Exel plc supply chain management at haus mart case analysis

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________________________________________________________________________________________________________________ Professors Zeynep Ton and Steven C. Wheelwright prepared this case. HBS cases are developed solely as the basis for class discussion. Certain details have been disguised. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

Z E Y N E P T O N

S T E V E N C . W H E E L W R I G H T

Exel plc—Supply Chain Management at Haus Mart

On August 15, 2004, Perry Watts, the Managing Director of Non-Food Retail at Exel plc, a global leader in supply chain management, returned to his office after a four-hour meeting with Alexander Maier, Exel’s Account Director for Haus Mart (HM). Watts was pleased with the progress Maier’s team had made with the HM account. Over the course of a two-decade relationship with HM, Exel had demonstrated an ability to execute logistics processes in the best possible way. Moreover, in the private-label home textiles division, Exel was now operating along all parts of the supply chain and had started coordinating product and information flow from manufacturing plants to HM stores. Watts thought this could provide an ideal opportunity for Exel to move into supply chain planning with HM. But not only would he and his team need to provide HM management with compelling economic and strategic arguments for such a change, they would also need to convince their own top management at Exel that they were ready for such a move into planning.

Industry Background

The Council of Logistics Management defined logistics as the “part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers’ requirements.” Many firms did not consider such activities to be a core competency. As a result, outsourcing logistics to third parties was estimated to be a $270 billion industry in 2003.

Third-party logistics providers (3PLs) traditionally offered one of two services—freight management or contract logistics—with a handful offering both.

Freight Management

The term “freight management” was applied to the upstream portion of the supply chain where materials were handled in bulk. Freight management companies took responsibility, on behalf of their customers, for transporting freight by air, sea, or land, typically securing space with carriers (such as shipping companies and airlines) at a lower price than their customers could have negotiated on their own, as well as handling all of the administrative work. Economies of scale were crucial, allowing freight management companies to negotiate better prices with transportation carriers. In addition, freight management companies typically offered customs broking and short-

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term warehouse management services. In 2003, global freight management was estimated to be a $140 billion industry, with an expected annual growth of 5-8% in the medium term.1

Despite the benefits of scale, the freight management industry was fragmented (Exhibit 1). For example, in the $22.5 billion air freight management industry, the top 10 companies had a market share of only 35.4% in 20022.

Contract Logistics

Dedicated contract logistics companies offered management of all logistics services with the exception of freight management. These ranged from managing warehouses to servicing manufacturing customers to providing home delivery on behalf of retail customers (see Exhibit 2 for a list of contract logistics services), but the two most commonly used services were local transportation and management of distribution center operations.

Contract logistics required a thorough understanding of the customers’ businesses. For example, while cost control and efficiency might be of great importance to a grocery store customer, reliability and speed might take precedence over costs for an auto manufacturer. Consequently, several contract logistics companies chose to serve a single industry. For example, TPG focused on the automotive industry and Christian Salvesen focused on fast-moving consumer goods and retail. Others, however, like Exel, served a broad range of industries.

In 2003, outsourced contract logistics was a $130 billion industry. Unlike the freight management industry, economies of scale were not seen as playing such a key role in contract logistics. Consequently, the industry was very fragmented, with the top 13 players controlling less than 17% of the industry in 20033 (Exhibit 1).

At the time of Perry Watts’s meeting with Alexander Maier, a number of outsourced logistics providers were starting to combine freight management with contract logistics in order to provide end-to-end solutions. For example, Kuehne and Nagel, Deutsche Post World Net, and UTi, who were traditionally freight management companies, had made modest efforts to enter the contract logistics market. Christian Salvesen, a contract logistics company, had recently announced that it would develop freight management capabilities to complement its contract logistics and to better meet its customers’ needs.

