Exclusive: Quantum Leap Forward

Inspired by world ranked supply chain management companies, including Li and Fung of China, Arshiya International is a supply chain management company with a difference.

President Paul Bradley told the 2008 Supply Chain Business Forum that the Bombay stock exchange listed multinational is set to take India and the Middle East by storm.

The two-year old company already has a market cap exceeding USD 350 million.

Bradley, who has worked closely with Li and Fung’s Dr Victor Fung, told the panel investigating new supply chain business models that he was approached by another transformational thought leader, Ajay Mittal, from one of India’s top business families, to help build a new supply chain model for India. Mittal, Arshiya’s Chairman and CEO was faced with a challenge.

“India is about to rise and the market potential in the Middle East is also growing,” Bradley says.

“In four and a half years, 10 per cent of consumer purchasing in India will take place in retail malls, 800 of which are currently under construction.

That will make India the fifth largest retail market globally, equating to more than USD 124 billion in consumer spending.”

Rather than incrementally improving logistics in India, Bradley says he and Mittal searched the world for the most radical ideas and how they could be integrated. A

s an example of the results, Bradley says Arshiya are now ‘inside’ four separate Indian retailers, including a major group which has outsourced its supply chain to the company.

“Our new 4PL entity is offering Indian CEOs and Presidents the opportunity to have a strike team of supply chain professionals from the Arshiya Group fully analyse their product life-cycles, and map current processes and product distribution across their networks,” he says.

“After gaining full access to a company for a month, including all its costs, salaries, product, manufacturing, interest rates, logistics, forecasts, minimum order quantity – everything, we provide ideas to completely redesign the customer’s supply chain process,” Bradley says.

“And we do it for free.”

“But if we can show that we’ve achieved savings and efficiencies by the end of that month, our customers agree to outsource supply chain control to us on a long-term basis, typically 3 to 5 years.”

“If we exceed certain KPIs, customers give us a special bonus each year,” Bradley adds.

“If we can find new ideas to save money, a client will share part of it with us for the first year. This is a completely new concept for India.”

“Our clients have very visionary CEOs at the helm who are embracing a new approach for competitive advantage,” Bradley says.

“They provide us with information a traditional logistics company would never usually have access to..

There are no hidden spreads, but we charge a management fee which is allocated to our senior management cost, where the real knowledge lies.”

With the exception of a few such as Arshiya, the creation of new business models is not occurring on a very wide scale.

To date, for example, the 4PL model described by Paul Bradley is still misunderstood within the Logistics industry.

These days, the term usually denotes a kind of ‘super 3PL’ which manages other providers and offers a wide variety of ‘value add’ services.

Internationally recognised supply chain expert and panel chair John Gattorna, whose initiative was behind the invitation-only Forum was one of a team from Andersen Consultants (now Accenture) that jotted down the initial 4PL idea on the back of a napkin in 1995.

He says it was intended to do away with contracts, replacing them with a more collaborative, equity based relationship.

“You can’t ‘tender’ for a 4PL according to the original concept,” Gattorna emphasises. “Companies that choose to develop a 4PL based on contractual relationships find it difficult to function, because if difficulties arise, finger-pointing begins rather than focussing on the solution.”

According to Gattorna the true 4PL, or Joint Services Company (JSC) as he prefers to call it these days, is a joint venture between a group of organisations, initiated by two or more companies as the owners and ultimately controllers of the business.

These enterprises might be competitors or have dissimilar markets, but they must share a compatible culture and vision.

The businesses form a consortium or joint venture where 3PLs continue to provide the physical assets such as warehousing and transport, but the 4PL is the vehicle that manages them.

“As well as 3PLs, junior equity partners in the consortium might include consultants and finance companies,” Gattorna explains.

“But every stakeholder has to bring some capability to the party.”

Along with equity in the vehicle, the relationship requires a ‘pre-nuptial’ exit agreement stating how long the parties must commit before choosing to roll over or buy back capabilities to an agreed formula.

Such an agreement would also contain incentives and rewards to encourage a strong working relationship.

Companies place key staff in the new vehicle who bring business acumen, experience and know how to ensure it’s proper functioning.

Gattorna believes that once working properly, parties would make returns on their capabilities and assets along with fees and dividends according to their equity in the management company.

In an ideal form, companies would allow the vehicle to manage their assets and infrastructure until such time as they wished to buy back their capabilities.

