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Express transport companies' shift to 4PL

Given the economic downslide of the past year and the effect it has had on trade, it would then be a matter of only the very toughest business strategy that would emerge victorious. For a lot of companies with smaller operations in cargo transportation, it has been a merge-or-bust year as the hunt for innovative cargo sources continues.

Emerging as winners in the field are global transportation and logistics operations which have transcended their original core businesses as integrators to more sophisticated, third and fourth party logistics and supply chain management providers. Speaking to some of the top express transportation companies in the field, namely FedEx, UPS, TNT and DHL, it now emerges that the shift from third party to fourth party logistics has been not so gradual in the past year or so. How they have kept a step ahead and achieved great strides in forging global logistics set-ups have been a matter of being driven by customer needs during difficult economic times.

Today, the integrators like to be thought of as express transportation, logistics and supply chain management companies. Their customers are

Hans Olijve, Director of Corporate Accounts of TNT Express Worldwide (HK) Ltd... in an economic downturn. SCM makes a big difference in a company

not only using them for managing parts of the supply chain like warehousing and distribution, but their services are now extending to warehouse management, spare parts supply, service parts logistics, repair and exchange, inventory management, all the way to the all-important financial services.

Many companies outsourcing their logistics are now calling on these 3PLs to become lead logistics providers, not just simply managing the supply chain but subcontracting other 3PLs to handle individual areas of the supply chain. Individually, the integrators have been buying up companies that would give them the logistics capabilities to serve their customers. UPS Logistics acquired Fritz last year to help them move heavyweight cargo by ocean and air.

"UPS Logistics, our logistics arm, also has a subsidiary called SPL (Service Parts Logistics) which focuses on giving large multinational technology companies the ability to get parts to their customers within four hours, anywhere in the world. They have created strategic stocking points around the world so that when the computer, say, of a HP customer in India breaks down, SPl can dispatch the part and someone to work on it immediately. We can do that better, faster and more efficiently than HP can do themselves," explains Matt McGee, Vice President of Marketing for UPS Asia Pacific Region, who directs marketing, electronic commerce, advertising and public relations activities for the region which spans the area as far north as Japan, and Greater China, to the Indian subcontinent, South-East Asia and as far south as Australia and New Zealand.

TNT, owned by the Dutch postal office, helps clients set up warehousing operations all over Asia. "We have no 'hub in the region. We go where our customers operate. We are more flexible that way. In Jakarta, the Philippines, Singapore, Hong Kong, China or in Malaysia, we can help customers set up warehousing and logistics. We are also a transportation provider, and when our customers make decisions in the logistics field, it's all related to inventory management, to transportation policy, and basically, where they want to keep their product. Those three decisions have a great impact on customer service," explains Hans Olijve, Director of Corporate Accounts of TNT Express Worldwide (HK) Ltd.

"For instance, for one of the largest mobile phone manufacturers in the world, we operate about 20 depots in Indonesia and Taiwan, and about 30 small depots in Japan. Our customers need to react to their customers within a certain amount of time and this cannot be done by simply coming out of, say, Singapore to Taiwan. The company needs to be close to their customers. The depots are for replacement parts and they need to send it in two or three hours, so you need to have a small buffer stock location within the vicinity. We also build together with our customers infrastructure or facilities of various sizes, which could range from 50 to 100 sqm or 200sqm, depending on the need, but all of these are linked back to a regional logistics centre which can be either in Singapore or in Hong Kong."

John Farrell, DHL's Logistics Infrastructure Manager within the Global Customer Logistics Group, based in Singapore, calls their express distribution and logistics, the "advantage solutions". Their services cover finished goods, spare parts, planned production, goods samples, financial services, repair exchange, test services, strategic inventory management, direct express inventory and return repair inventory. "The advantage solution for finished goods can be described as the movement of product from the manufacturer to distributor direct to the end customer or consumer as fast as possible without being held in a warehouse at any point," explains Farrell. Cisco Systems and Sun Microsystems as two customer who are leading the service parts "revolution" and are key customers of DHL Asia.

John Farrell, DHL's Logistics Infrastructure Manager calls their express distribution and logistics, the "advantage solutions"

"Our core competency of network and express distribution is moving parcels by express facility. Based on this competence, we developed logistics solutions tailored to market demand. We started developing Express Logistics Centres in Asia Pacific, including Tokyo and Sydney. There are now a total of nine ELCs globally for DHL. Products are stored in the ELC so that they can be easily moved around Asia, the greater China market, Japan, Southeast Asia," says Farrell. These ELCs are linked to the DHL global network, thus giving them the advantage of overnight delivery service when required.