Exel plc

Exel plc (Exel) was created in 2000 through the merger of MSAS, a freight management company, with Exel Logistics, a contract logistics company. John Allan, the Chief Executive of the merged company, commented:

Marrying together international freight management with ground logistics capabilities would enable us to create end-to-end solutions, which we thought would have significant appeal to

1 Source: Exel plc presentation, 2003.

2 Source: Exel plc investor presentation, 2004.

3 Christopher G. Combe, Edward M. Wolfe, and Laurent-Patrick Gally, “European Logistics,” Bear Stearns Report, October 2, 2003.

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our customers. We also would be able to cross-sell contract logistics to freight management customers and vice versa.

The merged company became the world’s largest provider of freight management and contract logistics services. In 2003, Exel’s sales were roughly £5.1 billion (see Exhibit 3 for selected financial data). About 44% of sales came from freight management and 53% from contract logistics. The remaining 3% came from environmental services4.

Exel’s global freight management network, consisting of 675 locations in 112 countries, offered air freight and sea freight services supported by an extensive land transportation network. Exel also offered customs management services in every market of operation. In a typical transaction, Exel would assume responsibility for transporting freight from the supplier to the port of shipment and from the destination port to the buyer, loading and unloading to and from the main carrier, and handling customs clearance and payment at the shipping and destination ports, as well as insurance. In 2003, Exel was the second largest air freight forwarder and one of the top six global sea freight forwarders in the world. With its scale and global reach, Exel was able to offer a variety of routes and schedules to its customers at competitive prices. With its knowledge of different carriers, ports of call and transit times, Exel was able to recommend the best options available to its customers. Moreover, Exel’s experience in customs management allowed it to process complex cross-border transactions quickly and accurately, preventing delays and overpayments for its clients. Preventing customs clearance delays significantly reduced variability in transportation lead times for Exel’s customers.

Exel was also the world’s largest contract logistics provider, with over 1,600 facilities in more than 120 countries. Exel provided clients in the consumer, retail, healthcare, technology, automotive, and other industries with services ranging from traditional warehouse/distribution center management and local transportation to various value-added services such as assembly, kitting, and software installation in the technology sector, to in-store logistics in the retail sector. But the bulk of Exel’s business in contract logistics was warehouse operations. By August 2004, Exel operated approximately 170 million square feet of warehouse space around the world. In addition to traditional warehouses, Exel operated multi-user warehouses for manufacturers of consumer products, electronics, and pharmaceuticals. These shared warehouses allowed manufacturers, who might even be competitors, to share space, labor, equipment, and transportation services. Exel also operated a number of campus sites, where multiple customers could be served from different facilities, as well as vendor hubs close to customers’ manufacturing plants, where it received goods from suppliers and delivered them to its customers on a just-in-time basis.

Exel typically signed four- or five-year contracts with its contract logistics clients. In open-book contracts, clients saw Exel’s costs and Exel charged them the costs plus a management fee, depending on the scale and complexity of the contract. Typically, this management fee might run to several hundred thousand pounds sterling per annum. In closed-book contracts, customers paid a fixed price to Exel and did not see its costs. The type of contract depended significantly on the degree of uncertainty perceived by Exel and by the customer, which, in turn, depended significantly on their previous experience with each other. New customers were likely to favor the fixed price of the closed-book contract; established customers with confidence in Exel’s performance might well prefer the open-book contract. In 2002, 65% of Exel’s contracts in contract logistics were open-book contracts.

4 Environmental services involved waste management, recycling, etc.

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Strategy Evolution

Three years after the merger that created Exel, the company’s management felt confident about the future. The merger had gone smoothly and Exel had become the largest and most balanced provider of freight management and contract logistics services in the world (Exhibit 4). Its ability to offer a wide range of logistics services and its global reach made Exel an attractive partner for large multinational companies. In 2003, Exel was serving 70% of the world’s top 250 non-financial companies. Home Depot, Dell, Unilever, Johnson & Johnson, Ericsson, Haus Mart, Volkswagen, Ford, Fujitsu, Marks & Spencer, and Safeway were among Exel’s customers. Maintaining a fairly equal balance of freight management and contract logistics contracts was important to Exel because it kept either one from dominating management’s thinking to the detriment of the other.

