Transportation Strategy Workshop IBM Global Business Services Point of View on the Logistics Provider Industry through t

1. Transportation Strategy WorkshopIBM Global Business ServicesPoint of View on the Logistics Provider Industry through to2015 May 2006

2. Agenda Logistics Provider Industry Overview Transport Strategy Considerations Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

3. Executive summary Logistics providers need to reinvent their business model in order to meet buyers more demanding requirements Executive Summary Buyers are seeking consistent global capability to provide greater reliability at lower total cost. This requires managing trade-offs between cost of inventory, transport, and storage. This calls for end-to-end integration, more tightly engineered synchronization, industry specialization, and optimization. This implies deep integration with buyers and partners across people, processes, information, and cash flow More demanding requirements Gap between buyer needs and provider capabilities Most providers over promise and under deliver. The business model of most providers trap them by failing to generate returns which will allow them to meet buyer demands Market shapers will develop shared user offerings which will be difficult for buyers to substitute. They will develop componentized solutions to increase returns, and will move away from country-centric to global line of business profit & loss management as portfolio managers. Tighter integration delivers greater value and increased lock-in across the network. Success will be measured by how well they increase reliability and reduce total cost The model reinvented Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

4. Contents Executive summary Industry Overview Five Drivers of change Future industry picture Implications for industry participants Appendix Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

5. Increasing Scope and Integration Industry Overview The provider business model is evolving to offer greater scope and deeper integration Key Attributes of Freight Logistics Roles Service Offerings Outsourcing Models Incremental Attributes Relationship Pricing Supply Chain Integrator (SCI) or Lead Logistics Manager (LLM) or Global Trade Orchestrator • Broad supply chain expertise • Knowledge and information-based • Inventory minimization • End to end network optimization • Advanced integrated technology • Adaptive, flexible and collaborative Collaborative more than Contractual Partnership Shared risk and reward Synchronized Supply Chains • Total transport planning • Operate and buy logistics services • Project manage network improvements • Single point of contact: total wallet • Limited technology integration with client Fixed and variable with some risk sharing Contractual Lead Logistics Provider (LLP) Lead Logistics • Integration limited to transport with warehousing • Limited geographical reach • Multi-modal transport management Third-Party Logistics Provider (3PL) Fixed and Variable Contractual Value-Added Freight Forwarders Transactional Contractual Transport, Warehousing, Customs broking • Focused cost reduction • Niche services Contractual and/or Spot Transactional Foundation Services Source: Adapted from “Third-Party Logistics Results and Findings of the 2004 Ninth Annual Study”. Authors are C. J. Langley, Georgia Institute of Technology, G. R. Allen, Capgemini, and T. A. Dale, FedEx Supply Chain Services, Inc. Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

6. Industry Overview The untapped prize is to reduce the inventory carrying costs – currently over twenty percent of total logistics cost Global Freight Logistics Market: US$ 2.7 trillion (~7% of global GDP) Total Size ~ US$ 750 billion Total Size ~ US$ 1.2 trillion Air Freight, $56B Water-Other, $76B Ocean-Container Shipping Lines (CSL) US$ (billions) Total Size ~ US$ 734 billion Rail Freight Road Freight Freight Forwarding (FF) Parcels Third Party Logistics (3PL) In-house Logistics Freight Logistics Segments Notes: A combination of top-down and bottom up approaches have been used for the overall market size. Inventory Carrying Costs and Distribution/Warehousing are approximately 2% of the global GDP. Total Transportation segment size has been estimated through a bottom-up approach by totaling the market size of each sub-segment. Other sources have estimated the total global freight logistics market size at 3.1 to 3.5 trillion US$ which is in the approximate range of 7-9% of global GDP. “CSL” denotes container shipping lines and “other Water” includes bulk shipping, tankers and other means of water transport Source: IBM Estimates for 3PL, FF, and Parcels market sizes , IBM BCS analyses, Baird Report Oct 2004 for Air Freight market size, DPWN fact book Nov 2004 for In-house and Outsourced Logistics market sizes, Datamonitor “Global Trucking,” and “Global Railroad” for Road and Rail Freight market sizes, Baird Report and Goldman Sachs report on Shipping Nov 2004 for CSL and other Water market sizes; X-rates.com for Euro Dollar exchange rate of 1.26 (2004 average) Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

