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Few logistics service providers have the resources to meet, on their own, all the global service demands of today's multinational businesses. Through partnerships and strategic alliances, however, logistics providers are creating virtual global distribution networks that offer a seamless, one-stop array of services to companies that have a growing desire to outsource these functions.
"Increasingly, we see customers wanting us to provide them with a global logistics network," says David I. Beatson, president and CEO of Circle International, a San Francisco-based forwarder with offices in more than 100 countries. "They are looking for a single global solution that provides sourcing as well as selling representation on a global basis." This is light-years from the situation a decade ago, he says, when the entire emphasis of a sales call was "what do you ship, what do you pay for it, and how can we get your business" - an approach that put virtually all of the importance on price. "Today, the emphasis is on logistics management and how we can help design a better process," he says. "We think of our business as being as much about information as logistics."
"The emphasis is on how we can help design a better process... We think of our business as being as much about information as logistics." - David J. Beatson of Circle International
According to Beatson, the customer may have existing suppliers in Penang, Taiwan and Japan and manufacturing plants in Mexico City and Amsterdam, and is tired or incapable of effectively administering the logistics puzzle that ties these pieces together. Or the client may be seeking ways to get into a particular territory, service a particular supplier, or bring product in and distribute it within a region.
"They don't have to buy the expertise to build that logistics network and put it in house, they can get it from us," says Beatson. "Then we can leverage the size of our network and the volumes we already have going into a certain country to get them the best price and service combination for moving and storing their goods. In essence, we become the virtual supply chain for that customer."
As illustration, he describes one customer for which Circle takes possession of product in the U.S. and manages it to Thailand. "There, we warehouse it and then release it on a production schedule to a manufacturing plant in Thailand on behalf of the customer. We even buy the product from the customer when we take possession and then get reimbursed from the customer's customer for the price of the product, plus the transportation and cost of the logistics management."
In some cases, the foreign locations are direct Circle facilities, while others are established partnerships with firms that have proven records. "In the past, we've done a number of acquisitions in different areas of the world, and we've done those acquisitions based on where we felt we needed to have additional space, or it brought specific industry capability to us, or it helped flesh out our coverage of a targeted geographic area," he says. In the past two years, Circle has closed two such acquisitions, bringing into its network Alrod International and Concord International.
Concord, a Singapore-based forwarder, brought extensive coverage and expertise in the markets of Singapore and the Far East. "We combined Circle's existing operation with Concord, and that elevated us to the number three spot in terms of logistics companies in Singapore," says Beatson. "They were an established player in Singapore, and were both a geographic and service fit, specializing in high-tech and consumer products." Circle's primary vertical market is technology, which represents a 26 percent share of the company's business, followed by automotive at 21 percent.
Circle now focuses on organic growth rather than acquisitions, though it does what is necessary to beef up its presence in targeted markets. "There are markets where we see, based on the growth we're projecting over the next three to five years, that we may not have quite the strength or visibility in that market that we would like to have to fully take advantage of the opportunities expected in those locations," says Beatson.
Such was the case in Europe, where Circle recently formed a joint venture with Maurier. "Maurier has a big ground-delivery service in France, with a strong presence and market identity, and a solid ocean forwarding division," says Beatson. By teaming those assets with Circle's air and brokerage business, the partners created a single entity with the global reach of Circle and the local market strength and local market presence and identity of Maurier.
When considering network partners, "Our first emphasis is quality of service - who can perform consistently, dependably and reliably," says Beatson. "No one asks how cheaply you failed. We look at the quality process of the carrier to determine how confident we can be that if we commit to something, we will in fact get service at that level. Then we look at how the two operations can fit together ... the operational balance, and how their quality processes are tied into ours." The third factor is price.
Customer contracts generally include performance-based compensation clauses. "We endeavor to get the same type of arrangements with our carrier base, although it's sometimes difficult to get carriers to belly up to the bar on the service contracts," says Beatson.
UPS Logistics Group currently relies on the UPS international network as well as global agency relationships to provide customers with logistics reach "into every nook and cranny in the world," says Bjorn Leigvold, director of marketing services for UPS Logistics Group.
"I can't emphasize enough the importance of performing due diligence up front and having very strong contractual language that protects both parties." - Bjorn Leigvold of UPS Logistics Group
The company continues to initiate start-up operations as well as to evaluate and proceed with strategic acquisitions in accordance with customer requests and market opportunities, while relying on transport partners to move products within the supply chain. "Typically we go where the opportunities are," says Leigvold. "In some cases, our customers are looking for us to go with them, or for them, to certain locations, but we also move when, through our own internal research, we see an opportunity on a certain continent or in a particular country."