DHL has Express Logistics Centres Bahrain, Sydney, Brussels, Cincinnati, Johannesburg, Miami and Singapore - forming a global network to cater for logistics needs of regional and global customers. Recently, the ELC in Tsuen Wan, Hong Kong was expanded to 58,000sqft. The ELC is now capable of handling over 600,000 shipments per year, is equipped with state-of-the-art inventory management system, online computer technology, comprehensive security systems and temperature control capability.

DHL Worldwide Express Logistics Centre in Tsuen Wan can handle over 600,000 shipments per year. It is one of 9 logistics centres around the world

The ability to link up with their global express network is the edge that these companies have over other logistics providers. Dennice Wilson, Vice President of FedEx Asia Pacific's Supply Chain Solutions, says: "We have 11 Logistics Distribution Centers served with 22 facilities. There are multiple facilities in Tokyo, two in Seoul, 22 all over Asia. These provide order management, order processing, management reporting, kitting, delivery within a certain number of hours for certain parts, handle finished goods, cross docking, merging, and so forth."

These centres are in turn linked to whole FedEx network of distribution centres in North and South America, and Europe, through the FedEx flight network. Then, there are the five operating

Dennice Wilson, VP of FedEx Asia PacificOs Supply Chain Solutions...Asia is key and critical to the supply chain in terms of origin, i.e., product sourcing

companies of FedEx, which includes for example, ground delivery service and overnight express in the US market.

"We have the ability to link our customers to services required by the type of product they have. Some products require urgency, some get into inventory because they are lower-cost and the inventory carrying costs are lower. So we match any model that our customer requires depending on what their product is," says Wilson.

Meanwhile, UPS is positioning itself in Asia to effectively carry out what it calls the "flow of commerce", i.e., the flow of goods, flow of information, and the flow of funds. Recently opened was UPS House, at Changi South in Singapore. The S$38mn, 280,766sqft facility houses UPS Asia Pacific headquarters, UPS Singapore office and operations centre, and UPS Logistics Group's Asia Pacific office and accompanying three-storey finished goods warehouse and service parts centre. UPS believes that bringing together the various business units will improve customer service by more effectively utilising resources, increasing productivity and making the operation more efficient.

UPS is also getting ready to open its intra-Asia hub in the Philippines' former Clark Air Force Base on April 1st. There will be 30 flights a week operating from the hub, serving Shanghai, Beijing, Seoul, Tokyo, Taipei, Singapore, with services to Penang and Bangkok as well as connections to UPS global network.

For this reason, it has been reported that UPS has a lot riding on the successful outcome of talks between Hong Kong aviation authorities and US Department of Transportation officials. The talks center on the opening up of Hong Kong's fifth-freedom flights of an additional 10 to US carriers. Cathay Pacific Airways has also urged the US Government to expedite its consideration of a pro-competition codeshare deal with its oneworld partner, American Airlines, that would give Cathay greater exposure to the US domestic market. Cathay said the item has been under deliberation for the past three years. Talks resumed February 27 but as of the second week of March, no announcement had been made on results. Hong Kong has been urged to liberalize its aviation market or else risk competition from its Asian neighbours.

Hong Kong Air Cargo Terminals Ltd, which handles over 85% of cargo throughput at Hong Kong International Airport, reported a 9% reduction in cargo handled in 2001 over 2000. Imports from other Asian countries fell by 10.3%, from Europe by 4% and from the US by 12.9%, in 2001. HACTL's Director of Marketing and Customer Service, said that the company is pushing hard to implement intermodal transport and IT initiatives to facilitate logistics integration with the Pearl River Delta.

"In Asia, there's a tremendous amount of knowledge and a tremendous amount of desire to be up-to-speed with trends in technology. They just haven't towed the line yet. But there's this thing called "globalisation" that's happening and that is going to force everyone else to catch up. And when it pushes through in Asia, it's going to happen at absolutely lightspeed. Everything in Asia usually starts a little later than most, but when it goes it just goes! Think about cellphones, the explosion in cellphones. And that is what's going to happen in supply chain management and logistics. If Asian companies want to compete against global multinationals, they have to become as efficient as their competitors, which means creating very efficient supply chains. And the truth

Matt McGee, VP of Marketing for UPS Asia Pacific...the real issue is what does the customer want- multiple solutions or just a single solution
is, since that's not their core competency, they would have to look for companies that can provide that to them. This is why UPS has created all these solutions and why we are in Asia because we want to be able to work with them so that they can compete worldwide," said UPS's Matt McGee.

