SEAFREIGHT FORWARDING – BUSINESS MODEL UNDER PRESSURE? Presentation to ETH Zürich, Logistics Management
SEAFREIGHT FORWARDING – BUSINESS MODEL UNDER PRESSURE? Presentation to ETH Zürich, Logistics Management Zurich, 30th April 2013 Challenges in sea freight forwarding_fin.pptx 1 Our logistics core team in Zurich: lateral hires paired with experienced consultants Matthias Hanke Dr. Matthias Hodel Peter Wiese Partner Project Manager Senior Consultant • 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 • 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 [email protected] [email protected] Challenges in sea freight forwarding_fin.pptx 2 Roland Berger Strategy Consultants is a top management consultancy with a strong global footprint Our offices 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 Source: Roland Berger Challenges in sea freight forwarding_fin.pptx 3 We support major players in the logistics industry in strategic and organizational questions Selected clients and project examples from the logistics industry KEY PROJECTS (EXAMPLES) > Complete strategic transformation and turnaround 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 Source: Roland Berger Challenges in sea freight forwarding_fin.pptx 4 Today's focus will be on seafreight forwarding Logistics Service Providers FOCUS KEY CHARACTERISTICS Overland Transportation > > > > 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 Global Forwarding > > > > 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 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 Integrators; Express Logistics > > > > 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 Source: Roland Berger analysis Challenges in sea freight forwarding_fin.pptx 5 Vocabulary for clarification – related to seafreight forwarding VALUE CHAIN INCO TERMS1) Shipper Inland logistics Customs Terminal DDP CIF Carrier/ shipping line Terminal Inland logistics Consignee Forwarder Forwarder FOB EXW Customs Forwarder Forwarder > 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 Source: Roland Berger analysis 1) International Commercial Terms; define risk and cost transfer from shipper to consignee Challenges in sea freight forwarding_fin.pptx 6 Agenda today In order to discuss strategic topics in seafreight forwarding, you have to… A … understand major trends on global economy, its impact on seafreight business and respective carrier moves B … get a glance of the resulting challenges for seafreight forwarders Consequently, you will recognize that… C … the forwarding business model in seafreight is faced with substantial changes … on the other hand, several so far untapped strategic opportunities may be addressed Source: Roland Berger Challenges in sea freight forwarding_fin.pptx 7 A. Global seafreight – Overview of the market and key trends Challenges in sea freight forwarding_fin.pptx 8 Chapter overview: Global seafreight – Overview of the market and key trends 1 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 2 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 Source: Roland Berger analysis Challenges in sea freight forwarding_fin.pptx 9 1 MARKET CHARACTERISTICS Seafreight is the world's principal mode of global transportation, mainly due to significant unit cost advantages Comparison of external costs and relative price levels Volume and price for transportation modes 150.000 TonKm, Trillion 30 20 10 2 4 6 8 Source: World Economic Forum, CEFIC, Roland Berger analysis 10 12 14 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 Challenges in sea freight forwarding_fin.pptx 10 1 MARKET MARKET CHARACTERISTICS CHALLENGES Seafreight market is forecasted to grow with 14% until 2015 – Emerging markets are the main driver of global growth Seafreight market growth CONTAINER TRAFFIC BY TRADELANE 2015 Million TEU (twenty-foot equivalent unit) Transatlantic East bound North America 1 20.4 3.8 4.4 1.8 IntraEurope1 Far East – Middle East 10.2 Transatlantic West bound Transpacific East bound 3.9 N. America – S. America 1.7 Intra-S. America High-growth trade lanes, above 200% Transpacific West bound 10.6 6 Far East – Europe 19.5 10.2 Europe – Far East Europe – 2.2 Latin America 67 Intra-Asia1 Far East – Australasia 2.7 3.7 Far East – Latin America Low-growth