane view etc.

> Covers end-to-end rate negotiation process

CONTRACT MANAGEMENT

> Management of service contracts with transport providers – linked with procurement module

> Renegotiation and updates to contracts as an integrated functionality

> Compare and retrieve contracted routes, rates, and service across transportation providers

SHIPMENT EXECUTION

> Bookings sent electronically along with booking confirmation responses - potentially EDI link to ERP system

> Send bill of lading instructions electronically, while also being able to receive approved B/Ls, and print B/Ls

> Create shipping instructions a and communicate electronically to partners

> Based on current service contracts

2 MARKET TRENDS



CargoSmart has similar focus as INTTRA, though mainly cooperating with Asia carriers

23


Key functionality

> Functionality covers the end to end seafreight process

– Integrated contract management module,

– E-invoicing functionality

> Measures carrier on-time performance – applied as input for carrier selection /negotiations

> Main collaborating partners are Asian carriers – MOL promoting CargoSmart as platform of choice to its customers

PLATFORM SAILING SCHEDULES

> Dynamic sailing schedules of over 30 carriers – as the only platform, providing real-time voyage data

> Active voyage management, with notifications enabling exception management for LSPs and shippers

> Private label interface, giving LSPs/shippers the ability to integrate CargoSmart's offering into a value-added service

BOOKINGS

> Online booking with the affiliated carriers - bookings to be confirmed

> Covers bookings of general cargo, reefer and dangerous goods

> Check of cargo versus international trading sanctions

> Allows sharing shipping templates with associate companies

SHIPPING INSTRUCTIONS

> Provision of shipping instructions based on booking

> Specify distribution lists for bills of lading or print express bills of lading

2 MARKET TRENDS



24

B. Seafreight forwarding – Key characteristics of the business model and challenges from industry trends in seafreight



Chapter overview: Seafreight forwarding – Key characteristics of the business model & challenges resulting from trends in seafreight

25


KEY CHARACTERISTICS

> Forwarders are positioned as intermediaries between shippers, carriers and consignees, accounting for approx. 35% of seafreight market volume

> Seafreight is getting increasingly important for forwarders as shippers shift away from airfreight towards seafreight

> Due to their trading based business model, freight forwarders operate with relatively low margin and are highly sensitive to declines in profitability

CHALLENGES FOR FREIGHT FORWARDERS

> Stagnating core markets – Growth plans of forwarders cannot be implemented in current strongholds; new fields of activity need to be tapped

> Cost pressure from carriers – Freight forwarders need to find ways to secure a stable profit margin

> Rise of e-commerce – Freight forwarders must develop an e-commerce strategy to sustain/ defend their position in the value chain

1

2



26

> Shipper/consignee directly interact with carrier

> Mainly applicable for…

– large shipping volumes

– full container loads (FCL)

– simple/ repetitive point-to-point shipments

The freight forwarding business model

Freight forwarders are intermediaries between shippers, carriers and consignees

> Freight forwarder coordinates transport of goods from shipper to consignee

> Mainly applicable for…

– all sizes of shipping volumes

– full and less than container loads (FCL & LCL)

– more complex supply chains incl. RFS, VAS, …

– named accounts and FAK (Freight all kind)

A

B

Carrier controlled value chain

Forwarder controlled value chain

1 KEY CHARACTERISTICS OF THE BUSINESS MODEL


SHIPPER CARRIER

FREIGHT FORWARDER

CONSIGNEE

FREIGHT FORWARDER

65%

35%

xx% Market share



Seafreight is a major contribution element for forwarders to generate revenue and profit – K+N stands out as the market leader

27

OVERVIEW REVENUE STRUCTURE OF FORWARDERS

45%

76%60%

24% 40%

55%

Kuehne + Nagel Panalpina DHL

Revenue1) [CHF bn]

EBIT1) [%]

3.9% 1.2% 3.3%

16.4 6.6 19.1

Other BUs: airfreight, rail/ road, SCM/ CL

Seafreight

Revenue and profit structure of selected major forwarders [2012]

> Seafreight is expected to grow in importance for forwarders, as shippers

– shift away from airfreight towards seafreight, mainly due to cost advantages

– increasingly need holistic management of their increasingly complex supply chains

– focus on core business and let third party providers manage more of their logistics

> Amongst international freight forwarders, Kuehne + Nagel stands out with large share of revenues and profits stemming from seafreight