Marketing and business development executives constantly have their antennae tuned to business opportunities, and the organization's senior staff has an ongoing dialogue about network expansion, discussing opportunities they see on their respective continents and then prioritizing an action plan.
Many of the customer-driven start-ups are triggered by the re-engineering of customer supply chains, a growing function within the logistics group. A customer may have five or six or even 20 warehouses spread across the world, and after evaluating their network and their customer and supplier locations, the logistics group may conclude that the client only needs two warehouses. "In that situation, we could actually design and build those as single-user facilities or else fit the customer into a facility we already own or one already within our network depending on what makes sense from a strategic business perspective for that particular client," says Leigvold.
The maquiladora industry is a good example of opportunity-driven network expansion, and the logistics group has responded with facilities on both sides of the U.S.-Mexico border. Similarly, the high-tech industry's sourcing in Asia for U.S. consumption fueled network expansion in that region.
When the logistics group evaluates and selects transport partners, it examines their financial stability, performance record and position in the marketplace. "Once we select a partner, we have very strict performance criteria. Each partner has a monthly report card that includes elements such as on-time delivery, freight claims and other aspects of customer service," says Leigvold. That data is fed into performance matrices, and the results determine whether that particular company continues within the network and becomes a major transportation partner. Where issues or problems typically arise are with the strict reporting requirements and what companies need to do to be a partner with UPS Logistics, both before an agreement and after, he adds.
For acquisitions or formal strategic alliances - the highest level of network partnership - the logistics group performs extensive due-diligence up front. "Instead of relying on the various firms you can hire in the U.S. to perform your due diligence, we have a group of people who can be dispatched to the international location to do on-the-ground evaluations," says Leigvold. Certain members from the parent company's mergers and acquisition team are assigned to work with the logistics group, which sends its own finance and operations specialists to the site. "We've all seen deals in this industry that have gone very poorly, and I can't emphasize enough the importance of performing due diligence up front and having very strong contractual language that protects both parties," says Leigvold. "You can eliminate about 90 percent of the potential problems if you do your work on the front end."
Management chemistry, corporate philosophy about business and quality, and a commitment to measurement and evaluation are critical evaluation elements. Information technology sophistication also is mandatory. "We're a very information-driven industry, and candidates have to have state-of-the art information systems and connectivity that is both global and web-enabled, a critical factor that filters out a lot of prospective partners," says Leigvold. "As a company, we're committed to speed and reliability, so they have to be committed to that, not only in terms of moving physical product, but also on the financial, cash management and information technology fronts."
In the future, UPS Logistics Group plans significant network expansions into South America, particularly in the service parts arena. Its first cornerstone is in Mexico, where it has aggressively pursued transportation service providers to service on-site manufacturing facilities.
"We're also looking at other key points in Latin and South America, but the economies of those countries presently leave much to be desired, so we are proceeding cautiously," he added.
Schenker AG also is focused on providing customers with a premier virtual logistics network, according to Bob Laird, managing director of Schenker Logistics.
Schenker AG consists of three elements: Schenker BTL, Schenker for Intercontinental Forwarding and Transport (IFT), and Schenker Logistics. Schenker BTL, an asset-owning truckload and LTL network with more than 7,000 road units, operates on a pan-European scale. Schenker IFT predominantly is composed of intermediaries and forwarders who add value to transactions by virtue of their status as customs and documentation experts. Schenker Logistics offers standardized logistics platforms.
"Schenker IFT has developed extremely strong relationships as partners with the major air and ocean carriers around the globe," Laird explains. "They carry the freight, and we manage it."
The term partnership takes on an enhanced meaning within Schenker Logistics, says Laird. "There's a tremendous emphasis on partnering with our customers because they entrust us with more than they will usually entrust to a traditional forwarder or carrier. Instead of individual shipments, these companies are handing us their inventory, and we are responsible for a lot of ancillary inventory requirements that go deeper into the supply chain than the simple movement of freight."
In that vein, Schenker Logistics also partners as managers of freight and inventory with its own forwarding arm, Schenker IFT, as well as others in the forwarding community. "Sometimes we have to manage domestic truckers, ocean and air carriers, and sometimes our own Schenker BTL organization in Europe will be our partner to handle the products of American manufacturers who want us to do pan-European distribution." Consequently, he says, "partner" is a relative term in its application to those specific divisions with specific missions.
"It's a complex world we live in today," says Laird. "One day you may be a competitor, the next day you may be a partner. And that's not only being said by the Schenkers and Sea-Lands and Schneiders; IBM is saying the same thing."