trade lanes, below 200% > Seafreight market forecasted 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 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 Source: HIS Global Insight, Drewry, KN Research Challenges in sea freight forwarding_fin.pptx 11 1 MARKET CHARACTERISTICS 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] Mkt. share [%] 15.2 13.5 8.3 6.4 4.3 4.3 4.0 3.6 3.5 3.5 mTEU # vessels 4.5 Vessels 4.0 Ordered 3.5 Current 3.0 2.5 0.2 1.0 2.6 600 500 400 0.4 300 2.0 1.5 > Size matters¨… allowing for economies of scale 3.1 2.3 0.5 0.1 0.2 1.4 1.1 0.0 APMMSC Maersk 200 0.1 0.7 0.4 0.7 0.1 0.7 CMA HL + COSCO Ever- HapagCGM Hamburg green Lloyd Sud Line 0.2 0.6 0.2 0.6 0.1 0.6 APL Hanjin CSCL Shipping 0.1 0.5 > 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 100 0 MOL 1) Top 100 shipping lines Source: Alphaliner, Roland Berger analysis Challenges in sea freight forwarding_fin.pptx 12 2 MARKET TRENDS Strong capacity growth leads to danger of overcapacity in the industry, results in rate declines and falling profitability Seafreight capacity development until 2015 [million TEU] CAPACITY DEVELOPMENT 50 45 Vessels Containers 40 35 30 FORECAST m TEU COMMENTS +47% 25 20 15 10 +27% 5 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 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 Challenges in sea freight forwarding_fin.pptx 13 2 MARKET TRENDS World trade development has been linked to GDP growth – Historical interdependence however is changing towards stronger volatility Yearly volume growth rates [YoY % growth] TRADE GROWTH CORRELATED WITH GDP GROWTH OUTLOOK % YoY change 30 20 10 0 -101985 1990 -20 GDP -30 World trade 1995 2000 2005 2010 2015 > 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 Source: WTO, OECD, IHS, Roland Berger analysis > 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 Challenges in sea freight forwarding_fin.pptx 14 2 MARKET TRENDS Seafreight market is highly cyclical with rate hikes of over 200% during a yearly cycle – European rates currently below slot cost? Rate volatility on key tradelanes [SCFI rates in USD/TEU ] > 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 Carrier slot cost ~USD 800-900/TEU1) Source: SCFI 1) Thereof Bunker: ~USD 500, Port & Channel ~USD 250, Vessel Rate ~USD 200 Challenges in sea freight forwarding_fin.pptx 15 2 MARKET TRENDS Shipping lines have seen a strong decline of profitability in recent years – Size is no guarantee for profitability Container shipping profitability Industry Return On Equity 22% Profitability of top carriers Comments Revenue [USD bn] > Seafreight carriers' profitability has dropped significantly since the beginning of the financial crises > Carriers did not expect the economic downturn – huge investments made in vessels that were underor 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 30 25 20 9% 15 3% 1% 10 5 -9% 2007 2009 2008 2010 2011 Source: PWC, Roland Berger analysis APM-Maersk CMA CGM MOL Hanjin Hapag-Lloyd Evergreen APL CSCL 0 -200 -150 -100 Note: MSC and COSCO excluded due to lack of data -50 0 50 Profit % change 2007-11 Challenges in sea freight forwarding_fin.pptx 16 2 MARKET TRENDS Digitalization is a key trend shaping the current seafreight landscape – New business models emerge at the horizont KEY ELEMENTS E-communication between forwarder, shipping line, road carrier and terminal E-communication shipper/origin and consignee /destination Electronic customs declarations Source: Roland Berger analysis 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 Challenges in sea freight forwarding_fin.pptx 17 2 MARKET TRENDS Three seafreight e-commerce platforms currently "on stage", so far with a rather pre-mature value proposition for the industry SHIPPING PLATFORMS KEY FUNCTIONALITIES > > 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 Source: INTTRA, GT NEXUS, CargoSmart, Roland Berger analysis Challenges in sea freight forwarding_fin.pptx 18 2 MARKET TRENDS Platforms provide an online solution for booking shipments – Integrated rate management necessary for full automation Generic e-commerce shipping platform process PLATFORM SHIPMENT PROCESS Shipper Select voyage Request booking Provide quote ELABORATION Provide shipping instructions Confirm booking