Exclusive: New Mantra

In 2007, despite unprecedented demand, export losses due to coal chain capacity constraints were in excess of $2 billion per annum in NSW alone.

General Manager Xstrata Rail and Ports, and panellist Anthony Pitt told the 2008 Supply Chain Business Forum panel on achieving requisite collaboration, that the resulting vessel queues cost the Hunter Valley and Goonyella coal chains more than $700 million per annum.

“The delivery of new rail and port infrastructure continues to be a constraint to realising full export potential across Australia’s coal chains,” Pitt told the invitation-only forum, an initiative of internationally recognised supply chain expert John Gattorna.

“Our industry in the Hunter Valley has only managed an 8 per cent growth despite more than $500 million in new infrastructure.

“Compare this with a growth of 75 per cent in thermal coal exports achieved by Indonesia in in the last four years.”

Remarkable by contrast is the success of the Hunter Valley Coal Chain Logistics Team (HVCCLT) in achieving productivity gains using existing infrastructure.

The first of its kind in Australia, HVCCLT is a collaborative organisation responsible for the daily planning of all Hunter Valley coal industry exports.

Created as a trial in 2003, the Logistics Team was set up by Pacific National (PN) and Port Waratah Coal Services (PWCS), as a response to increasing demand from the industry to improve capacity.

Formerly HVCCLT General Manager, Anthony Pit says the expectation from inception was to deliver significant capacity by running coal chain operations as a system rather than a series of component parts as was previously the practice.

“The short term goal of increasing throughput has been realised, along with the longer term objective of providing investment planning advice to the industry,” he says.

About 90 per cent of the Logistics Team’s resources are put towards improving system capacity.

“The HVCCLT presided over a spectacular 20 per cent increase in productivity from existing infrastructure,” Pitt says.

“The vast bulk of that benefit is generated through its co-operative model, which enables latent capacity to be unlocked through greater coordination of activities like maintenance programs at the track and ports.”

“In terms of the longer term initiative, the HVCCLT advisory service directly contributes to the efficiency of members’ capital expenditure across the entire system,” Pitt enthuses.

“Members are modifying and even adding new infrastructure initiatives in the knowledge that those changes are in the interests of the coal chain as a whole.”

“The team has also helped prevent investment in infrastructure that might otherwise be under-utilised.”

On a handshake, PWCS and PN agreed to co-locate their planning teams to enable more effective communication and the generation of new ideas about how to increase system capacity.

Joined by Newcastle Port Corporation, the trial was expanded and formalised in 2005 as a joint venture with stated objectives and governance.

HVCCLT members now include PN and QRNational as the train operators, Australia Rail Track Corporation and Rail Infrastructure Corporation as the track owners, PWCS as the operator of cargo assembly and ship loading services, and Newcastle Port Corporation which manages the vessel movements.

The functioning of the HVCCLT collaborative system completely relies on the participation of its members. However, as Anthony Pitt explains, the truly cooperative venture does not legally compel any of the group to cooperate in daily planning or to comply with associated instructions.

“I won’t say that it was without its challenges,” Pitt admits, “but everyone quickly came to the conclusion that it was the only sensible way to operate the coal chain.”

“The profit generated from this approach to planning was immediate.”

Despite strong pressure on member organisations resulting from bullish growth forecasts from the industry, Anthony Pitt is confident the collaborative model provided by the HVCCLT will prevail.

“In the current market place, where the demand for coal out of Newcastle is exceptionally high, the need for more capacity certainly creates an environment with the potential for tensions and competition,” he says.

“But I think the success of the model has been the glue that’s kept the team together, and is leading to greater cooperation into the future.”

So successful is the HVCCLT model, that it has been widely recognised and recommended to other supply chains by the Prime Minister’s Infrastructure taskforce.

What then, is behind the wider failure of stakeholders to manage the rapidly growing infrastructure capacity challenge?

According to Anthony Pitt, the ‘common objective’ ingredient, essential to the success of collaboration, is missing.

“This is mainly caused by the fragmented ownership structure of coal chain stakeholders,” he says, “which creates a misalignment of agendas.”