Exel had been successful in keeping its relationships with its customers; over 75% of its contracts in contract logistics were renewed after the initial contract period. Exel was often praised by its customers as well as analysts (Exhibits 5 and 6). Moreover, the company had been able to expand the scope of its relationships with many of its large customers (Exhibit 7). For example, Exel’s relationship with Goodyear grew from operating a single logistics center5 to operating multiple logistics centers as well as services including local transportation, returns processing, labeling, and tire bundling. Similarly, Exel’s relationship with Home Depot grew from operating two transit facilities6 in 2000 to operating nine transit facilities, one overflow distribution center, two warehouses, and two import distribution centers. From 2002 to 2004, Exel’s revenue from Home Depot increased from $8 million to an estimated $71 million.

There was a considerable growth opportunity in selling more services to existing customers. As of 2003, Exel’s share of its top 50 customers’ total logistics spend (including in-house and outsourced tasks) was only about 2% (Exhibit 8). In addition, with its operating capabilities and global reach, Exel was now in a position, not only to operate across all elements of a customer’s supply chain, but also to manage the coordination of activities, a valuable and profitable service in itself. In 2002, 86% of Exel’s revenues7 came from providing a customer with either a single service or a disaggregated group of services, each service being managed in isolation. Fourteen percent of Exel’s revenues, however, came from more integrated logistics services. In integrated logistics relationships, Exel not only provided the traditional services related to moving, storing, and handling the customers’ products and information, but also assumed a coordination responsibility, for which it could charge a fee (and provide clients with greater savings/lower costs) in addition to the fees for its traditional services.

Exel’s relationship with Maxtor, a leading supplier of hard disks for computer manufacturers, provided an example of how an integrated logistics service could add value. Exel’s first contract with Maxtor was for managing transportation from Maxtor’s facilities in the Far East to its customers in North America, Europe, and Asia. Maxtor’s expectation was that Exel would consistently transport its products in under 48 hours and with minimum loss and damage. In addition, Maxtor required Exel to provide in-transit visibility. By meeting and even exceeding these expectations8, Exel won

5 Goodyear’s logistics centers received, stored, and shipped tires and often carried out value-added services such as tire shaving and tire branding. These facilities were larger than typical Distribution centers. For example, the Southern California Logistics Center was 828,000 ft2, had 99 truck doors and 102 trailer spots, and shipped over 6 million units per year.

6Also called cross-dock facilities. In a transit facility, products are received and then dispatched to stores without sitting in inventory.

7Exel investor presentation, New York, May 14, 2003.

8 Exel was able to provide over 98.5% world-wide, on-time delivery with less than 0.1% damage or loss, four quarters in a row.

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more of Maxtor’s logistics business. As of 2003, Exel was operating Maxtor’s entire distribution network. In addition to local transportation and freight management, Exel operated Maxtor’s consolidation centers in the Far East and its distribution centers in North America, Europe, and Asia, where Exel provided value-added services such as kitting, warranty validation, electro-mechanical assembly, testing, and failure analysis.

But in addition, Exel coordinated the entire network. This extended relationship delivered great value to Maxtor. Exel was able to decrease regional transportation costs by 30% through improved visibility. Through tightly controlled product flows, Exel was able to reduce lead times and reduce finished goods inventory by 16%. In the computer industry, where short life cycles meant that prices declined steeply after a product introduction, this reduction in lead times meant that Maxtor could sell its products at a higher price and for a longer time.

Lead Logistics Partner

The success of integrated logistics relationships with clients such as Maxtor, Goodyear, and Ford in Europe encouraged Exel’s management to create a new business model where Exel would become the customer’s Lead Logistics Partner (LLP). In this model, Exel and its customer would form a joint team to design and manage a single flow linking together transport, warehousing, manufacturing, inventory management, and suppliers. This joint team would create a “control tower,” ordinarily located on the customer’s premises, to oversee all aspects of a customer’s supply chain. The control tower would use Exel’s basic services in freight management and contract logistics, along with services from other providers when appropriate.