Provide booking number Invoicing Arrange inland transport etc. Execute shipment Carrier Provide sailing schedule Calculate rate for shipment Handled through shipping platforms Source: Roland Berger analysis HYBRID/OFFLINE SOLUTION Handled through other systems, not automated > 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 Input Challenges in sea freight forwarding_fin.pptx 19 2 MARKET TRENDS Platforms are still in early stage of development – Overall direction rather heterogeneous SHIPPING PLATFORMS > Seafreight shipping platform > Facilitates e-commerce in seafreight > Largest platform, connected to over 40 leading shipping lines MAJOR PARTNERS > 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 > Cloud based supply chain platform > Covers door to door flows of goods > Second largest seafreight platform > 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 > Global logistics platform > Has "real time" sailing schedule info > Mainly connected to Asian shipping lines > No direct transportation partners, but several technology partners e.g. Cisco and HP > Working with especially Asian carriers – Main forwarder client is Panalpina Source: INTTRA, GT NEXUS, CargoSmart, Roland Berger analysis 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 Challenges in sea freight forwarding_fin.pptx 20 2 MARKET TRENDS INTTRA is the largest shipping platform – Focus is on combining integrated sailing schedule and container booking functionality Key functionality SAILING SCHEDULES > Search across 30 carriers amongst complete sailing schedules > Full visibility on some 10 million voyages worldwide, though only planned schedules 1) According to INTTRA Source: INTTRA, Roland Berger analysis CONTAINER BOOKING > 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 OTHER FUNCTIONALITY > 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 realtime rate information for participating carriers Challenges in sea freight forwarding_fin.pptx 21 2 MARKET TRENDS GT NEXUS takes the functionality one step further – Full seafreight management process handled by the platform Key functionality (focus seafreight) FREIGHT PROCUREMENT CONTRACT MANAGEMENT SHIPMENT EXECUTION > Standardized platform and > Management of service template to procure capacity – contracts with transport both global bids and spot rate providers – linked with procurement procurement module > Focus on creating transparent > Renegotiation and updates to comparability between offers contracts as an integrated from various providers functionality > Reflects information needed for > Compare and retrieve global frame agreements, contracted routes, rates, and including volume forecast, service across transportation tradelane view etc. providers > Covers end-to-end rate negotiation process Source: INTTRA, Roland Berger analysis > 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 PLATFORM > 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 Challenges in sea freight forwarding_fin.pptx 22 2 MARKET TRENDS CargoSmart has similar focus as INTTRA, though mainly cooperating with Asia carriers Key functionality SAILING SCHEDULES PLATFORM > 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 > 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 Source: INTTRA, Roland Berger analysis BOOKINGS > Online booking with the affiliated carriers - bookings to be confirmed > Covers bookings of general cargo, reefer and dangerous goods SHIPPING INSTRUCTIONS > Check of cargo versus international trading sanctions > Provision of shipping instructions based on booking > Allows sharing shipping > Specify distribution lists for bills templates with associate of lading or print express bills companies of lading Challenges in sea freight forwarding_fin.pptx 23 B. Seafreight forwarding – Key characteristics of the business model and challenges from industry trends in seafreight Challenges in sea freight forwarding_fin.pptx 24 Chapter overview: Seafreight forwarding – Key characteristics of the business model & challenges resulting from trends in seafreight 1 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 2 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 Source: Roland Berger analysis Challenges in sea freight forwarding_fin.pptx 25 1 KEY CHARACTERISTICS