7. Industry Overview Margins between services vary, but the highest rewards for market share gains lie in activities driven by economies of scale Potential Scale Economies in Outsourced Logistics Asset free Supply Chain Mgr Asset Supply Chain Mgr High Freight Forwarding Shared User 3PL Parcel carrier Dedicated User 3PL Complexity Less Than Truck Load Consolidation Center Full Truck Load Cross-dock DC Warehouse Low Low High Scale Potential Source: IBM BCS analysis Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

8. Toll K&S Patrick Industry Overview The level of returns in this industry make it relatively hard to attract capital Return on Invested Capital (ROIC) and Operating Margin comparison Industry Average Operating Margin : 8.1% 30% CH Robinson Expeditors Wincanton 25% UPS 20% TNT Kuehne & Nagel 15% Weighted Average Cost of Capital: 10.9% UTI FedEx Exel 10% Return on Invested Capital Industry Average ROIC: 10.7% Kintetsu Yamato Deutsche Post Geodis 5% Christian Salvasen EGL Nippon 0% 0% 5% 10% 15% 20% 25% -5% Hays -10% Operating Margin (EBITDA/Total Revenues) Notes: ROIC and Operating Margins are average values calculated for the latest five years. ROIC is defined as Net Income/Total Capital. Industry Averages are the simple averages of all players plotted on the graph. Weighted Average Cost of Capital is based on US Industry Average Source – IBM BCS analysis, Thomson Financial for financial data, WACC data from Ibbotson & Associates Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

9. Contents Executive Summary Industry Overview Five Drivers of Change Future Industry Picture Implications for Industry Participants Appendix Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

10. 1 More Demanding Buyer Requirements Five Drivers of Change Buyers have more demanding requirements Requirements in Priority Order 1. Greater Reliability 8. Industry Specialization 2. Lower Total Cost What Buyers want 7. Optimization 3. Consistent Global Capability 6. More Tightly Engineered Synchronization 4. Global End-to-End Integration 5. Deep Integration with Buyers and Partners Source: IBM BCS analysis Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

11. 2 Global Sourcing Five Drivers of Change As global sourcing increases, providers must respond by extending their capabilities Global Sourcing Issues Manufacturing Wage Costs • Key Drivers • Competitive labour rates • Availability of skills • Favourable Tax rates • Low Duty rates • Constraints • Reliable transport and infrastructure • Uncertainty drives up inventory as safety stock is increased US$ per Month Notes: Graph incorporates latest available yearly data: UK and USA – 2004; Germany, Japan, Mexico, Poland, and Singapore – 2003; Brazil, China, France and Taiwan – 2002; India – 2001 Current currency conversion factors have been used. Hourly data was converted to monthly data by multiplying hourly rate by 40 hrs per week times 52 weeks per year and dividing by 12 Source: International Labor Organization LABORSTA Database Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

12. Customer Relationship Linkages Customer Fulfilment Distribution Manufacturing Supply Supply Chain Strategy Network and Asset Configuration Manufacturing Strategy Strategic Sourcing Product Development Strategy Distribution Oversight Manufacturing Oversight Supplier Relationship Management Product Management Integrated S & OP Planning and Control Distribution Planning Manufacturing Planning Supplier Planning Demand Planning and Forecasting Retail Marketing Execution In Store Inventory Management Customer Fulfilment Primary Transport Inbound Transport Line Scheduling Plant Inventory Management Customer Account Servicing Execution Distribution Centre Operations Make Product/Components Manufacturing Procurement Transport Resources Assemble/Pack Products Product Directory Customer Directory Product Movement Data Customer Directory Product Directory Supplier/Materials Directory MES Data Data Product Movement Performance Measurement Retained Core - Not for outsourcing Traditional “core” candidates for outsourcing - Extend scope of outsourcing to transform? Either multi-sourced teams (in & out source) or total outsource Source: IBM BCS analysis Non-core -Probably already outsourced 3 Five Drivers of Change Outsourcing Envelope Slowly Widening The boundaries of the opportunity space are slowly widening …. but not as fast as investors have been promised Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