“On one end of the scale, industry-owned coal loading terminals such as Port Waratah Coal Services and the Newcastle Coal Infrastructure Group (NCIG) are the only entities in the coal chain investing ahead of demand,” Pitt explains.

“Their shareholder and customer incentives are perfectly aligned, but they have no long term contracts to underpin investment.”

“The lack of long-term contracts for track and port means future demand is invisible,” Pitt says.

“It also means infrastructure providers are forced to second-guess the industry.”

“Since each infrastructure provider holds its own view of demand, making investment decisions is extremely difficult.”

“On the other end of the scale, ARTC, the government owned rail infrastructure provider is focused on the weighted average cost of capital (WACC), and stranded asset risk,” Pitt maintains.

“Apart from political risk, the ARTC is unlikely to face any significant consequence from non-investment.”

“Meanwhile, the train companies are functioning in a highly competitive market.”

“They invest based on contracts with customers, but often, the contracts aren’t linked to what the coal chain can deliver as a system.”

“For example, in 2007, 112Mt of contracts were sold in a system that can manage a maximum of 95Mt.”

Apart from the alignment of objectives, Carpenter Ellis Principal and panel Chair Deborah Ellis says achieving requisite collaboration requires the parties involved to have, or develop, appropriate sub-cultures and the capability to sustain them.

Based on John Gattorna’s theory of the 4 basic types of organisational culture and the various combinations of these that are possible (Living Supply Chains FT Prentice Hall, London, 2006), Ellis shows that upon an initial assessment, the sub-cultures of the PWCS and PN diverge from other stakeholders in the coal chain.

“PWCS and PN share alignment with each other, sitting in between the ‘Hierarchical’ and the ‘Rational’ cultural types, while the Port of Newcastle, ARTC and Queensland Rail exhibit a purely ‘Hierarchical’ organisational culture,” she says.

“Of the four types, both the ‘Hierarchical’ and ‘Group’ cultures have an internal focus,” Ellis explains, “however, while the ‘Group’ culture thrives on synergy and teamwork with the aim of achieving cohesion, the ‘Hierarchical’ culture is motivated by systems, measurements and control. It aims for ordered outcomes.”

“The ‘Rational’ and ‘Entrepreneurial’ cultures share an external focus, but the ‘Rational’ culture is motivated by action, objectives and energy to achieve results, while the Entrepreneurial culture is more focused on innovation and flexibility to achieve growth.”

“Collaborative groupings ultimately need to reflect the dominant buying logics of their customers,” Ellis observes.

“Where partners find their subcultures are not a natural ‘fit’, one partner, often the supplier, needs to adapt to mirror the other, usually the customer, for a collaborative relationship to be sustainable.”

“To make matters more complex, aligned sub-cultures might not always mean a perfect fit,” Ellis adds.

“In the case of PWCS and PN, where the sub-cultures sit between ‘Hierarchical’ and ‘Rational’, the relationship may only succeed with a results-oriented and dynamic collaborative model.’”

Essentially, Ellis argues, establishing a collaborative relationship requires strong leadership to pull the partnership together initially, as was the case for the HVCCLT, when PWCS and PN agreed to take the first steps.

“Once the opportunity has been identified and a direction agreed, effective leadership is 90 per cent of the ingredients required to enable the implementation of a collaborative arrangement,” Ellis says.

“Process and systems become far more important as the relationship is being embedded and institutionalised,” she says, “with leadership becoming only 15 per cent of the ingredients required to keep the partnership flourishing.”

Panellist Professor Ivan Su, of Soochow University in Taiwan points to another kind of collaborative model, successful because of the consistent leadership contributed by Japanese exporter and supply chain company ITOCHU Corporation.

“With a business philosophy of customer satisfaction and joint growth with stakeholders and the general public, ITOCHU has expanded its thriving Family Mart business into Taiwan, Thailand, Korea and more recently China,” he says.

According to Professor Su, the success of ITOCHU’s Family Mart chain can partly be attributed to a clear understanding of market demands for 24 hour convenience shopping, and having a successful home market business and supply chain.