The fundamental reasoning behind such a structure is to allow companies to acquire instant capabilities.

If capabilities are well chosen, including shared infrastructure and assets, companies could substantially cut costs and improve the bottom line through increased volumes.

It’s not difficult to see why the idea hasn’t been embraced in its entirety.

One only has to witness rapid consolidation in the logistics industry to realise that most prefer the perceived control achieved by acquisitions and mergers, compared to the more nebulous benefits of mutual risk and reward.

The Joint Services Company structure is yet to surface in Australia and worldwide examples are few and far between.

Early attempts at the 4PL structure managed to absorb elements of the concept but ultimately fell down in various ways.

Gattorna points to Connect 2020, a subsidiary of UK water utility Thames Water Supply which sells procurement and logistics services to other utilities in the UK.

It arose in 1995, as an alliance between Thames Water Supply, Accenture and other service providers.

While the consortium still exists, it was unable to pull in other utilities that feared their value would be extracted for little benefit.

Despite this, Connect 2020 has achieved a 10 per cent supply chain cost reduction, a 40 per cent reduction in inventory a 70 per cent backorder reduction and an increase in customer service levels by over 97 per cent.

Another example is the 1994 joint venture between US-based agricultural machinery company New Holland and Accenture in an 80-20 structure in their Italian operation.

It was bought back by New Holland several years later, however, not before the company made $67 million savings in its first 7 years, along with a 20 per cent inventory reduction, 65 per cent increase in operational efficiency, over 90 per cent improvement in order fulfilment accuracy and 15 per cent freight savings.

“The dozen or so 4PLs that I’ve seen around the world over the last ten years including GE Medical Systems, Ford Espana in Spain, AT&T Wireless and others are prototypes that we’ve learned a lot from,” Gattorna says.

“Now is the time to take the model to a new level and a new scale.”

One of the sticking points in the development of the JSC was the perceived inability for equity partners to move in and out of the arrangement.

Gattorna points to the Virtual Network Consortia (VNC), a similar model that presents a solution to this problem.

“Rather than strict equity arrangements, VNC stakeholders form a loose alliance,” Gattorna says.

“They can join and leave the consortium as appropriate, forming more of a plug-and-play arrangement.”

“In most other respects, the VNC is similar to a JSC. Both models focus on acquiring the capabilities needed at a particular point in time to do a particular job.”

“They provide a particular supply chain solution at speed and at scale.”

“Both utilise highly connected processes across companies and shared investments and incentives, however, in a VNC, everything can be unwound if desired by major stakeholders.”

The VNC model seems a good fit for Arshiya.

Of the company’s structure, Paul Bradley says the answer was to create a ‘value chain umbrella’ with many different participating companies.

“A partner company can enter any part of the enterprise, but imagine the power when you connect them all,” he enthuses.

“Arshiya is also affiliated with two US multi-billion dollar companies, with more strategic alliances likely to evolve,” Bradley adds.

“We can take the best global practices and networks, yet drive the company as an Indian multinational.”

Under the ‘umbrella’, Arshiya customers can access product distribution across India, FTWZ infrastructure and rail networks, global shipping services (Air and Ocean), Project Logistics services, standalone IT, and 4PL supply chain capabilities that can adapt to changing requirements in any market.

Unlike any other 4PL, Arshiya owns its own IT network and intellectual property through Singapore-based company Cyberlog.

“Arshiya might have 10 different warehouses in India with completely different operators, but customers can go online using the Cyberlog system, and see the product on rack three, level two with full visibility,” Bradley explains.

“We’re a single point of contact. The IT system links several warehouses yet they’re all different companies.”

“We interface to SAP and INTRA but we have no license restrictions,” Bradley says.

“With hundreds of programmers, we can design new IT systems any time we want and our costs are controlled.”

While Arshiya grows its business in India and the Middle East, Australian panellist Brett Higgins of AMP has observed an opportunity to transform the local tourism industry using the VNC model.

“There’s no single source of truth for tourism supplier information,” Higgins says.

“Despite the plethora of choices, customers can’t easily plan, select, and purchase travel goods or services.”

Higgins’ idea, to be developed within his own travel services company XYZ Travel, is to build collaborative supplier relationships locally and go to market nationally.

“Suppliers of transport, accommodation, attractions, and tour operators need to be streamlined so that wholesale information is more easily accessible to retailers, including those online,” he says.

“Capabilities need to be assembled to achieve rapid development and expedited entrance to the marketplace.”