Initially, the control tower would coordinate all parts of the supply chain to better execute the customer’s own plans. For example, it would make decisions about how to route and schedule shipments and where to hold inventory. But at a more advanced stage, the control tower would move beyond coordination and become involved in supply chain planning. For example, it would forecast demand for products, optimize inventory levels, and create production plans. At this stage, Exel and the client would jointly create value by better matching supply with demand.

This model was speculative. Exel was very experienced in coordinating different elements of a supply chain, but it had not engaged in joint supply chain planning before. Although there was tremendous potential value in combining supply chain planning with execution, this approach was on the leading edge of current practice in logistics and not without risk to both Exel and its customer.

Exel’s Four-Team Approach

Over the years, Exel had developed a very effective process for creating, selling, and implementing new services. The process was carried out by a sequence of four teams, focusing in turn on business development, solution design, implementation, and operations.

Business Development Teams

At Exel, the term “business development” encompassed the full spectrum of activities which would be called “sales” in many other businesses. Selling supply chain services was a particularly complex challenge. Each situation—the customer’s products, facilities, processes, relationships, and history—was unique. Extensive problem solving was required in order to propose a solution that would provide a dramatic improvement and immediate significant cost savings. Furthermore, this

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problem solving involved a complex tradeoff between Exel’s desire to leverage a set of proven structures and procedures (thus benefiting from economies of scale) and the need to customize these components to each unique situation.

Exel’s sales process was mainly divided into (a) account management—building a comprehensive understanding of the customer and creating a climate in which to provide added value, and (b) opportunity management—using that understanding to recognize, articulate, research, and pursue specific business opportunities as they arose.

Solution Design Teams (more likely to occur in the Contract Logistics and LLP opportunities)

After Exel and its customer had mutually agreed that Exel would bid on a business opportunity, a detailed proposal had to be prepared. This would frequently provide an in-depth analysis of the customer's supply chain and suggest an iterative process to provide an improved, remodeled version of all or part of that supply chain that would benefit the customer and provide more business for Exel. The crafting of such a process was referred to as “solution design”; it included a broad range of disciplines from computer simulation to financial modeling. Historically, solutions had frequently been tailored to each customer. More recently, Exel realized that the best solutions were often those that were quick to implement, well proven, and flexible. Hence, solution design came to mean customizing Exel's proven “off-the-shelf” supply chain components to fit the customer’s needs. These components included performance measurement tools, warehouse stocking algorithms, standardized quality control methods, and operating organizational structures and procedures for training and motivating employees and tracking improvement.

Implementation Teams (more likely to occur in the Contract Logistics and LLP opportunities)

This team was responsible for all that happened between the customer placing a piece of business with Exel (that is, once the business development and solution design teams had done their work) and the agreed solution (e.g., warehouse or delivery network) becoming fully operational and achieving the agreed steady-state performance levels. Exel was well aware that this phase was where the best laid plans could go terribly wrong. For example, Exel typically created savings for a customer by restructuring a distribution network which had been created back when most freight traveled by sea, when in-transit information was scarce and imprecise, and when excess product could still be sold at a reasonable price. While there was much to be gained by bringing such a network up to date, a poorly implemented warehouse reorganization could result in a disastrous labor confrontation and serious losses. Although Exel was relying mainly on its vast experience, it also invested heavily in project management tools and techniques to ensure that it delivered on its promises.

Operations Teams

In the end, the task of the previous three teams was to prepare “smooth sailing” for the Operations Team, whose task was to run all warehouses, delivery fleets, freight management stations, call centers, and other services contracted to Exel on an ongoing basis. The vast majority of Exel's 109,000 employees were employed in operations.