OF THE BUSINESS MODEL Freight forwarders are intermediaries between shippers, carriers and consignees The freight forwarding business model 65% SHIPPER CARRIER FREIGHT FORWARDER Market share Source: Roland Berger analysis Carrier controlled value chain > Shipper/consignee directly interact with carrier > Mainly applicable for… – large shipping volumes – full container loads (FCL) – simple/ repetitive point-to-point shipments CONSIGNEE FREIGHT FORWARDER 35% xx% A Forwarder controlled value chain > 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) B Challenges in sea freight forwarding_fin.pptx 26 1 KEY CHARACTERISTICS OF THE BUSINESS MODEL Seafreight is a major contribution element for forwarders to generate revenue and profit – K+N stands out as the market leader Revenue and profit structure of selected major forwarders [2012] OVERVIEW REVENUE STRUCTURE OF FORWARDERS Revenue1) [CHF bn] 16.4 6.6 19.1 EBIT1) [%] 3.9% 1.2% 3.3% Other BUs: airfreight, rail/ road, SCM/ CL 45% Seafreight 55% Kuehne + Nagel 60% 40% Panalpina 76% 24% DHL > 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 Source: Roland Berger analysis Challenges in sea freight forwarding_fin.pptx 27 1 KEY CHARACTERISTICS OF THE BUSINESS MODEL Business model is highly dependent on revenue management and on economies of scale in purchasing to improve results Typical freight forwarder P&L structure (illustrative) [% of revenue] > Costs of 3rd party carriers – indirectly influencable by forwarders ~76-81% 100% > > Economies of scale lead to lower cost per shipment > Cost of Sales also driven by business mix between Air/ Sea/ Road Forwarding > ~19-24% Operating expenditures (OPEX) Net Revenue Cost of Sales Source: Roland Berger analysis > ~8-10% Gross Profit Direct Costs ~5-7% ~1-4% Indirect Costs EBITDA > > COMMENTS 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 Challenges in sea freight forwarding_fin.pptx 28 1 KEY CHARACTERISTICS OF THE BUSINESS MODEL A disproportional change of revenue and CoS will lead to a "transistor effect" on profitability "TRANSISTOR EFFECT" (Exemplary Simulation) COMMENTS Revenue per TEU Cost of sales per TEU GP per TEU Starting point 100% 84% 16% Over proportional reduction of revenue -15% -10% -41% Same rel. change of revenue and CoS -10% -10% -10% -5% -10% 21% Over proportional reduction of CoS 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 Source: Roland Berger analysis > 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 Challenges in sea freight forwarding_fin.pptx 29 2 CHALLENGES FOR FREIGHT FORWARDERS Seafreight market dynamics combined with seafreight forwarding business characteristics result into some interesting challenges for forwarders KEY MARKET CONDITIONS CHALLENGES FOR FREIGHT FORWARDERS Core markets stagnating and seeing increased volatility > 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 Shipping lines and shippers forward cost pressure to forwarders > 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 Increased digitalization opens market for e-commerce > 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 EVIDENCE? Others… > … not in scope for today Source: Roland Berger analysis Challenges in sea freight forwarding_fin.pptx 30 2 CHALLENGES FOR FREIGHT FORWARDERS While volume stagnation and cost pressure can already be observed, evidence of digitalization needs a second look 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 Source: Roland Berger FREIGHT FORWARDING VS. TOUR OPERATING: Players in the value chains Freight forwarding Tour operating Shipper/ Consignee Customer Forwarder Tour operator / Travel agent/ OTA Customs, Warehouse, Terminal Destination management agency Carriers (Sea, Overland) Content provider (Airline, Hotel) Challenges in sea freight forwarding_fin.pptx 31 2 CHALLENGES FOR FREIGHT FORWARDERS Tour operators have a similar position in the value chain as freight forwarders – Recent developments triggered significant upheaval Tour operating comparison: overview > 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 Source: Roland Berger analysis Challenges in sea freight forwarding_fin.pptx 32 2 CHALLENGES FOR FREIGHT FORWARDERS A fully dynamic production needs 4 elements: platforms, "data mixer", standardized data