In order to achieve this, Higgins says XYZ Travel will need to establish the right operational culture and consider the key management levers.

“Strong brand awareness and distribution through travel agent shop fronts can be achieved through strategic alliances with airlines and resources,” he maintains.

“However, visionary leadership, high business acumen, corporate Intellectual Property and an effective Supply Chain Target Operating Model will be essential.”

“I’ll be looking for accelerated business advancement, an instant distribution channel and an innovative flexible business culture,” Higgins says.

“Such a business will require an industry solution focus and needs to deliver high customer satisfaction. High partner commitment will be incentivised through equity in the business, but a clear assessment criteria and process for selecting strategic partners will need to be developed.”

This must include detailed capability requirements with a fair return for each, and provision for the entry and exit of partners.”

It’s difficult to imagine businesses in the current international business climate forming such alliances without the desire to guard perceived competitive advantages.

General Manager Supply Chain Strategy & Procurement Fonterra Dairy Co-operative Group and panellist Nigel Jones reflects this view.

He says that while Fonterra appreciates the need to find the right business model to improve performance going forward, the company is hesitant to deliver increased control of the company’s intellectual property (IP) to third parties through the supply chain.

“Seasonal fluctuations in dairy production, low visibility, underutilisation, a small talent pool, and the inability to justify investment is causing costs that reduce the international competitiveness of New Zealand exporters and importers,” Jones says.

“At Fonterra we’re faced with the problem of finding a way to deliver value while still retaining our IP.”

“We see a further complexity arising in that if we were to outsource our IP, we may lose the value that our volumes provide.”

“Until now, Fonterra has been unable to find a 3PL partner that can get its head around all the issues involved.”

Nigel Jones also observes that it’s hard for Australian companies to know where to draw the line in terms of what can be done before breaking the Trade Practices Act, especially in relation to working with competitors.

According to Principal Lawyer, Australian Competition & Consumer Commission (ACCC) and panellist Alexandra Merrett, it’s often (although not always) possible to structure a collaborative venture or new business model in a way that achieves the desired objectives without contravening the Trade Practices Act.

“The ACCC would counsel parties considering collaborating with their competitors or attempting new business models to first seek advice from lawyers with competition expertise,” she warns.

“This is a very technical area of law. Rather than approaching lawyers with a structure already in mind, it can be preferable to explain to your legal team exactly what you are trying to achieve and leave it to them to consider ways in which you can do it.”

Merrett says it’s is also worthwhile remembering that even where particular outcomes look like they may contravene the Act, there are special ‘exemptions’ available.

“The most likely form of exemption relevant to collaborative arrangements between competitors or possibly new business models, would be an authorisation, which is only available upon application to the ACCC and requires demonstration of sufficient ‘public benefit’ arising from the arrangement to outweigh any competitive detriment,” she explains.

“Obtaining authorisation can be time consuming and expensive, but – depending upon the scope of the collaboration or new business model- definitely worth it, particularly when compared to the very high penalties that apply to contraventions of the Act.”

“The bottom line, though, is that this is a very complicated area of law, so parties need to be prepared to spend money on good legal advice,” Merrett says.

“Getting it wrong can be extremely expensive, not to mention bad for a company’s reputation.”

Despite this, John Gattorna argues that regulatory restrictions are no longer an excuse to avoid pushing the boundaries in search of new business models.

“A pressing factor for change is that operational excellence has a diminishing returns effect,” he says.

“After a period of time, the elements combining to drive performance such as transportation and warehouse management yield lesser profit — even with continuing, or greater investment.”

“Dynamic alignment enables a re-jigging of what you do internally to face up to your market better,” he says. But even having done this there’s still a limit to how far you can go.”

“There are many opportunities for consortia to pool huge volume across industries.”

“In countries such as Australia and New Zealand, it may be the only way we can build scale to compete with the bigger companies overseas.”

While Gattorna admits the idea requires a leap of faith from a CEO willing to break the mould, he argues that if a company were to build an entity such as the VNC, it would potentially be looking at 30-40 per cent net improvement in operating performance after set-up costs.

“In conjunction with re-alignment initiatives at the enterprise level, industry leaders must seek new multi- enterprise execution models that deliver change at speed and scale,” Gattorna says.

“While it may take increasing pressure on the bottom-line before companies are willing to change, we’ve gone as far as we can with operational excellence. We now need a quantum leap to move forward.”

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