13. Deliver Sell 4 Integration Drivers of Change The extent of incorporating technology advances into logistics services may ultimately separate the winners from losers Supply Chain Suppliers Manufacturers Customer Channels Stores Distribution Centers Flows: Product, Process, Information, Cash + Capital Management Synchronizing supply and demand • Integrating customer forecasts and demand with their suppliers to plan logistics requirements • Participation in customer’s Sales & Operations Planning process Make Plan Source Monitoring shipment status • Monitor shipment status throughout pipeline with proactive event notification • Improved ability to identify short and over shipments Multiple channels and customer touch points • Single source dashboard to view overall performance • Tracking from order to delivery • Knowledge of total pipeline customer inventory Multi-source orders and fulfillment • Ability to track purchase orders through their entire lifecycle • Knowledge of total pipeline supplier inventory Integration with manufacturer’s systems • Access to order commitments & delivery schedules • Visibility into order production status Standardized data definition, Key Performance Indicators & event monitoring for collaborative decision making Excess inventory Long lead times Excess manpower Deteriorated customer service Business performance uncertainty & risk Distributed information Dozens of planning and execution systems Inaccurate information Slow moving information EQUALS Source: IBM BCS analysis Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

14. 5 Consolidation & Convergence Five Drivers of Change Speed of convergence may be limited by learning how to performance manage businesses with widely differing core competencies Provider Segments 3PL/ Customized Distribution Freight Forwarding Network- Transport Express- Parcels LTLs Containers Point-to-Point + Charter Transport Relative Asset Profile High Low High Medium Core Competency Customer Intimacy Buying Yield Management Capacity Management Source: IBM BCS analysis Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

15. Five Drivers of Change The challenges faced by Providers makes the status quo unsustainable, and makes a compelling case for reinvention Challenges Drivers Profitably increasing scope and integration Realizing the inventory reduction prize Achieving scale economies Raising returns on capital • More demanding buyer requirements • Global sourcing • Outsourcing envelope slowly widening End-to-End integration • Consolidation and convergence Model reinvented Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

16. Contents Executive Summary Industry Overview Five Drivers of Change Future Industry Picture Implications for Industry Participants Appendix Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

17. Future Industry Picture We expect the industry in 2015 to be more global, concentrated and segmented, and better at execution 2015 Limited number of global networks Segmented around buyer types Improved execution excellence Global • ~20% of buyers have large volumes (top 25 in the AMR list), are most demanding for specialized services, and global • ~50% of buyers have medium volumes and are mostly continental in geographic reach • ~30% of buyers are low volume and mostly national in geographic reach • Fortune 500 companies become more global businesses • Logistics Providers “follow the flag” • Business processes are standardized and systems are integrated • Better visibility of end-to-end supply chain information and integration with partners and customers • Effective & shared metrics to continuously measure performance • Exception management through event monitoring • Single view of customer • Top 10 providers control more than 50% of the market • The top provider controls around15% Source: IBM BCS analysis Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

