Kuehne and Nagel in Asia Pacific

Q.1 What do you understand by freight forwarding? Explain the global environmental changes that affected the freight forwarding industry in 1990s.

Seller Buyer

FF

FF

• A freight forwarder(forwarder or forwarding agent) is a person or company that organizes shipments for individuals or corporations to get large orders from the manufacturer or producer to market or final point of distribution

• Forwarders will contract with a carrier to facilitate the movement of goods. A forwarder is not typically a carrier but is an expert in supply chain management

• FF prepare and process the documentation and perform related activities pertaining to international shipments

Early

• Integral link in the movement of goods from supplier to buyers

• Earlier it was unsophisticated• Origin.: FF- concept evolved in Venice, Europe in the

thirteenth century

• A middleman or “ Frachter” was a combination carrier & forwarding agent who transported a merchant & accompanying goods to a destination of sale

Modern• In 1990s became extremely competitive & multi billion dollar

industry• Need to match supply & demand, Which was associated

with the growth of commerce & industry in general, was undertaken by intermediaries or forwarders

• Operates under different names in different countries (freight forwarder, Spediteur & commissionnaire de transport)

• Function was of moving goods across wide continental land masses or oceans & transporting goods while in fact owning no means of transportation

• An FF was the intermediary between a consignor or consignee of goods & the transport carriers, wharfingers, customs authorities, & other parties in customs brokerage, ship brokerage, & export car loading.

Major global changes

• The distribution market for physical goods• supply chain management• Competition

Changes that affected FF…• Single European market in 1993 • The emergence of new markets• Freight forwarding was a rapidly changing & dynamic

industry• Globalization of world markets, • Rapid advancements in information technologies, • Changing demand & supply for products & services • Users of freight forwarding were increasingly seeking to

shorten product cycles & minimize inventory • Ensuring timely, reliable & efficient movement of goods

• By 1990s , world merchandise trade had been growing @ of 12 % pa

• Production & delivery of goods & services to customers increasingly required co-ordinated efforts at a global level

• FOR MNCs, ability to manage & develop globally supply chains was becoming increasingly critical to success

• Some companies with international business dealings began to look to their FF firms & carriers for assistance

Q.2How did the expectations from freight forwarding industry change with the above environmental changes? What did freight forwarders do to meet these expectations?

• Companies sought to shorten product cycles while ensuring their goods continued to move markets in ways that were timely, reliable & efficient

• For many controlling the flow & inventory of products was an important business objective

• For some the rapid movement of goods directly to the shop shelf or manufacturing facility was paramount

• For others retention of parts at a distribution centre was the key• Firm began to seek transportation & distribution suppliers with

worldwide capabilities & who possessed broad & high-level service capabilities supported by trained & dedicated professional, & with superior information technology( IT) & information system(IS)

• SCM has also become a vital element of product competitive advantage

• Logistics advice and consulting

• From above it can be concluded that FF customers placed more emphasis on managing supply chains & detailed product flow information to secure & sustain competitive advantage

Steps taken to meet their expectations

• Extensive use of modern ICT– it ensured data exchange between all operational applications as well

as to customers– information flowing up the SC from buyers could assist & alert

management to changing customer preferences & identification of market opportunities

• Efficient SCM which can ensure product delivery in timely & efficient manner– ensure tight co-ordination between the various value adding

activities of the firm– ability to pin-point bottlenecks & problems along supply chain

through enhanced visibility of upstream & downstream processes• A credible FF

Question: 03

• Explain the trends in freight forwarding industry in the Asia – Pacific region in 1990s? What were the difficulties faced by freight forwarders in trying to provide integrated SCM logistics capabilities in the region?

Solution

• It was well established • Unique Characteristics:– vast geographic expanse – diversity in countries – cultures and language – different levels of political and economic

development

Hence, all together presented several opportunities and a myriad of challenges to FF industry

Contd.

• Hong Kong was major trade and transportation hub in Southeast Asia– sophisticated transportation network – good availability of services such as banks, insurance

companies, FFs and terminals – efficient telecommunication infrastructure– well established legal and financial systems – innovative electronic commerce infrastructure

• Physical goods distribution market– huge geographical size and high population area– long term upward economic growth potential and the

relatively underdeveloped market– viewed as major growth opportunities providers for FF

Contd.

Four categories of companies:• Wealthy Democracies: (Japan, Australia & New

Zealand )– Custom process were mature– duty levels low– advanced infrastructure

• Trading Tigers: (Singapore and Hong Kong)– free custom process– zero duty levels– mature logistics and infrastructures

Contd.

• Burgeoning Industrialist: (Taiwan, Korea, Malaysia, Thailand & Philippines)– complex custom processes– Medium duty levels– dynamic, immature logistics infrastructure

• Future Powerhouses: (China, India & Indonesia)– informal customs process – high duty levels– backward emerging logistics infrastructures

The difficulties faced by freight forwarders in trying to provide integrated SCM logistics capabilities in the region:

• Differences between countries in the region and other competitors to develop integrated SCM logistics capabilities

• Profit margin across the FF industry were in decline• SCM integrated logistics critical to development of

door-to-door distribution network in Asia – Pacific • Firms generated high volume business that had

moderate returns • Traditional FF business margins was less than 2% but

this was easier to practice

Question: 04

• What was the nature of competition in the Asia-Pacific region?

