There have been attempts at achieving transportation & logistical core operating system convergence among same-branded conglomerates, especially among those that have recently acquired new service lines, but often ill-conceived concepts are observed failing during development or deployment - sometimes spectacularly.
At the customer-face in E-Commerce markets we have already noted very different emerging requirements for delivery (home, office, two-person, installation, packaging removal). Hence, even if there is a single-branded transportation group offering the whole suite of services required, sourcing from a brand doesn’t necessarily mean that you are buying from a single carrier or logistics operation in practical terms. A single transportation brand's business unit or service elements may have completely different modes of operation, systems, and equipment; managers of those individual services may also have different levels of relative competence in comparison to their competitors in their individual service lines.
Such single-branded transportation conglomerates that we speak of were usually founded upon a single business line, and let's grant here that they have performed sufficiently well in that business unit to establish themselves. However, many such conglomerates find it difficult to unwind a management philosophy, or a manner-of-execution, whose efficacy is peculiarly successful only in their foundation service line's style-of-business.
Moreover, asset owning transportation businesses have often been encouraged to leverage those "lazy" assets in their balance sheets in order to acquire non-asset owning businesses, or specialist operations. This same privilege is harder to come by in a non-asset transportation company's balance sheet where the prominent feature is goodwill. But in such cases that larger transportation & logistics groups have acquired businesses with different service lines, they are often observed to fail to delegate sufficient policy-making authority to those with the required business skills to run the business. Hence, such transportation conglomerates are often seen in the market financially performing & executing poorly in comparison to dedicated service competitors. Where this is observed, there forms a natural inertia for the conglomerate to tear itself apart over time.
We hope to speak effectively here employing our experience, and hope that if we digress, that our case still emerges and does not appear merely an indulgence. One significant proposition we offer is that too often transport conglomerates have assumed that their acquired subsidiaries had more to learn from them, than the-other-way-around; and hence their efforts to integrate effective holistic solutions fall short in delivery.
When I started in the forwarding business, my first employer was Brambles-Ruys. One half of this joint stock company was owned by a large Australian company then called Brambles, and the investment was seen as synergistic with its road transport division. This same Brambles division was already en-route toward failing spectacularly when attempting to transform itself into a road freight forwarder. On the other side was the Dutch Nedlloyd liner shipping affiliate company named Ruys. Nedlloyd were a group that went on to fail in other subsidiary endeavors, as we will testify later.
Next up was Burlington Northern, a freight railway company that decided that it might be an international freight forwarder; it didn't last.
Then I was to work for an Australian company named Fliway that blended domestic road freight, express, and international forwarding. It worked for a good while, its market share underwritten by its high tech transport specialist unit, until such times that business computer sizes were observed as starting to shrink. Moreover, being in the Australian domestic road & air express freight market during the Mayne/TNT duopoly years was generally fraught for medium sized players - in many instances owing to unexpected union-related issues. Occasionally such firms had also done it tough while at the wrong end of customer targeted pricing issues from larger competitors, those same issues which came home-to-roost with later regulator activism - all a little too late for us. Hence our Australian company became just a non-asset based international forwarder/customs broker, with a small international express business that was now operating as a forwarder domestically.
In the meantime, Fliway represented the Purolator Courier global courier network in Australia. Earlier, while visiting the Purolator US operations, we had already gotten the taste of what it was like to be standing before an impending business failure. Our first note of alarm was certainly one that stayed with us; and it re-appeared time and again as we foresaw transportation failures elsewhere - it was the sight of many idle vans in very large holding yards. We visited Purolator's Indianapolis air hub, and as an indication of their scale in the air express envelope market at least, they probably ranked ahead of Airborne and Emery at the time. At about 40,000 packages per night, Purolator may have ranked second after Fedex in that envelope sector, because UPS was probably then yet to have ramped up their US domestic air express business in earnest.