1) Only freight forwarding BUs





EBITDA Indirect

Costs

~5-7%

Direct Costs

~8-10%

Gross Profit

~19

-24%

Cost of

Sales

~76

-81%

Net

Revenue

100%

~1-4%

Business model is highly dependent on revenue management and on economies of scale in purchasing to improve results

28

Typical freight forwarder P&L structure (illustrative) [% of revenue]

> Forwarding business model shows relatively low margins and is highly sensitive to declines in volume and gross profit

> There are two key potential levers to improve profitability

– Actions above gross profit: increase revenue (->sales) and reduce cost of sales (->purchasing)

– Actions below gross profit: reduce operating cost

> Increase of net revenue requires continuous revision of product/ service portfolio as well as appropriate revenue management strategies

> Reduction of cost of sales requires mature purchasing strategies, pro-active capacity management

> Reduction of OPEX looks at overhead and at demand related FTE adjustment in operations

COMMENTS > Costs of 3rd party carriers –

indirectly influencable by forwarders

> Economies of scale lead to lower cost per shipment

> Cost of Sales also driven by business mix between Air/ Sea/ Road Forwarding



Operating expenditures (OPEX)



A disproportional change of revenue and CoS will lead to a "transistor effect" on profitability

29

"TRANSISTOR EFFECT" (Exemplary Simulation)

Starting point

Same rel. change of revenue and CoS

Over proportional reduction of CoS

Revenue per TEU

Cost of sales per TEU

GP per TEU

100% 84% 16%

-10% -10% -10%

-5% -10% 21%

> Forwarding with similar P&L structure as a trading company – profit is driven by the ratio between transport capacity cost and sales

> "Transistor effect" describes the amplifying effect on gross profit due to a disproportional change of revenue (sales price) over cost of sales

> Revenue influenced not only by market demand and competitive offers but also by currency impact

> Cost of sales not only influenced by carrier's pricing and revenue management but also by bunker price development

COMMENTS

Over proportional reduction of revenue

-15% -10% -41%



Changes to revenue and cost of sales have a multiplied impact on gross profit Even a proportional decrease of revenue and cost of sales must be immediately answered by appropriate cost cutting actions with a view to OPEX cost



Seafreight market dynamics combined with seafreight forwarding business characteristics result into some interesting challenges for forwarders

30

> Current strongholds for freight forwarders (e.g. Western Europe) will not support sustainable revenue growth

> Increasing volatility of freight rates makes maintaining a stable revenue and gross profit level difficult

> Consequently, forwarders must tap into new revenue and profit sources

> Rate negotiations with carriers (and shippers) will become increasingly difficult and gross margins are expected to decrease

> Forwarders need to find ways to ensure profitably even with lower gross profit margins

> Freight forwarders' operating models need to ensure compatibility with the emerging e-commerce systems and EDI requirements

> Freight forwarders might be facing risk of a weakee position in the value chain


CHALLENGES FOR FREIGHT FORWARDERS KEY MARKET CONDITIONS

2 CHALLENGES FOR FREIGHT FORWARDERS

EVIDENCE?

Increased digitali-zation opens market for e-commerce

Shipping lines and shippers forward cost pressure to forwarders

Core markets stagnating and seeing increased volatility

Others… > … not in scope for today



While volume stagnation and cost pressure can already be observed, evidence of digitalization needs a second look

31


CURRENT SITUATION

> As of now, platforms do not yet constitute a significant threat to the forwarders' business model as they have:

– Limited gain in transparency due lack of real time rate comparison

– No automated real-time processing of booking requests, but mere simplification of ordering process (for shipper)

– No integration of the entire transportation flow but only link to seafreight carriers and forwarders

– Etc.

> However, enlargement of functionalities of platforms might be possible, as evidence from a similar industry suggests

FREIGHT FORWARDING VS. TOUR OPERATING: Players in the value chains


Freight forwarding Tour operating

Destination management

agency

Content provider (Airline, Hotel)

Customs, Warehouse,

Terminal

Carriers (Sea, Overland)

Tour operator / Travel

agent/ OTA

Forwarder

Customer Shipper/ Consignee



Tour operators have a similar position in the value chain as freight forwarders – Recent developments triggered significant upheaval

> Tour operators and freight forwarders with a similar position in their industry's value chain – acting as intermediaries between capacity providers and their clients

> In tour operating industry, technological innovation combined with overcapacities triggered drastic changes

– Capacity providers to be accessed directly their customers

– Increasing price transparency has sharpened the customers' focus on pricing – many products have become mere commodities

– Enhanced internet capabilities (standardized databases, platforms and "data mixer" functionality enabled new business models based on dynamic production

– New business models challenge established players, with low cost production, large scale offering, superior online sales strategy etc.

