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Exel has demonstrated their expertise in both the service groups and therefore the company is largest logistics provider both in terms of freight management and contract logistics. Exel plc offers mix of both the service groups in the proportion of 44% for freight management and 53% from contract logistics. The turnover of Exel was 5.1 billion in 2004.(Exhibit 1)The Company has extensive network of 675 locations and 112 countries for freight management and 1600 facilities and 120 countries for contract logistics. Still Exel has only 2% share from the total spend of its customers on logistics. Thus there is huge potential for growth and expansion. This is only possible if Exel thinks beyond its traditional disaggregated service delivery and enters into integrated service package. Exel is planning to move from execution to planning with integrated model approach and they wanted to start the joint planning process with Haus Mart.
There are currently four issues for which decision has to be made. 1) Is Exel ready to move into supply chain planning?
2) Do they have capability and skills to manage entire supply chain from planning to execution? 3) Do they have necessary bandwidth for this project as well as for the customers who would request similar service? 4) Is Haus Mart, the right choice to start with this new strategy?
The company was established in 2000 and in 5 years, it has grown with net free cash flow increase of 30% CAGR. But at the same time, turnover increased by mere 3% CAGR. This indicates the level of operational excellence Exel plc has developed to cut down the costs and thereby increase in net cash flow. (Exhibit 1) In 2003, Exel was serving 70% of world’s top 250 non-financial companies. The company has been successful in maintaining relations with customers which can be indicated by the fact that 75% of the contracts were renewed after they were expired.
Though Exel was growing at phenomenal pace, there was still tremendous potential for the Exel to grow. The total share of Exel in the amount spent by its top 50 customer on logistics was just 2%. (Exhibit 2)Till now Exel was providing the customer disaggregated service or single service category as 86% of Exel’s revenue came from disaggregated services. The remaining 14% came from integrated services that include overall coordination responsibility additional to regular services like warehouse management, moving etc. This approach could fetch more returns as Exel can charge for providing integrated services.
This integrated model was termed as LLP (Lead Logistics Partner). In this model, Customer and Exel would for joint team to manage single flow link across the supply chain from purchasing to customer delivery. Initially this team is responsible for making post-production supply chain decisions like inventory holding, shipment routing and scheduling etc. In later stages, the team will take deeper approach and will be responsible for pre-production aspects of supply chain like demand forecasting, matching supply with demand etc.
The model has huge potential for expansion and growth for Exel plc. The company is planning to implement this model with its customer named Haus Mart. Haus Mart is Germany’s leading retailer for home textiles housewares and accessories with total sales of £3.5 billion and it is Exel’s customer since 1980. Initially Exel is involved in freight management for Haus mart but later in 2003, Exel took over 5 distribution centers of Haus Mart. In operation of these 5 DCs, Exel has shown tremendous performance by achieving 10% of projected five years saving in just 7 months. Looking at facts and figures, it can be interpreted that Exel has necessary expertise in terms of capability and skill to handle joint planning with HM. Also Exel has developed well defined and proven management program in handling HM distribution centers in past.
KEY DECISION CRITERIA
Criteria for decision have been identified by ROI approach as well as risk involved in getting returns. Following are decision criteria used for evaluating the alternatives.
1. Potential risks involved by entering into supply chain planning 2. Returns on the investment.
3. The capability and skills of management to manage entire supply chain from planning to execution 4. Management bandwidth in terms of skilled human resource and their ability to manage growing business efficiently. 5. Haus mart, the right setting to test this new strategy.
After analyzing the case data, there are visible two alternatives which I will present as a combined strategy for all problem statements are taken into consideration. Alternative 1:
Exel has very well proven management methods and set of expertise that is its core competency. Exel also has been very successful in freight management and contract logistics because of their in depth knowledge of the processes and application of the same. In this context, Exel should capitalize on the opportunity to expand their business from logistics to joint planning with Haus mart. Though Exel do not have prior experience on the supply chain planning processes, the basic framework of set processes is strong and therefore Exel can quickly adapt to the new business prospects.
Currently Exel has 1,09,000 employee as well as presence in almost 120 countries. It implies to the larger management bandwidth for undertaking similar projects in the future. Haus Mart is the right setting to initiate the joint planning. Haus Mart has been Exel’s old customer and therefore Exel knows in detail most of the processes in Haus Mart’s supply chain. Exel has also lowered the cost of moving and storing goods for Haus Mart and also the delivery time. This knowledge will be crucial for Exel in joint planning with Haus Mart as they are in better position to streamline the pre-production and post-production parts of supply chain.
Never enter into supply chain planning. Instead try to improvise on their core competency of logistics services to capture more clients. As Exel is exceptionally performing better in this area, they should concentrate on getting more business in this domain. Also Exel doesn’t have prior expertise in Supply chain planning, the decision of entering into this segment may not fetch them same level of returns as their current business.
Analysis of data suggests that Exel has only captured 13% of their customer’s total outsourced logistics spend. There is still very high untapped potential from their current customers to capture remaining 87% of spend that the companies are currently outsourcing to other 3PL providers.
Another important factor in opposition with the entry of Exel in planning is ‘Risk involved’. Planning decisions are highly viable to risk factor and in the event, customer suffers losses because of inaccurate planning, part of the loss has to be borne by Exel. It could be extremely costly business as already the margin in logistics business is thin.
Thus Exel should stick to its core business and should not enter into planning of supply chain.
Exel should look for the tradeoff between returns and risks. Data analysis indicated that spend on logistics represents only a portion of total supply chain cost and hence there are huge growth prospects with respect to planning in supply chain but at the same time, risks cannot be ignored. Hence to tradeoff, Exel should enter into supply chain planning carefully with one of these two approaches:
* Exel should start with portion of supply chain planning and not all planning activities with Haus Mart. As Haus Mart is very large company, even few joint planning activities will fetch considerable amount of returns. This strategy will create expertise in specific function and thereby reducing risks of losses due to bad decision. The strategy will also provide necessary management bandwidth as transition will be gradual instead of radical. * Exel should not start planning activity with Haus mart but with other smaller company. Exel should collaborate with customer’s planning department in every possible aspect of supply chain planning. Again the strategy will fetch high returns and minimize the risk as company size is not as big as Haus Mart.
The following strategy need to be adopted considering decision criteria and available alternatives. * Exel Should enter into supply chain planning
* They already have skills and expertise with logistics services which Exel can use for acquiring further expertise in supply chain planning. The fundamental systems and processes in Exel are very strong (IT services, training process etc). Hence Exel management can efficiently adapt to the customer needs in supply chain planning domain.
* The management bandwidth could be of concern if Exel takes many contracts at once. As it is whole new domain for Exel, I recommend to start with small company and plan entire supply chain to get the necessary experience before moving to large company like Haus Mart. * In early stages of new business, there are high probable chances of making errors with decision making. Thus Exel could not afford to bare losses in high amount if they start with Haus Mart. * Thus clearly Haus Mart is not the right setting for Exel to implement their new strategy.