bases, real-time connection to capacity mgnt. systems Dynamic production in tour operating (exemplary snapshot) Distribution system Platforms Distribution system T/O.com / OTA.com (?) IBE Dynamic production Dynamic packaging T/O labeled hotel content Standardized databases T/O Legacy packages Negotiated T/O content for X- prod. - Seasonal - Framework Real-time connection to individual capacity management systems Source: Roland Berger analysis Bedbanks FlightCache (via Amadeus) Other LCCs Package tours short-haul mass market high yield market Package tours long-haul Individual tours short-haul and long-haul Flights TT- PORTFOLIO IMPACT FOR T/Os Own nego tiated capaci ties Specialist tours (sailing, climbing, safari, diving, ...) Cruise ship journeys Retail shops Destination management agents Hotel ownership Challenges in sea freight forwarding_fin.pptx 33 2 CHALLENGES FOR FREIGHT FORWARDERS Only a few moves are required to set the entire seafreight forwarding business model upside down – how long will it take? FUNCTIONALITIES FWD PLATFORMS T/O PLATFORMS >> Online search of specific offerings ✓ ✓ >> Comparison of offering details ✓ ✓ >> "Online" booking of selected offering ✓ ✓ >> "Online" settlement of bills ✓ ✓ >> Issuing of all documents as e-documents ✓ ✓ Independent platforms showing multiple shipping products, fed from various web pages, enabling comparison >> Standardized data bases comparable with aviation industry >> >> >> 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") Source: Roland Berger analysis ? ✓ ✓ ✓ ✓ Challenges in sea freight forwarding_fin.pptx 34 C. Strategic options – How might forwarders respond to contemporary market conditions? Challenges in sea freight forwarding_fin.pptx 35 Chapter overview: Strategic options – How might forwarders respond to contemporary market conditions? FORWARDERS' STRATEGIC OPTIONS (EXCERPT OF SELECTED LEVERS) A Increased pressure on forwarders profit margins B Source: Roland Berger analysis ACTIONS Revenue 1. Enforce focus on trade-lanes from/to emerging markets ABOVE enhancement 2. Expand USP/ offering outside core forwarding GROSS 3. Invest in complementary segments of the transportation value PROFIT 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 ecommerce Cost of Sales 6. Review carrier purchasing negotiation levers (Purchasing) 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 ACTIONS OPEX BELOW management 11. Review duplications in the global organizational set-up (center, region, country) GROSS PROFIT 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, …) Challenges in sea freight forwarding_fin.pptx 36 1 - 2 REVENUE ENHANCEMENT In the face of stagnating markets, freight forwarders have to actively seek for new and sustainable profit pools Market selection dimensions IDENTIFICATION CRITERIA > Profitability of the industry vertical/ logistic services/ geography segment combination Intra-Asia > Market growth of the industry vertical/ logistic services/geography segment combination Asia-Middle East Seafreight FCL Seafreight LCL Inland logistics Terminal logistics Other … Trade financing > Entry barriers into a specific segment Value added service Other … Contract Logistics > Capability fit of the segment requirements with current positioning SCM Asia-Africa Logistics IT services TRADELANE Asia-South America > Investment needs in terms of asset equipment > ...other LOGISTIC SERVICE Source: Roland Berger analysis Challenges in sea freight forwarding_fin.pptx 37 3 REVENUE ENHANCEMENT More active participation in the seafreight value chain bears potential for revenue diversification for freight forwarders Expansion in the value chain Service providers, including e-commerce platforms Shipper a Inland logistics Customs Terminal Carrier Terminal Inland logistics Customs Consignee b Forwarder (capacity trading and 3PL value chain management) a> Forwarders can relatively easily enter the service provider market, e.g. K+N buying a stake in INTTRA 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 c> Terminals are highly profitable but asset heavy and not likely to give forwarders synergies d> Carriers are extremely asset heavy and business model is different – not likely to give forwarders synergies Source: Roland Berger analysis