“For ITOCHU, collaborative efforts have always been underpinned by persistently developing local knowledge and the right model for Asian business development,” he says.

“Cultural alignment and leadership is reinforced by rotating company executives and the frequent exchange of key operational personnel in the supply chain.”

“This ensures the transfer of the right business experience and knowledge to the regional firms under one central orchestrating mechanism.”

Importantly, another factor in ITOCHU’s collaborative success is its approach to fostering local motivation and loyalty through providing regional Family Mart stores and their service providers with an equity position in the business.

“While ITOCHU Corporation holds 61 per cent of its rapidly growing Taiwan-based Family Mart business (now the second largest CVS in Taiwan), Taisun along with other local firms hold the other 20 per cent,” Professor Su explains.

“Family Mart Taiwan’s service provider, the Taiwan Distribution Company (TDC), established in 1989, is 50 per cent owned by Family Mart Taiwan and 20 per cent by ITOCHU Company and other local firms.”

Despite the obvious benefits of collaboration, panellists agree that the concerns Australian organisations have about losing competitive advantage through opening themselves up to deeper partnerships is impeding development.

John Gattorna argues the energy and thought that’s gone in to competitive analysis has been excessive, taking the collective eye away from the delivery of strategy.

“This area of darkness inside the business has to be opened up by people who aren’t afraid of what they might find,” he says.

“Rather than being distracted by competitors, we need to concentrate on the forces within, develop appropriate cultures and communications and genetically re-engineer our businesses internally.”

Gattorna also believes businesses have misunderstood the role of collaboration.

“We still have this view in Australia and elsewhere that collaboration will fix everything,” he says.

“As we move from ‘lean’ manufacturing to ‘lean’ supply chains, people need to choose those partners with which they really want a long-term mutually beneficial relationship.

For the rest of your customers, you simply use another formula.”

According to Arshiya International president and panellist Paul Bradley, collaboration means admitting there are ways to improve your business beyond what you can do yourself.

“Organisations need to build relationships the Asian way, with trust, shared visions and even with competitors,” he says.

“They then need to set up rules of engagement, which is always done at the top.” Bradley argues smart businesses use technology to keep control.

“You use your ideas and human talent to drive the competitive advantage,” he says.

“If you have the courage, there are ways you can collaborate that are of mutual benefit on fixed assets and fixed structure.”

By way of example, Bradley points to his Indian-based company Arshiya, which is building free trade warehousing zone parks which will be open to both customers and competitors to enable aggregation.

“Instead of competing, imagine smaller, mid-sized warehouses leasing space out to retail competitors,” he enthuses.

“Being neutral, Arshiya will put in its own, fully owned IT system and people to manage the warehouse and protect confidentiality.”

“The warehouses, which are currently losing money due to excess capacity, will gain the business we bring in for them. It’s collaboration. It’s a win-win model.”

“The question is,” Bradley adds, “do we want a fixed logistics structure for moving products between A and B, and holding information within, or do we want to build dynamic supply chain models that can shift and adapt continuously as the market changes?”

“As cost of capital changes, as labour changes, as currency fluctuates we increasingly need dynamic supply chain models with full, transparent control of product.”

“It’s not theory; but it’s done by companies that collaborate.”

Clearly, as Anthony Pitt points out, the export earnings and subsequent benefits to the Australian economy are at stake.

In terms of the coal chain, this amounts to a projected 50 per cent growth in export volumes over the next five years.

The predicament also rings true for other industries.

“The new mantra for Australian business should be ‘to compete in the market, but co-operate in the supply chain’,” John Gattorna says.

“Once we psychologically step across the line to that stage of development we’ll very quickly rise in world standings.”

Held at the Sofitel Hotel in Werribee, Victoria, the 2008 Supply Chain Business Forum was hosted jointly by the Institute for Logistics and Supply Chain Management at Victoria University, Melbourne, and Macquarie Graduate School of Management, Sydney.

The next Forum is scheduled for February, 2010 in the Hunter Valley.

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