Logistics Quarterly

As business networks become a primary source for new differentiation in the marketplace, a growing number of CEOs and COOs are studying business network transformation. Increasingly, companies are moving up the value chain faster by collaborating more closely with business partners to deliver their services and find new efficiencies and ways to innovate across entire business networks. Integration is the underlying element behind BNT, with everything from process integration to partner integration coming together through BNT.

LQ: What is business network transformation?

Mike Riegler: Business network transformation (BNT) is the process by which companies collaborate with their business partners and customers to improve efficiencies and deliver innovative solutions for competitive advantage. It affects the way companies such as logistics service providers (LSPs) collaborate, create solutions and interact with their customers, and it allows them to grow beyond their traditional industry boundaries to expand their business. We use BNT as a generic term covering all types of industries and businesses.

LQ: Why is BNT principally of high value to the logistics service provider industry?

Mike Riegler: One of the key industries that will soon be riding the wave of business network transformation is the LSP industry. Today, the LSP industry is facing competitive pressures that compel it to move beyond its traditional boundaries. Outsourcing and globalization are the two primary trends in the LSP market that have afforded unprecedented opportunities for LSPs. However, LSPs need to mitigate traditional barriers to leverage these opportunities. We believe BNT will help them to distinguish themselves as leaders in this global market.

LQ: You alluded to globalization and outsourcing. Can you elaborate on these trends and highlight some of the steps LSPs should consider when mitigating potential barriers to these opportunities?

Mike Riegler: When we look at today’s global economy, we see emerging markets, such as China and India, that require the lead logistics service provider to have more comprehensive expertise and capabilities. But at the same time, logistics service providers must work to protect their core domestic businesses. Globalization is stretching into and out of the United States and Canada, and we’re seeing, for example, some of the local U.S. truck companies — Schneider National, YRC, and other prominent firms — making purchases and establishing their presence in emerging markets countries, partly to protect some of their core U.S. business and to capture the first and last miles of transportation overseas. The first and last miles are now in these emerging markets — they’re no longer in the United States in many cases. These companies have had to transform their boundaries — from being a domestically focused transportation company to becoming international multimodal and multiregional organizations.

LQ: How can BNT also add value to niche 3PLs’businesses?

Mike Riegler: Small niche-oriented companies that use service providers, want to grow their business to capture more volume in margin-related business. As a result, they are expanding to develop their core logistics processes. On the other hand, traditional logistics service providers who are involved with the core logistics operations such as transportation management are more interested in niche areas of the marketplace where value-added services are growing with higher profit margins. Oftentimes they don’t have the capacity to organically grow into these niche areas of the market rapidly enough to produce desired returns. They’ve had to acquire niche-oriented companies and have attempted to assimilate these new operations into their legacy IT environment in order to expand their value proposition with additional services. These are some of the challenges we have identified as LSPs move beyond their traditional boundaries in order to seize these opportunities. In our view, the business network transformation process is well suited for the LSP industry. It’s an exciting time for these LSPs. In a global village, they need to consider whether it’s likely they’ll be swallowed up by new opportunities or whether they can develop the capabilities to seize these opportunities over the next five years. Forecasting what traditional LSPs will look like in five years and considering the kinds of services they will include in their portfolio are important considerations today. Most importantly, we should ask, What will their customers ask of them?

LQ: What are the benefits of BNT for the customers of 3PLs?

Mike Riegler: The global shipping community wants to take advantage of the low-cost operations in emerging markets such as China and India, but they often lack the core capacities required to control an operation in these regions. Increasingly, they want more of their business processes outsourced and carefully controlled by LSPs that are established in these markets. BNT can help LSPs’ customers to develop in these markets and benefit from cost reductions through global sourcing, but in a controlled context.

After all, globalization has introduced a lot of variability into the supply chain. This often results in higher inventories to counter risks and, in many cases, creates a negative impact on sales. Not surprisingly, shippers often rely on LSPs as an integral part of their business network to reduce these kinds of excessive inventory. In global logistics practices, the LSP’s business processes can be embedded with the BNT to contribute to the best possible processes and practices for global shippers, in my opinion. This is an important value proposition for the LSP.

As they grow their businesses and improve their internal processes, LSPs can share that excellence with their customers. SAP is part of an annual 3PL study prepared by Professor John Langley of Georgia Tech, DHL and Capgemini. One of the most interesting findings of that study is that global shippers’ internal processes and their efficiency gains could soon be an important means of evaluating what LSPs in collaborative business relationships deliver.

Cost reduction and other traditional factors will continue to be important ingredients in the LSPs’ value proposition to shippers. However, in the near future, shippers will review how an LSP has improved their internal processes. Too often LSPs are constrained by their IT landscape, which hinders their ability to innovate and deliver comprehensive services and solutions. Consequently, one of the important areas for BNT is to help the LSP to find new solutions to include in their service portfolio and to bundle these sets of solutions for their customers. We believe it will enable LSPs to extend their services so that, as they work with global shippers and other service providers, they will not be shackled by legacy systems and other boundaries that do not allow for the quick deployment of innovative solutions or the development of innovative solutions. In addition, as LSPs’ regional presence expands and as their service capabilities grow by means of acquisitions or partnerships, BNT enables them to present a single solution to their customers, even though it may be a partnered solution with other firms.

LQ: Why can’t the LSPs grow competitively without it?

Mike Riegler: Outsourcing and globalization are trends that represent an enormous amount of opportunity. However, the only way that this growth can be captured is by LSPs moving beyond their traditional boundaries. Core transportation and warehouse management activities by LSPs will drive a limited amount of growth by themselves. To grow their business profitably, LSPs will need to use a bigger net to capture new opportunities. The second way BNT contributes to their business is by helping to sustain long-term growth, which often requires them to redefine how they are doing business. Collaborative solutions aimed at increasing competitive advantage will now require business process integration throughout customer and supplier operations. The ensuing LSP business network will establish the LSP as the single source for their customer and allow them to control their business even as their solutions have expanded; we have seen instances where acquisitions by LSPs enable them to capture opportunities, but they have not been able to control these opportunities centrally. So while one area of their business may prosper, another area weighed them down, resulting in severe losses to the core business. Possessing and enabling this control is essential for their business transformation; this core agility — and collaboration platform — will enable them to better capture and benefit from the wave of changes, which we foresee in the five years. We know that these opportunities will need to be responded to quickly, so a more sound foundation should be created today in order to enhance an LSP’s ability to grow profitably and expand. In summary, our view is that first, you must be in a position to capture new business opportunities; second, you must manage and control; and third, you must prepare for the next round of explosive business growth in order to remain competitive.