Logistics Make the World Go Round, at Least in the Global MarketplacePublished: June 22, 2006 in Knowledge@Wharton
During a panel discussion titled, "Logistics: Bridge to Global Prosperity," at the June 8-9 Wharton Global Forum in Istanbul, moderator George Day described logistics as "the connective tissue that makes the global economy work." Logistics, he said, can be "a huge source of competitive advantage and help expand and launch new business models." Combined with information technology, he added, logistics can "dramatically extend the geographic reach of both large and small organizations." To explore the ever-expanding role of logistics, Day was joined on the panel by Michel Akavi, CEO of DHL Worldwide Express, Middle East, Mirzan bin Mahathir, executive chairman and president of Malaysia-based Konsortium Logistiks Berhad, and Yavuz Cizmeci, chairman of Turkey's ACT Airlines.
"Logistics is moving the right product in the right quantities to the right place at the right time," stated Day, a Wharton marketing professor who has studied performance-based logistics in such companies as Cisco Systems and General Electric. "The really good supply chains have significantly lower costs, lower inventory and better customer service. Consider Cisco. Its after-sales service group is a $4 billion business and delivers 720,000 spare parts to the company's various manufacturing facilities. Logistics services include customers, field engineers, and fulfillment, distribution and materials repair centers. "The more effectively you manage logistics, the more effectively you take uncertainty out of the system," he said.
Eight Trends in Logistics
Panelist Michel Akavi told the audience that when he asked a conference organizer where the panel was taking place, she replied that people would be "arriving a little late and a bit slowly. I said, 'Great. They need a logistics session to wake them up.'"
Akavi provided that wake-up call with a discussion of what he sees as eight trends that currently affect logistics. The first is the "explosion" of global trade and global production due to the "the toppling of the old political order, especially the fall of communism. In addition, customs barriers have fallen, especially in Europe, and there is greater trade between the continent's eastern and western parts. Akavi also cited NAFTA (North America Free Trade Agreement), MERCOSUR (the South American Free Trade Pact), the World Trade Organization, and GATT (General Agreement on Tariffs and Trade) as creating a "wave of international trade. The more this happens, the more there is a need for logistics."
Look at the Internet, he noted. Being a door-to-door document delivery company, "we were scared of the Internet. But fortunately, documents still need to be signed, sealed and stamped ... .We hope Turkey will not adopt the bad habit of electronic signatures when it joins the EU," he said with a smile, adding that "goods do not travel electronically, thank goodness." The more people use the Internet, the more business there is, the heavier the packages are and the greater the need for letters to move around the world.
The second trend is the transition to a post-industrial society, Akavi said. "We have a stagnating population in western countries; the average age is increasing, more money is spent on communication and health, and less is spent on mass produced products. The trend is to more individual transient niche goods combined with services." That means a greater variety of goods needs to be transported, in more specialized ways, directly to users/consumers. "So the logistics industry must specialize in niches, such as the textile industry whose players need to be very responsive to fashion trends. You cannot produce a million products in one place at one time. You have to produce them quickly," often in different parts of the world.
The third trend is that we now live in an "on-demand world, Akavi said. "We are a time-is-money society. We are moving to time-based competition. Speed is almost more important than a cheap price. You see that in micro electronics, with chips and game consuls. With PCs and phones, the term used is 'agility' -- the ability to get to the market first. Demand is changing the logistics world."
The fourth trend is a growing environmental sensibility. People now ask: "How can we transport less, more efficiently, and how can we do more recycling," Akavi said. "In Europe, we see that the trucks on highways are getting more restricted. Austria is banning some truck traffic on weekends. Rails are being used more often to transport goods because less energy is used. There is also more concern about noisy planes. We had to change our fleet in Brussels to quieter planes, and we are moving the Brussels hub to Leipzig, Germany, an area where there are less people. Environmental concerns are shaping the industry."