> Established tour operators have difficulties adapting their business model to the new reality – consequently they are struggling for sustainable USPs

Tour operating comparison: overview





A fully dynamic production needs 4 elements: platforms, "data mixer", standardized data bases, real-time connection to capacity mgnt. systems

33


PORTFOLIO IMPACT FOR T/Os Dynamic production in tour operating (exemplary snapshot)


T/O labeled hotel content

Dynamic packaging

Flights

T/O.com / OTA.com

T/O Legacy packages

TT-

-

-

LCCsBedbanks

Other

Distribution system

IBE

(?)

Distribution system

Own

nego -

tiated

capaci

ties

Flight

Cache

(via Ama-

deus)

Negotiated

T/O content

for X- prod.

- Seasonal

- Framework

Plat-forms

Dynamic production

Standar-dized data-bases

Real-time connection to individual capacity management systems

Package tours short-haul mass market high yield market

Package tours long-haul

Individual tours short-haul and long-haul

Specialist tours (sailing, climbing, safari, diving, ...)

Cruise ship journeys

Retail shops

Destination management agents

Hotel ownership



Only a few moves are required to set the entire seafreight forwarding business model upside down – how long will it take?

34



FUNCTIONALITIES T/O PLATFORMS FWD PLATFORMS

>> Online search of specific offerings ✓ ✓

>> Comparison of offering details ✓ ✓

>> "Online" booking of selected offering ✓ ✓

>> "Online" settlement of bills ✓ ✓

>> Independent platforms showing multiple shipping products, fed from various web pages, enabling comparison ✓

>> Availability of real-time data on prices and capacities, directly linked to carriers capacity management/ booking systems

✓

>> Purchasing of product packages instead of components (availability of "data mixer")

✓ ?

>> Issuing of all documents as e-documents ✓ ✓

>> Standardized data bases comparable with aviation industry ✓



35

C. Strategic options – How might forwarders respond to contemporary market conditions?



Chapter overview: Strategic options – How might forwarders respond to contemporary market conditions?

36

Increased pressure on forwarders

profit margins

A ACTIONS ABOVE GROSS PROFIT

B ACTIONS BELOW GROSS PROFIT


FORWARDERS' STRATEGIC OPTIONS (EXCERPT OF SELECTED LEVERS)

Revenue enhancement

Cost of Sales

(Purchasing)

OPEX management

1. Enforce focus on trade-lanes from/to emerging markets

2. Expand USP/ offering outside core forwarding

3. Invest in complementary segments of the transportation value chain

4. Define value proposition in relation to potentially emerging shipping e-commerce platforms

5. Ensure operating systems are up to date and compatible with e-commerce

6. Review carrier purchasing negotiation levers

7. Review risk policy in purchasing carrier capacities

8. Introduce GDP forecasting modules into purchasing strategies

9. Review non-seafreight purchasing items

10. Reduce operational overhead in line with demand volume

11. Review duplications in the global organizational set-up (center, region, country)

12. Review efficiency potential in SG&A functions (Sales, FIN, HR, IT)

13. Flanking strategic moves with adaptation of short term spending policy (e.g. travel budget, …)



37

TR

AD

EL

AN

E

Intra-Asia

Asia-Middle East

Asia-South America

Asia-Africa

Other …

LOGISTIC SERVICE

Lo

gis

tics

IT s

ervi

ces

SC

M

Val

ue

add

ed s

ervi

ce

Tra

de

fin

anci

ng

Sea

frei

gh

t F

CL

Sea

frei

gh

t L

CL

Market selection dimensions

> Profitability of the industry vertical/ logistic services/ geography segment combination

> Market growth of the industry vertical/ logistic services/geography segment combination

> Capability fit of the segment requirements with current positioning

> Entry barriers into a specific segment

> Investment needs in terms of asset equipment

> ...other In

lan

d lo

gis

tic

s

IDENTIFICATION CRITERIA

Co

ntr

act

Lo

gis

tics

Oth

er …

Ter

min

al lo

gis

tics


In the face of stagnating markets, freight forwarders have to actively seek for new and sustainable profit pools