After reviewing the Purolator Indianapolis hub's night operations - and observing their freighter aircraft as they flew in & out of this single central hub from all over the US, and their package sort belt systems, we noticed that the last plane out left a virtually clean deck behind at the hub. It was at this time that we came to appreciate that finding something that was lost in the Purolator express system was a fraught exercise. Our thought-line was that perhaps there were more manually marked route coding issues than managed to present themselves in the exceptions area that evening. Experienced hands told us: "if it was lost - and it didn't pop out on a delivery run tomorrow - you will find it is usually lost for good".
Later, I was introduced at first hand to the Purolator Courier "War Room" at their Basking Ridge, NJ Headquarters. The surrounding area is wealthy indeed, and I was even given my first ride in a limo (back to the airport) from there - but sadly it had not rubbed off on Purolator's ability to generate cash.
While in NY and NJ I did learn a few things about disruptive services. First there was the helicopter lift of premium express documents from JFK airport to NYC rooftop helipads off the back of inbound banking and advertising documents that had landed just prior on a Concorde service from London. These were perhaps akin to drone delivery services in their day. And their rotary wing lift cost per kg for defying gravity was probably significantly lower than for any drone on today's horizon. We guess also that the likelihood of the said rotary wing device falling on granny's head in the urban jungle in comparison to a modern-day drone en route to a designated back yard may even have been lower?
Another Purolator concept was the introduction of drop boxes in CBD office buildings - these were the secure lockers of their time. Yet another was the Purolator high speed pick-up-fax-print-and-deliver concept for documents to be moved across the US; it was the 3D printing technology of it's day. The pursuit of disruption as a key-note part of the attempt to shift Purolator's internal economic paradigm, however, was to fail. The thing I really learned though, was that if someone says there is a "war room" in operation at a large-scaled business, it is probably all over bar the shouting. Purolator went on to be acquired by Emery, which quickly became Menlo after ingesting Purolator's "war room".
Emery itself didn't know whether it was an asset-owning carrier or a forwarder, but it pretended to be an asset owning operation all the way through in the systemic sense. Emery didn't last, nor the successor Menlo (which had offloaded the aircraft fleet). Airborne were to pick up the express traffic from many of the old Purolator global network partners. They in turn were bought by DHL, and they weren't to last as a full service US domestic express carrier either. And did I mention the big buckets of losses in each of these transactions?
Talking of buckets (and I neither want to get too personal or specific here), we have observed among asset owning carriers (or pretenders) across the globe some world-scale accounting buckets. Some of these so-called operating cost recovery buckets needed to be filled with money by means of internal cost-sharing, and were said to merely cover these organisation's owned or leased asset operating costs. On occasion I have observed such financial systems in action, often under the label of network costs, and our regular view of them might best be captured by the line 'commercial socialism in action, outcome guaranteed'. In some instances I saw the perfect expression of that guarantee - it was that everyone was to be hit with network costs, no matter if they actually used the assets. Yet another thing about cost buckets like these is that sometimes everyone and anyone that is influential within an executive group appears able to find an excuse to tip their costs into one. Then, finally, there might be accountancy empire expenses tipped into the same bucket, those self-assigned to share the bucket expenses around (including the consulting costs for whatever was trending as the most tax effective manner in doing this).
Owing to the fact that a global company's corporate history these days concentrates rather more on the forgetting, and less on the remembering, perhaps it is also both indulgent and useful to recall here that some of the old Purolator global network partners (that were independent) were eventually acquired by UPS as initial territory partners in their global network roll out. We mention this to provide more illustrative depth to the big-fish-eating-smaller-fish churn of the period.