"The real issue is what does the customer want-whether it's multiple solutions or just a single solution. One example is a garment industry customer we have in Hong Kong. It has its own in-house technology people, own computer programmers and they build their own programmes. All they need is a company who may dependably and reliably pick up their parcels and move them to the UK everyday. They already have their technology and in-house logistics capability, but they don't have the transport capability, and pick-up and delivery solutions," explains McGee.

"Our technology is built on an open platform, that enables us to migrate and integrate our technology into existing technologies. For UPS, it's all about listening to the customers needs and then saying 'Look, we have these solutions. If you want them, we can set them up for you."

TNT's Global Account Management

For TNT, Global Account Management comprises four mainlines, namely Automotive & Industrial with customers such as ABB, Johnson Controls, Rockwell Automation, etc;

Motor Vehicles-Volkswagen, Mitsubishi Peugeot, Volvo, Daimler Chrysler, General Motors, etc;

Live Sciences-Bayer, Roche, Metronic, Phillips Medical, GE Medical, Siemens Medical, etc;

IC & Electronics including semiconductors, computers-Phillips, Siemens, Sony, Nokia, Ericsson, Motorola, Nortel, Alcatel, CISCO, etc.

"When business is booming, logistics or supply chain management is of less importance, and it's just taken for granted that it's there because you need to get the goods out as soon as possible anyway. But in an economic downturn, supply chain management is one of the last economic frontiers where you can make a big difference for the company," says TNT's Hans Olijve.

"And this is what's happening now in Asia. A lot of companies are now looking at how they can streamline their supply chain operations because it has a direct impact on the bottom line of the company. For instance, I know of a company with 300 people for logistics, and 13 depots in China. It is not their core business but this is simply the way the business expanded. They are not used to sourcing their supply chain needs.

Artists impression of UPS Asia hub in Clark Field in the Philippines, to open April 1

"Now, companies from the US and Europe with production facilities in Asia are focusing on streamlining their operations and supply chain management. They want to work together with companies that understand their organisation and most of the time it's companies like us because we know them and they know us from Europe or from our operations in the US. We understand how they work and they can tap into our resources." In 2000, TNT bought the logistics company of CSX.

Importance of SCM

"If you look at sourcing today, most of the world's product sourcing is done in Asia," says FedEx's Wilson. "This part of the world is key and critical to the supply chain in terms of origin as the source of products. At FedEx, we see ourselves in the beginning of the supply chain with our Asia network. For example, for Motorola which has five plants in Asia, we handle the transport of all of their semiconductor chips into the US, Canada and Mexico for their manufacturing.

"For Compaq, we do a build-to-delivery process where we basically do a customer direct ship. So instead of taking a PC and moving it into the US and storing it in a warehouse, we have the ability to move it from its origin-where it's manufactured-as a full shipment and then break up the shipment at the port of entry and distribute it directly to the customer. It cuts many days off the cycle," says Wilson.

Wilson says that this is basically the service FedEx gives the customer: to help improve cost structures by providing them models which cut down their inventory. In many cases, the amount of carrying costs of inventory is much higher than the cost of express transportation. "FedEx has been doing logistics and supply chain management for years. Basically, we look at cost structures and then the best way for the product to hit the marketplace. And so what has been happening is that people are now realizing how important basic product movement is to the overall business-comparing the actual physical movement to inventory carrying costs."

Wilson cites research that shows that industry experts now believe that for every $1 spent on the transportation express mode, companies save about $1.50 in inventory and warehousing costs. Depending on the product, a company can save a lot of money and get their product to the marketplace quickly.

Studies have shown that over a 20-year time frame, from 1980 to 1999, logistics and transportation advancements in industry have reduced business inventory by US$4.6 trillion. Typically, inventory costs make up 30 to 40% of the cost of the finished product. By reducing inventory costs and improving supply chain management efficiency, there is even a greater chance to improve on those economies.