Solution

• Local FF providers:– small stand- alone operations (fewer than 50 employees)– little or no IT and SCM capabilities – concentrated on lower end of physical goods

• Integrators:– specialists in the express carriage of documents – small parcels and other time definite products and services (Federal

express, DHS & UPS)

Contd.• Third-party outsourcing agent: In late 1980s and early

1990s, some industries (FMCG, chemical, automotive, aviation & ship spare parts) – outsourced their SCM logistics function giving the opportunities to third party professionals

• IT service providers– opportunities to integrate downstream by purchasing or

distribution business– to offer SCM capabilities to customers

Contd.• Consultant

– specialists in SCM – more prevalent in the market– often with IT service providers, acquired FF companies

• Other FF competitors• responded to competition by developing and offering multi-

service solutions• fitted with information system to enhance core FF deliverables

through “one stop concept”

Q5‘Over the years Kuehne and Nagel has adapted its supply chain to maintain a strong position in all regions and across all core business activities’. Explain.

• Among the first to introduce modern Euro Logistics, recognised as one of the most important products in the transport market.

• Recognized the opportunity in “United Europe” and expanded rapidly into Europe and the Americas creating a worldwide network.

• Took the first step towards building up the airfreight sector by setting up its own Far East operation.

• It became the first German forwarder to acquire an Electronic Data Processing (EDP) system.

• Became a leading forwarder in project forwarding by Increasing shareholdings in the larger forwarding companies in Europe and setting up industrial plants worldwide.

• Electronic data interchange (EDI) services were continually upgraded and offered electronic links between KN and customer sites

• Expanding core business activities across all spheres of SCM ranging from ocean-freight to project forwarding services.

• Airfreight, road, rail, and logistics, together with a range of specialist services.

• Project forwarding activities covering the delivery of shipments to port by rail, road or inland waterway, export packing, port handling, storage and FOB deliveries, in addition to a host of other services.

• Airfreight services included maintaining a worldwide network, providing high-frequency services to key destinations, combined sea-air services, and the provision of aircraft and ship spare parts and charter services.

• Logistic centres of competence were developed across four key sectors: consumer electronics and high-tech products; the automotive industry; chemical and industrial goods and consumer durables, and a range of logistics services.

• KN also supplied some IT solutions to customers in continental Europe and made extensive use of modern information and communications technology, which led to developing SCM capabilities for potential export to other regions serviced by KN.

Turnover Net Turnover Gross Profit

5168

3938

995

6243

4779

1168

1996 1997

Germany rest of Europe North, Central & South America

Asia Pacific Middle East & Africa

12.40%

23.50%22.30%

37.60%

41.40%

35.50%33.40%

19.20%

10.70%

1.20%

growth in turnover gross profit

26%

5%

5%41%

22%

Share of gross profit

Ocean freightOther servicesSpecial servicesOverland/Rail/LogisticsAirfreight

debt to equity ratio return on

equity self financing ratio cash

balance sheet total

24.30%23.90%

237.20%

0.00%0.00%

24.90%24.20%

281.30%

10.90%10.50%

Financial position

1996 1997

Q. 6 ‘Kuehne and Nagel’s Asia-Pacific operation was not comprehensive enough to give complete geographical coverage within the region’. Do you agree with the statement? Explain.

• Yes, It was not Comprehensive because of following reasons:I. Only 1% of K & N business was derived from Intra Asia

Business although it was responsible for covering 17 Asian countries

II. Limited to Sea and Airfreight distribution only i.e. Port to Port facility

III. Railways should have use for freight forwarding purpose as most of Asian countries have extended rail networks

IV. Services beyond Ports was inadequate to meet growing demand from Multinational companies operating in Asian markets

V. Providing superficial services

Q7• ‘The future strategic direction of Kuehne and

Nagel’s Asia-Pacific operation presented several problems and opportunities to Dolder’. What do you think were these problems and opportunities?

Problems

• They were dependent over Europe

• About Asia-Pacific they were conservative

• There major competitors were DHL & FedEx

• For survival they need to be more aggressive

Opportunities

• They have network of global offices• They have ability to coordinate with

companies in different segments• It can collaborate with customers and

integrated SCM companies• It can compete on reputation, connection and

experience

Q 8

• What was the possible alternative strategies that were adopted by Dolder? What strategy would you recommend him to adopt?

Need for strategy

• Due to increase in competition the KN operations required a future strategy to be successful in its logistics and transport business.

• Huge size of the Asia-Pacific both in terms of population and geographical distance, long term upward economic growth potential and relatively underdeveloped nature of physical goods distribution industries provided major growth opportunities.

KN alternative opportunities1. KN should continue with its core business activities

i.e. ocean freight, project forwarding, airfreight, road, rail , custom broker and logistics.

2. To improve the SCM– Identify the local companies for expansion in the Asia

Pacific and integrate the logistics operations with the local partners and local customer demands.

– Utilize the core competencies of the partnering firm to improve the SCM inefficiencies.

– Improve the IF/IS solutions to satisfy the changing customer demand and requirements.

– Hire IT experts for generating higher profits and get the first mover advantage.

Cont….

3. Explore other areas or locations which can generate profit for the company like the benefit from the differences between the customs process, duty levels and infrastructure.

4. The unique characteristics such as diversity in culture and language, different levels of economic and political development and vast economic expanse of the Asia pacific region is to be studied

• To identify the possible tie-ups with regional partners.• To bridge the gap in the future Asian economies like India and

China.

Recommendation

To improve the SCM• Identify the local companies for expansion in the Asia

Pacific and integrate the logistics operations with the local partners and local customer demands.

• Utilize the core competencies of the partnering firm to improve the SCM inefficiencies.

• Improve the IF/IS solutions to satisfy the changing customer demand and requirements.

• Hire IT experts for generating higher profits and get the first mover advantage.

Thank you!