As a result, it's critical to choose network partners carefully and methodically and to balance the strengths of those prospective partners with the customer's service requirements, particularly when selecting transport partners, says Laird.
"When I say customer service requirements, obviously time is a factor, but it's hardly the only factor," he explains. With the growing emphasis on inventory reduction throughout global corporations, service reliability is of increasing concern, as customers want their incoming goods and materials arriving at the specified time - not early, and certainly not late.
And the value of a zero-defects supplier is undermined by in-transit damage, so damage-free service no longer is simply a matter of the dollar value of the freight claim. The cost of shutting down a production line dwarfs the associated freight claim and traumatizes the supply-chain strategy of just-in-time inventory control. Where hazardous materials are involved, safety is paramount.
At Schenker Logistics, those carrier selections are made by the divisional vice presidents of each transport mode, who have developed their own set of guidelines for their carrier groups. "What may be an ultimate requirement in airfreight service, like next flight out or next-day time-definite delivery, may not be so much of a factor in ocean carriage, where reliability is critical. With ocean, it's not so much the transit time that is important; what's important is if you say you're going to get there on Wednesday, do it." Other links in supply-chain logistics are coordinated and depend on the shipment being there as specified, and a late arrival upsets the proverbial apple cart.
"The customers leave us to our good judgment, so we pick our best partners based on those requirements initially, with an eye on the customer's overall operation," says Laird. "At Schenker, we only want to be associated with premier operators, and that's what our customers expect from us."
This emphasis on quality does not necessarily preclude attractive pricing for customers, he adds. "We have the ability to give our customer a price break for premier service because of our volume with these carriers. We are in a far better competitive position to give them more competitive pricing than a smaller forwarder operation."
Fritz Companies' global expansion, as with most logistics providers, initially followed the trading patterns of its customers, says Jay Bellin, director of marketing. Though this trend continued, as evidenced by Fritz's entry into Russia in the early 1990s to serve the needs of Occidental Petroleum, the company also developed relationships in promising areas of economic development. Its entry into Southeast Asia followed the general southward movement of garment manufacturers and high-tech goods as the economies there opened up to western trade.
At first, the focus was on establishing reliable partnerships as opposed to launching start-ups or negotiating acquisitions. "We were much more interested in local expertise rather than an expatriate program," says Bellin. "Our philosophy in the early '90s, when we really expanded our network, was to establish agency relationships with the leaders in local markets."
After the company went public and had access to capital - and the logistics business intensified with the growth of global business operations in general - network ownership become an increasingly attractive option. "We made our first offers to our agents, the people we had worked with, and converted those agency relationships to wholly-owned offices," he explains. "That way, we brought into the company people from the local market who were respected in the local community, had a good track record with the local forwarding association, and were both knowledgeable and respectful of the local practices as opposed to launching a start-up and importing American processes and policies." Today, Fritz has several hundred wholly-owned offices in 120 countries.
"We brought into the company people from the local market who were respected in the local community." - Jay Bellin of Fritz Companies
The benefits cut both ways, says Bellin. "For many of these international locations, their local customers needed the network as well as access to our customers in the U.S." A good example, he says, was Fritz's acquisition of its operation in Australia. "The only way the people in Australia were going to be able to continue to serve their customers with best-in-class service levels was to partner with Fritz in a long-term relationship and be able to sell the advantages of ownership - an actual financial link to the Fritz network. That way, their local customers could reliably take the long-term view that it was going to be a lot easier for them if they started sourcing in Brazil or Philadelphia, as their Australian forwarder would have an established and dependable access to those markets. For many years in this industry, customers were hurt as a result of freight forwarders changing agent representation over and over again."
Another plus for those local companies was access to a global network while only having to settle with one company, as opposed to administering agency relationships and the associated financial settlements with forwarders in 50 different countries. Similarly, there was one marketing force.
According to Bellin, a large percentage of former agents that were established in the early 1990s are now Fritz employees working Fritz offices. At this point, Fritz only has one agency relationship of any significance left: a partnership with Suzuyo in Japan, marketed as Suzuyo-Fritz Logistics Services. A company that has been in business since the 1800s, Suzuyo has five forwarding offices in Japan and also is involved in port operations and stevedoring services.
Despite Fritz's large network, Bellin says the company does not promote its services based on size. "We want to emphasize the quality of our customer service," he says. Claims regarding global coverage should, in general, be taken with a grain of salt and customers should look beyond the written word, he adds. "If you look at every two-bit mom and pop forwarder, their brochure says they are in 400 offices in 180 countries, so there's no legitimacy in terms of defining a network. Anyone can go to a directory and find an agent in Kenya, but what kind of relationship do they actually have?"
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