Exel had a comprehensive approach to the management and delivery of day-to-day operations, epitomized by a documented set of standard operating procedures called the Exel Operating Management and Methodology (EOMM) System. This not only helped hourly associates and their supervisors carry out their tasks, but also enabled the company to develop operational metrics, measure operating performance in detail, and use these measures to compare the performance of individual sites and to identify improvement opportunities. (Exhibit 9 shows a balanced score card Exel used for warehouse operations.) Exel also regularly conducted special workshops to share best

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practices across the firm. Process improvement teams regularly visited facilities and identified opportunities for improvement, using a customized approach called “Process Improvement Methodology.”

Exel’s Operations teams not only managed and improved customers’ day-to-day operations, but at times were the source of service innovations and expanded solutions for their customers. Stefan Patterson, the project manager of the Haus Mart account, recalled one example:

On occasion we have sent merchandise to retail stores and the next day the stock would still be in the backroom, not put away. During one Christmas peak, one of our contract logistics clients’ major stores in Berlin was about to fall over. The store manager phoned the Exel- managed distribution center and asked if there was any way the distribution center could help. Exel sent a team to the store and within 24 hours completely changed the backroom and corrected the problems in the store. When the word got around and Exel evaluated the model, the result was the creation of a new service: in-store logistics. Today Exel does backroom replenishment and returns processing for several retailers such as Toys “R” Us, Haus Mart, House of Fraser, and Marks & Spencer.

Global Account Teams

In addition to these four project management teams, Exel had dedicated global account teams for its larger clients. Each global account team consisted of a senior director, who had the ultimate accountability for the success of the relationship with the customer; a project manager, who planned projects with the customer and tracked progress; an operations owner, who was accountable for project implementation, operational performance, and continuous improvement; and a development manager, whose main responsibilities were to develop the account plan strategy and to pursue future growth and relationships.

Information Technology

IT played an important role in Exel’s business. For example, in freight management, IT systems allowed Exel to maintain accurate data on transportation carriers’ routes, schedules, and prices. Exel uses that data to quote prices for customers, ensure adequate capacity, access the status of shipments, and handle direct payments with transportation carriers and customers. Similarly, in distribution center operations, IT systems allowed Exel to have accurate data on what was available at the distribution centers and where it was located, data which it used to facilitate the movement of material in the distribution center.

All IT systems used by Exel connected to Exel’s Supply Chain Integrator (SCI2), a system developed in-house to provide information on the location of inventory in the supply chain and the delivery status of shipments and to notify management of delays and other delivery problems. SCI2 was a Web-based application; customers could access it with a user ID and a password. Moreover, SCI2 had the ability to link into customers’ ERP systems.

Maintaining the accuracy of data stored in SCI2 was crucial and required strict process discipline. As Exel Chief Executive John Allan noted:

You can have the best systems in the world, but if the data that people are entering to the system is of poor quality you’ll get garbage in, garbage out. Very often when people believe that they are encountering problems with their systems, the real issue is the data quality.

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Part of Exel’s strength was the effort it put into training all employees who used its IT systems and insisting on a high level of accuracy. The data had to be trustworthy. When they were, Exel customers didn’t have to carry extra inventory just to make sure they really had what their numbers said they had. They could confidently make delivery promises to their own customers based on the data stored in their systems. Furthermore, warehouse employees were more productive when they spent less time—very little, in fact—searching for misplaced or nonexistent stock. This, in turn, not only increased their morale, as they knew they were now working in a first-rate warehouse, but added significantly to their productivity.

Haus Mart

Haus Mart (HM) was one of Germany’s leading retailers of home textiles, housewares, and home accessories. HM stores carried a wide range of products from bedding and towels to small kitchen appliances. In home textiles, the company offered a selection of brand names as well as private-label merchandise. Haus Mart’s total sales in 2003 were €3.5 billion, with an operating profit of €318 million. Thirty percent of the company’s total sales came from its private-label merchandise and 70% came from brand-name merchandise.