18. Future Industry Picture The industry faces three distinct buyer segments: the battle will be for the middle ground Solution Buyers Logistics Buyer Segments Bundled Services Buyers • Buy/manage end to end solutions: physical and technology • Desire supply chain flexibility in terms of plug and play • Shift to on demand business structures • Desire greater visibility and reliability Outsourced global, supply chain services Commodity Buyers Diversified Portfolio of Services, Specialized Segments • Gain lower costs, through scale of fewer providers • Desire less complexity • Focus on simplicity and standardization • Some information integration and more value added services Buying type Increasing Scope and Integration of Offerings Extent of Geographical Reach • Keep in play specialized providers but switch frequently to lower prices • Brands don’t matter • High level of operational efficiency provided by suppliers – within the silos within which they service • Sufficient understanding of visibility of pipeline and provider capabilities allows disintermediation of 3PLs and more use of foundation services Foundation Services National Global Continental Source: IBM BCS analysis Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

19. Future Industry Picture The Provider industry will eventually shake out to form three provider segments, each serving a buyer segment Logistics Provider Segments • Able to deliver end-to-end supply chain integration and synchronization repeatedly for many global customers • Drives standards that add value to buyers: data, visibility, ease of doing business, trade finance benefits etc. • Able to support supply chain flexibility in terms of physical and IT application plug and play, which drives confidence in delivery capability • Undertakes supplier management for buyers • Likely to emerge as a consortium including a Lead Logistics Provider and other parties Synchronized Supply Chain Services • Good at acquiring scale and scope in new emerging parts of the world – drives consolidation • Acquire a broad range of capabilities; also drives consolidation • Globally integrated offering seamless physical and information services • Better at mass customization – “Deliver what they advertise” Increasing Scope and Integration of Offerings Provider Types Lead Logistics Providers • Foundation service providers are more sought after than 3PL’s • Transport providers grow in scale and become more concentrated • Very little product differentiation • May be a highly specialized niche provider • Geographic reach is mostly national • May start by partnering with Lead Logistics Provider but end by being acquired by them Foundation & Value Added Services Bundled Services Buyers Solution Buyers Commodity Buyers Buyer Types Source: IBM BCS analysis Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

20. Contents Executive Summary Industry Overview Five Drivers of Change Future Industry Picture Implications for Industry Participants Appendix Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

21. Implications for Industry Participants > Strategic Clarity Additionally, processes, systems, organization, and metrics must align with chosen segment strategy Processes, Systems, Organization, and Metrics for Different Segments Synchronized Supply Chain Services Providers Foundation & Value Added Services Providers Lead Logistics Providers • High standardization – relatively limited customization options • Culture of high process standardization and componentized activities; customized products are turned into replicable ones for other buyers Process • Culture of high process standardization with activities componentized by buyer supply chain. Customization limited to maintain scale economies. • Real time, end-to-end integration; deeply integrated into the customer’s business • Plug & play – component based n-tier architecture (Service Oriented Architecture) • Standardized, but high integration is local Systems • Tightly coupled with buyer systems • Automated forms of optimization (network, schedule, etc.) • Country based P&L • Outsourcing of non-core processes • Able to value customer knowledge Organization • Sector based global P&L to improve conformance on global customer contracts • Superior partnering skills • Excellent skills around analysis, synchronization, optimization under uncertainty, change and project management • Non core processes completely outsourced • Sales and development teams able to sell benefits of standardization • Able to reduce labor outlays by leveraging recruitment and on-boarding skills • Non core processes mostly outsourced • Profitability • On-time delivery • Fill rate • Error rate • Damage rate • Cost/Sales On-time delivery Fill rate Error rate Damage rate Cost/Sales Profitability Cost/Sales On-time delivery Profitability Fill rate Error rate Damage rate Top 6 Metrics (illustrative) Source: IBM BCS analysis Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