The fifth trend is the "rediscovery of structural process organization," based on greater efficiency and better organization, and the sixth trend is the "deregulation and privatization of public services in communication and transport. We are a good example," said Akavi. Deutsche Post, which owns DHL, "used to be a sleepy inefficient postal system for Germany. After it was privatized and modernized, it started to become profitable. Then it wondered what it should do; it couldn't just sell stamps all its life. So it moved from a postal service to an integrated logistics and transport company."
The seventh trend is an orientation toward shareholder value. "Logistics is moving to focus on core competencies. We have seen companies divest so they can concentrate on their core business. There is more outsourcing of the transport function," which helps third party providers like DHL expand and also fuels the growth of specialized transport logistics companies.
The eighth and last trend, according to Akavi, is newer communications technologies. "With the Internet, you can find out where your shipment is and contact your call center if the package is stuck. But now, you can also use mobile phones [to do that]. Tracking and tracing is becoming more available. Our company can trace all shipments automatically and detect those that are stuck before the client realizes the shipment hasn't arrived." The RFID -- radio frequency identification tags -- technology is "enormously important for our sector. Without RFID, it would be very hard to find your shipment in our huge warehouses. This [technology] will have a great impact in the coming years."
Mirzan bin Mahathir, who described his Kuala Lumpur-based company, Konsortium Loistiks Berhad, as split into logistics components and logistics solutions, echoed Akavi's comment that companies are outsourcing their logistics more and more in order to concentrate on core competencies. He went on to note that "the bridge to global prosperity has two levels," the country level and the company level.
On the country level, "nations must develop their logistics infrastructure in order to compete. It's not enough to attract manufacturing if you can't get manufactured good to the market in an efficient way," he said. Infrastructure includes building ports, airports, roads and bridges to move, not just goods, but people. Airports are especially critical: "In the Middle East everyone is realizing that airports are a vital piece of infrastructure" and many of them are being built, some close together.
"But the hardware itself is not enough. Physical infrastructure doesn't help if it is not going to be used effectively," Mirzan noted. Three things are needed: information technology, efficient physical movement and a reliable financial system. "In developing countries, these three things need to go hand in hand. In a few places this has happened, like Singapore. And it is improving in some of the other countries as well."
In the logistics business, Mirzan added, goods need to be sent as directly as possible to the market, and they need to reach their destination on time. Yet various government obstacles can hinder that process, including excess paper work, burdensome inspections, and corruption. "If the leadership in any country were to look at logistics and see its role in bringing prosperity to its people, they would have to address these areas." Some countries get it, Mirzan said; others don't.
From the company standpoint, he added, some are starting to look at themselves as logistics companies even when they are producing actual goods; it is a competitive advantage. Dell, he suggested, "is actually a logistics company that happens to be in the business of computers. They are very efficient at doing what they do, but it is mainly logistics."
Panelist Yavuz Cizmeci, chairman of ACT Airlines, reminded the audience that Istanbul has historically been a logistical crossroads for commerce and trade, and that Turkey itself is poised to be a logistics center of the future. The trend now, he said, is for many big companies to open branches in Turkey or buy companies already there, ready to take advantage of the country's increasing trade, and its sea, truck, railway and aircraft transportation options. Spending on logistics, he said, should take off in the near future.
During a question and answer session, Akavi was asked how his company uses software solutions to optimize its logistics, such as truck loads. "Software is not logistics' core business," he said. "While there is still a lot of software development happening in house, we are working more and more with software developers to find solutions... . About 6% to 7% of our revenue is spent on IT and an increasing amount of it is outsourced."
Another audience member noted that he had always perceived the logistics field as having ease of entry, as long as a company can move something from point A to point B. But with improvements in technology and with more mergers among existing companies -- and with small-sized companies still having an advantage in small communities -- are the mid-sized companies being squeezed out, or are there still opportunities for mid-sized companies to grow?
"There is definitely room for small, medium and large companies," Akavi said. "We have become large but we offer integrated solutions. Some customers, however, need only a point A to point B transport. Sometimes a smaller size gives more flexibility and can offer better prices. If you don't need a huge network like we have, then there is a market for medium-sized companies."