1 REVENUE ENHANCEMENT 2 -



38

More active participation in the seafreight value chain bears potential for revenue diversification for freight forwarders


> Forwarders can relatively easily enter the service provider market, e.g. K+N buying a stake in INTTRA

a

Expansion in the value chain

Shipper Inland

logistics Customs Carrier Terminal

Inland logistics

Consignee Customs Terminal

Forwarder (capacity trading and 3PL value chain management)

Service providers, including e-commerce platforms

b

> Inland logistics is a peripheral mode of transportation for the forwarders, though requiring a move away from the asset-light business model most forwarders have

> Terminals are highly profitable but asset heavy and not likely to give forwarders synergies

> Carriers are extremely asset heavy and business model is different – not likely to give forwarders synergies

a

b

c

d

3 REVENUE ENHANCEMENT



Forwarders need to decide how to position themselves towards e-commerce – Three principal strategic options are at hand

39


Forwarders' strategic options to deal with emerging e-commerce platforms


STRATEGIC OPTIONS

> Use platforms for BUYING AND SELLING capacity with arms-length relationship and low effort/investment

I

COMMENTS

> No significant investment

> "Easy" and flexible solution but not sustainable

> Does not mitigate threats from platforms

> Become an INTEGRATED PARTNER through investment in one of the established platforms

II

> Develop OWN PLATFORM as a new business area with a significant investment/effort

III

> Medium-sized investment

> Allows for mitigation of threats by influencing direction of platforms

> Reduces flexibility by locking onto one platform

> Significant investment

> Control of platform and its direction

> Active participation in changing the industry – potentially nonetheless into a direction not favorite for FWDs

EVALUATION

Cost Complexity Impact



E-commerce platforms pose both opportunities and threats – Market leaders have started to respond to the emergence of platforms

40

OPPORTUNITIES

> Forwarders might gain access to the 65% of seafreight market that is currently controlled by carriers – leverage volumes and capacity management to compete with carriers' spot-rates

> Forwarders will be able to reduce complexity and cost of operations through automated processes

> Forwarders will increase the number of carriers they collaborate with, as integration is simplified by the platforms

THREATS

> Increased transparency likely to hollow-out forwarders margins, as shippers can compare rates in real time

> Carriers will be able to increasingly take-over forwarders' market segments – further expansion by building capabilities in in-land logistics segments

> Carriers might allocate rates based on platforms' volume instead of individual shippers, eliminating forwarders' ability to negotiate a volume-driven price advantage

RECENT INDUSTRY MOVES

> Developed in-house transport management system for its forwarding activities (SALog)

> Roll-out by 2013

> Key investor in INTTRA

> Implementing SAP's TM ERP system

> System being rolled-out

> Supporting CargoSmart

> Complete organizational transformation (NFE) with focus on digitalizing key processes – based on SAP TM

> Roll-out by 2015

> Moves from GT Nexus to INTTRA for all seafreight

+ -



Impact of e-commerce platforms



Review carrier purchasing negotiation levers (Exzerpt)

41

6 PURCHASING 9 -

PURCHASING FRAMEWORK

• Understand, that transparency on freight rates will "rocket" to new dimensions - acknowledge, that ad-hoc carrier prices will become an integrated part of the future purchasing processes

• Review/ define trade-lane strategies

• Manage consolidated view on all seafreight volumes

• Differentiate seafreight volumes by specific customer groups

• Define carrier specific strategy; booking rules … by trade-lane

• Rethink carrier volume deals which include the utilization of spot prices – precondition: adapted risk exposure strategy

• Elaborate alternative models for container rates – e.g. linked to floating container rate indices reduced by individual rebate schemes (potentially tailor-made for specific customer groups) – avoid regular renegotiation effort

• Reduce/ avoid container drop-off and pick-up charges by bundling inbound/ outbound volume per country areas

• Create transparency on procurement levers

• Conduct tender calls where possible

• Clearly defined purchasing processes (roles, …)

• Create transparency on carrier specific KPIs

• …

PURCHASING AND FORECASTING OPERATIONS

• Thoroughly exploit market and competitive intelligence

• Introduce freight rate forecasting algorithms (IT-based) aiming for risk reduction from volatility; appropriate "proxy baskets" help to indicate freight rate trends