Challenges in sea freight forwarding_fin.pptx 38 4 REVENUE ENHANCEMENT Forwarders need to decide how to position themselves towards ecommerce – Three principal strategic options are at hand Forwarders' strategic options to deal with emerging e-commerce platforms STRATEGIC OPTIONS >I Use platforms for BUYING AND SELLING capacity with armslength relationship and low effort/investment EVALUATION Cost Complexity Impact COMMENTS > No significant investment > "Easy" and flexible solution but not sustainable > Does not mitigate threats from platforms II> Become an INTEGRATED PARTNER through investment in one of the established platforms > Medium-sized investment > Allows for mitigation of threats by influencing direction of platforms > Reduces flexibility by locking onto one platform III> Develop OWN PLATFORM as a new business area with a significant investment/effort > Significant investment > Control of platform and its direction > Active participation in changing the industry – potentially nonetheless into a direction not favorite for FWDs Source: Roland Berger analysis Challenges in sea freight forwarding_fin.pptx 39 5 REVENUE ENHANCEMENT E-commerce platforms pose both opportunities and threats – Market leaders have started to respond to the emergence of platforms Impact of e-commerce platforms + OPPORTUNITIES - THREATS > 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 Source: Roland Berger analysis > 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 Challenges in sea freight forwarding_fin.pptx 40 6 - 9 PURCHASING Review carrier purchasing negotiation levers (Exzerpt) 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 • • • CARRIER PURCHASING • • • Thoroughly exploit market and competitive intelligence Introduce freight rate forecasting algorithms (ITbased) 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 … Challenges in sea freight forwarding_fin.pptx 41 6 - 9 PURCHASING Review risk policy in purchasing carrier capacities 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 "stocktaking" of sourced capacity – danger of losses if carrier market rates drop in the meantime see details on next 2 pages > 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 Challenges in sea freight forwarding_fin.pptx 42 6 9 - PURCHASING Overcoming the risk averse nature of forwarding presents an enormous opportunity for increasing profit margins Risk taking in carrier purchasing REVISED TRADING CONCEPT COMMENTS Freight rates Proxy indicators Hedged buying rate Cost per TEU TRADING DYNAMICS II II I III I Time > 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 Source: Roland Berger analysis > 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 –I Hedge capacity when proxy indicators forecast increasing rates II– Sell procured capacity before market rates fall below hedged rate level – Procure and sell capacity at spot III rates and postpone renegotiation of rates with shippers Challenges in sea freight forwarding_fin.pptx 43 6 - 9 PURCHASING Review non-seafreight purchasing items Procurement of other commercial services within Seafreight (~20%) 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. … Challenges in sea freight forwarding_fin.pptx 44 10 - 13 OPEX MANAGEMENT On the back of rising cost pressure, freight forwarders continuously have to actively manage their operational efficiency Reduce OPEX & SGA cost a b REVIEW VALUE CHAIN ACTIVITIES Marketing & Sales Pricing Operations Customer Service Cost impact high Capacity sourcing 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 Current scope of activities Source: Roland Berger analysis Targeted scope of activities Categorization of measures (indicative) Factor cost reduction Internal optimization Regional / CT setup low Abolishment activities that are… – …not sufficiently value adding – …not sustainable – …unnecessary complexity drivers EFFICIENT SET-UP OF OPERATIONS AND SERVICES Process improvement low Automation Structural adjustment Outsourcing Set up SSC Separate entity Location adjustment high Implementation challenge > 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 Challenges in sea freight forwarding_fin.pptx 45 It's containers that changed the world! Challenges in sea freight forwarding_fin.pptx 46
© Copyright 2024