But let's not leave Europe alone, because after the Purolator adventures, I was then seconded to join Union Transport in Germany. They were a German trucker and long-term globally located international freight forwarder whose business model was sound in the latter, but fraught in the former; owing-in-part to the impending EU Schengen agreement that was about to remove the import-export desks for truckers across Europe. When I was sent in to give my impressions of one of Union's major LTL depots, the too-many-trucks-in-the-yard symptom was immediately apparent. The owners did take a cursory look at a proposal to develop an intra-EU air express network, but perhaps their hearts weren't in it, and they were both smart enough not to go down that track at that time, and equally so to take the offer that shouldn't have been refused. Besides Union's international forwarding business, there was another healthy corner of Union Transport in their part of the DPD business, but we will leave the discussion of the networked model for that enterprise until another day.
And what happened to Union? The global shipping line Nedlloyd bought Union Transport for it's "desirable" trucking business, as a part of their fast-moving pan European road freight network roll out plan. And after missing some notable points in due diligence they were to find that the individual businesses they acquired, and moreover the whole concept, didn't work for them, & they left the field. It may have also been the last throw of the dice for Nedlloyd in the strategic sense before the Maersk merger (in effect an acquisition). I haven't mentioned until now that Nedlloyd also had a forwarding business called Damco, a business that then knew how to lose only small amounts of money under a shipping company's ownership, but then they were yet to hit their full straps as it proved later under Maersk. There was also the Nedlloyd Districenters 3PL, and well, we won't say.
Next up, while not being an employee, I was invited inside the operations of the Frans Maas-Yellow Freight partnership. These were EU and US truckers whose concept was based upon the notion that LTL (less-than-truckload) domestic transport appeared in their eyes to be similar to LCL (less-than-container-load) international freight forwarding; so why not get into that business on a door-to-door basis between the EU and US? What could go wrong?
At least in the case of the German Frans Maas operations, when I was asked to tour their operations teaching their people about international air freight consolidation procedures, they had covered the subject at forwarding school in Hamburg, and we had something to work on. And yes, they were surprisingly effective in the short time we worked together. When I visited Yellow Freight HQ at Overland Park, however, my first impression again was "war room". Every tractor and trailer Yellow were operating across the US was said to be a light on the big electronic board before me. Subsequently it proved that my first impression was enough, according to Yellow's performance in the decade following. Yellow do survive today, however, based upon the bail out capacity generated when their unions were finally cornered; and owing to market power finally having succeeded in increasing US domestic LTL prices at spectacular rates above CPI from the noughties onward (and perhaps it was just a coincidence that Fedex and UPS were acquisitive new LTL market entrants in the intervening period).
At the Frans Maas interval time, our Australian Fliway operations began being progressively acquired by the US freight forwarder Fritz, who themselves were on the path to dot-com era NASDAQ listing glory. It was at that time that we first learned that our long-held theories surrounding a forwarder's need to concentrate on their net earnings, which in turn were calculated out of accurate individual job-based accounting, should be set aside in order for our reporting to more prominently feature the far higher (yet hardly material) gross revenues. It turns out, however, that a company like Expeditors (one among the few that held the line in respect of our aforementioned "net earnings are king in forwarding" proposition) has done far better in their share price over time than the top line and bucket accounting obsessed carriers beloved by Wall Street analysts to this day.
In the meantime a decent Intertrans forwarding acquisition was picked up by Fritz, and it brought in a strong US freight forwarding IT platform, but the powers that be decided that "global" systems were the only way forward. One such system we recall that was under our global assessment panel's review at that time was based upon an offering from an erstwhile logistics warehouse IT platform provider. These clever folk had decided that the international freight forwarding transaction was logically similar in structure to domestic inter-warehouse transfers. Again, what could possibly go wrong? Our review panel strongly recommended rejection of the proposition, and it was a small victory. The platform itself went off into obscurity as far as I know, but such concepts are still known to turn up on occasion. Perhaps the DHL Global Forwarding folk, those behind their global IT forwarding platform venture, the same which has hit such troubled waters, had similar-styled, even if different brainwaves.