• Sophisticated preparation and simulation of results

• Transparency on hedging levers in case of risk exposure

• Close coordination of purchasing and pricing

• Operate yield management systems …

CARRIER

PURCHASING



Review risk policy in purchasing carrier capacities

42

Risk taking policy

> Forwarders partially change procurement strategy from risk-free back-to-back deals to risk taking

> Key to success is the right timing of purchasing guaranteed (i.e. risk attached) capacity and reselling it – good prognoses tools required

> Benefits from risk taking procurement strategy are twofold:

– Carriers might be willing to pay a risk premium for guaranteed volumes at a fixed price – thus managing their business in a volatile environment

– Freight forwarders can bundle their volumes and thus improve their negotiation power

> The downsides of non-back-to-back deals however are obvious: huge exposure through "stock-taking" of sourced capacity – danger of losses if carrier market rates drop in the meantime

> Another form of risk taking (not linked to purchasing) would be adaptations to the cash cycle

Today, the forwarder can benefit from a positive cash cycle: shippers usually pay earlier for services than the carrier is charging them

The forwarder could move into trade financing function for the shipper against interesting interest rates of course – results also into increased risk

see details on next 2 pages

6 PURCHASING 9 -



Overcoming the risk averse nature of forwarding presents an enormous opportunity for increasing profit margins

43


REVISED TRADING CONCEPT

Time

Cost per TEU Proxy indicators

Hedged buying rate

> Forwarders apply a low-risk, direct trading strategy – a revised risk strategy can generate significant profits … but needs to be managed!

> Time lag between proxy indicators and freight rate developments can be utilized for intelligent procurement

> Approach holds significant risks and forwarders need to ensure that they

– Hedge capacity when proxy indicators forecast increasing rates

– Sell procured capacity before market rates fall below hedged rate level

– Procure and sell capacity at spot rates and postpone renegotiation of rates with shippers

I

COMMENTS

II

I

II

III

I III

II

TR

AD

ING

DY

NA

MIC

S

Freight rates

Risk taking in carrier purchasing

6 PURCHASING 9 -

> Proxy indicators partially based on GDP forecasting modules

> Systematic identification and bundling of all sources of information for trade volumes, carrier utilization and freight rate development to be utilized such as freight rate indices, spot rates, competitive intelligence

> Structured/ sophisticated analysis of all available information and preparation of buying/pricing decisions is imperative and includes IT-based forecasting models, weekly market/pricing alignment meetings and a weekly call on the pricing strategy



Review non-seafreight purchasing items

44

Procurement of other commercial services within Seafreight (~20%)

6 PURCHASING 9 -

1. General question: Is there still efficiency potential concerning purchasing and use of commercial services in seafreight?

2. To what extent is there a structured cross-country purchasing approach for Trucking/ Rail/ Barges/ Terminals?

Review # of suppliers and consider alternative suppliers (especially in rail feeder services)

Bundle volumes

Established standardized service portfolio with a view to packing and stuffing

Consider alternative terminals

…

3. Does it make sense reviewing the LCL network infrastructure (# LCL gateways)?

4. Does it make sense optimizing the LCL and FCL routing from inner-Europe to the ports whilst leveraging advantageous purchasing deals of the commercial services (IT based optimization of either lead-time or cost)?

5. …



45

On the back of rising cost pressure, freight forwarders continuously have to actively manage their operational efficiency

a REVIEW VALUE CHAIN ACTIVITIES b EFFICIENT SET-UP OF OPERATIONS AND SERVICES

Current scope of activities Targeted scope of activities

Abolishment activities that are… – …not sufficiently value adding – …not sustainable – …unnecessary complexity drivers

Focus on existing core forwarding activities – goal is to foster efficient service delivery

Integrate activities – that can be more efficiently delivered in-house, than from third party providers

Cost impact

Implementation challenge

hig

h

low

> For targeted scope of activities, efficient set-up of service

delivery has to be developed

> Key question include make-or-buy, integrated vs. separate entity, close decentralized vs. centralized/offshoring

> Additionally, cost saving potentials in internal processes to be analyzed

high low

Process improvement

Structural adjustment

Automation

Location adjustment

Set up SSC

Separate entity

Outsourcing

Categorization of measures (indicative)

Internal optimization

Factor cost reduction

Reduce OPEX & SGA cost

10 OPEX MANAGEMENT

Capacity

sourcing

Marketing

& Sales Operations

Customer

Service Pricing


Regional / CT setup

13 -



46

changed the world! It's containers that

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