22. Industry Overview Although there is geographic variation, the retail industry is the largest user of in-house and outsourced logistics by value across all regions Breakdown of Freight Logistics Industries Served by Geography (~14% excluded) United States Europe Japan + China Retail and Consumer Products Automotive Hi-Tech Pharmaceutical Consumer Electronics Source: Datamonitor Consumer Business Asset Service • Grocery • Drinks • White goods • Brown goods • Textiles • DIY/Furniture • Books/music/video • Automotive • Hi Tech • Pharma/health • Aerospace • Construction • Agriculture • Energy • Utilities • Defence • Aviation • Financial • Education • Government • Entertainment • Business Services End User Demand Driven Asset Driven Of course, each industry buying segment also has its own unique freight logistics needs • Notes: Europe consists of UK, Germany, France, Italy, Spain, the Netherlands, Belgium, Denmark, Sweden, Finland and Norway Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

23. Drivers of Change Consolidation and convergence among providers is likely to continue as they try to improve capabilities and extend reach Convergence Between 3PL and FF • Ocean Group which was a top FF with a presence in 3PL merged with Exel, a much bigger 3PL skewed towards the UK and US to form the combined Exel - 2000 • Exel acquires Tibbett & Britten, the #3 3PL - 2003 • Deutsche Post starts offering parcel and express services and acquires a 25% stake in DHL Express - 1998 • Acquires leading FF and 3PL Danzas, also acquires airfreight provider AEI – 1999 • Acquires majority share in DHL Express – 2002 • Acquires Airborne Express - 2003 • TNT Group, originally operating a mail and parcels business builds 3PL business with major acquisitions in USA and Italy enabling them to become highly innovative in automotive inbound supply chain. Introduced more IT in inbound supply chain and common collaborative layers - 1999 -2001 • Broadens portfolio by acquiring FF Wilson Logistics - 2004 • UPS Logistics Group to provide supply chain solutions is formed in 1995 • Acquiring FF Fritz – 2001 • Acquires FF Menlo - 2004 • Broadens portfolio with acquisition of LTL Overnite Express in 2005 • RPS subdivision of Caliber Systems (acquired in 1998) re-branded as FedEx Ground in 2000 • Acquires leading LTL American Freightways (AF) in 2001 and re-brands services offered by AF and prior acquisition Viking as FedEx Freight in 2002 • Kuehne & Nagel establishes KN Lead Logistics to take on Lead Logistics Provider role - 2002 Source: Company Websites Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

24. Agenda Logistics Provider Industry Overview Transport Strategy Considerations Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt

25. Stage I Stage II Stage III Emerging Freight Contracted rates Core carriers Core carriers with Carrier · · · · volume partnerships Many carriers Central purchasing · · Procurement commitments with decentralized Use of electronic Decentralized · · execution Central support brokering · purchasing and execution No compliance · Inbound freight · tracking Compliance · controlled by tracking vendors Limited inbound · freight controlled Inbound freight fully · integrated Shipment Paper orders Electronic orders Automated load Automated load · · · · planning at the planning at the Decentralized Manual with limited · · Planning Entity level Enterprise level planning tools Manual without · Centralized · planning tools Decentralized · Inbound and · Outbound only · outbound Carrier Manual Via Phone Manual routing Automated carrier Automated carrier · · · · guide for outbound assignment assignment using Based on carrier · Assignment & and inbound inbound carriers availability No use of inbound · Dispatch Limited use of carrier assignments Continuous moves · · Vendors control · automation in outbound inbound · planning assignments Transportation Maturity Matrix Model Most companies evaluate their processes against a Maturity Matrix Model. Integration of spot buy capabilities Shipment Dispatch only Dispatch and Dispatch, shipment Proactive tracking · · · · Delivery notification status, and delivery and exception Exception · Monitoring and notification management notification by Limited use and · Control customers reliance on EDI Integrated EDI Use of Internet · · Post Shipment Post Audit only External Match and Internal Match and Self Invoicing · · · · Pay Pay Activities Carrier Many Carriers, Core Carriers Core Carriers w/ Working with · · · · Many Rates vol, commitments Carrier community Limited · Management to reduce “cost to No Performance Performance Performance · · serve” monitoring monitoring Tracking Timely Reviews · Freight Logistics Point of View | 20050901-Freight-Logistics- POV Draft-v43.ppt