And the Fritz business? They were acquired by UPS, with the publicly announced business case made for the acquisition featuring Fritz's systems and people. After being acquired by UPS, there were substantial UPS investments with management rotations from the express carrier's talent pool, many of them the same that had apparently been duly diligent during the acquisition. And then UPS bought the financially troubled Menlo, and immediately set about merging it with Fritz (convinced that the Menlo asset-carrier styled systems together with additional dips into UPS's asset carrier trained management talent pool would make the difference). Again, with all that learning absorbed in advance, what could go wrong? Perhaps the next earning report will prove that they have made it work?
So eventually today we get to our case. The organisational nature of the transportation companies an E-Commerce merchant chooses to engage with today is no small matter. The idea that integrated logistics in conceptual terms necessarily means that merchants might engage with a single transportation & logistics brand globally, and across many service lines, should have been regarded as contentious decades ago. And this matter would have been settled by now if there were better financial market analysts, and those that were otherwise had been held to account. More-deals-is-good-deals has, however, won out; and that is solely down to loose money.
If trends toward specialisation, and/or the emergence of channel fracturing, in turn leads to substantial changes in E-commerce transportation tasking, we contend that the optimal organisational nature of the logistics enterprises employed will likely now come to the fore. On the other hand, we are not endorsing views such as the following, those that might forecast Amazon's ability to become a significant effective third party or asset-operating logistics & transport organisation in their own right.
(nb: we highlight "Disclosure: Jeff Bezos is an investor in Business Insider" extracted from the above report. We have made comments before in respect of their PR prowess that you can take-or-leave, yet perhaps too this report may have been useful backgrounding and well-timed for ensuing contract negotiations)
At this point, however, we return to contemplate the various emerging transport-versus-warehouse scenarios and the multi-channel approaches that we have discussed earlier in this series. And on the tech side, in essence, major E-commerce shippers are - over time - likely in the real world to be routinely forced to dis-aggregate the transportation transaction (in both the financial and routing sense) from the order & shipping process at the E-Commerce portal.
In a practical sense, we believe that larger organisations are all doing this already. Our guess, as surmised some time ago in this blog, is that Amazon's past logistical follies were connected with the UPS surge in long distance US domestic express transport moved through the UPS Louisville central air hub during the Xmas peak 2 seasons ago. If so, the employ of long distance overnight domestic air transportation for either replenishment of local distribution centres, or initiating customer direct delivery for small consumer orders from remote fulfillment centres, is likely not to be economically sustainable for an E-Merchant. However, it is also likely to be commercially imperative to make the high cost deliveries if the E-Commerce market fabric of the largest E-merchandisers is threatened. Such measures as UPS's announced employ of car parks as temporary distribution centres last Xmas may hence be cited more as evidence of that threat, rather than as an effective solution.
And, in such cases where E-Commerce orders rely upon locating & verifying alternate sources of supply within an E-merchants supply chain, before initiating the transport order, it will in all likelihood lead to complexities best managed behind-the-scenes rather than at the user interface.
The prospect of local stocks running dry ahead of replenishment in a lumpy peak season market as described, is almost a given. The on-line consumer's reaction is also a given; and conditioning them otherwise likely impossible if stocks or substitutes are available from alternate bricks & mortar locations. Therefore, most major E-Commerce shippers are likely to be drawn toward employing a similar cascading metric of transport-versus-warehouse solution in their supply chain over time. In turn, this means that the appropriate transport transaction will necessarily need to evolve to be the most effective and economical for the transport task based upon the different locations from which the order is fulfilled. Moreover, we question under this scenario whether single-branded organisations have what it takes to retain the levels of business that they enjoy in this sector today.
We have spoken earlier about the above in terms of demand management, fulfillment centre locations, and emerging multi-channel E-Business models. On another day, we will return to these things and will seek to incorporate the issue of how to broadly measure, and most effectively employ, available transport capacity when planning an E-Commerce supply chain.
And we thank you for your patience on an especially long day in the posting.