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Dilemma for Asian freight forwarders: Simplify or diversify
By David Gold
As the economic crisis juggernaut rolls on David Gold, chief executive officer for Dependable Global Express (DGX), Asia-Pacific, reflects on the way ahead for Asian freight forwarders
To simplify your business or to take the opposite tack by changing and diversifying your services to the customer is a dilemma facing Asian forwarders of every size, type and description in these perilous times.
Solving this dilemma could mean the difference between future success or failure for hundreds of forwarders now struggling to remain viable while experiencing the sharpest decline in the transportation business for the past 60 years.
Until the middle of last year, the US and many Asian nations were experiencing a mild recession, similar to most post-war economic declines. Despite a weakening economy, most forwarders managed to grow their businesses at a modest pace and remained profitable.
Despite intense competition and low yields, the majority of forwarders remained optimistic about future growth. It seemed nothing could stop the trend toward globalisation. The increasing interdependence of nations meant growing trade for all. Greater amounts of commerce between nations required direct carriers and their agents to supervise and transport ever-growing mountains of goods travelling by land, sea and air.
To accommodate this seemingly inexhaustible supply of goods, shipping lines and air carriers went on a buying spree. Billion dollar orders were placed for new equipment. Ocean carriers ordered dozens of new container ships with massive 10,000-TEU capacity. In the air, orders for new wide-bodied, long-range cargo aircraft poured into Boeing and Airbus.
It seemed nothing could stop the march to greater world trade with its accompanying prosperity. Advanced nations were building consumer-driven, prosperous societies unequalled in human history. Emerging nations were sharing in this worldwide boom to a greater extent than at any time in the past. For the first time in human events, billions of people who had lived barely above the subsistence level for thousands of years, began to enjoy a reasonably decent standard of living.
Many forwarders in Malaysia, Thailand, Singapore, Korea and Japan diversified their businesses by offering third party warehousing. Large warehouses were secured with locked-in leases offering warehouse space on the open market. Often, these leases were without time obligations. This forwarder-responsible warehousing became successful and many forwarders invested heavily in warehouse space. The larger the forwarder, the bigger the investment.
Then came last year's "Black September''. In that month, seemingly without warning, an economic tsunami hit developed and developing nations alike. What had been a relatively mild downturn became an economic catastrophe unseen in 80 years.
Freight forwarders were in uncharted waters. How to react to this unprecedented downturn in world trade? How to retain a forwarder's customer base and ensure that his services would continue to be of value to shippers?
To keep existing business and harness new customers, the forwarder now faces three choices; each seemingly antithetical to the others.
One is to return to the "stone age'' of forwarding. To go back to the nuts and bolts of running a forwarding business; to offer the customer a superior combination that consists of the basics of the business that include competitive pricing, delivery of goods on time and when promised, accurate transmission of information from forwarder to customer and transhipment of goods from loading dock to final destination; and to conduct one's operation in a leaner and meaner manner than at any time in the past when a forwarder opened its doors with nothing more than a telephone, typewriter and tele-type machine.
A second alternative is to reinvent oneself. To become less of a "delivery merchant" and more of a management and business consultant; to become embedded in a customer's entire logistics system - inventory management, supply requirements, current and future production volume, and outsourcing.
By offering these value added services, the forwarder heightens his role from just a transportation agent to an involved and integral part of his customer's business. In this scenario, the forwarder's creed becomes, "I must know my customer's business even better than my own".
A third choice is to become a niche player. To become a specialist in handling certain types of cargo such as electronics or apparel and/or concentrating on certain lane segments; and to stick
to your knitting in these markets. The niche forwarder who specialises in certain types of business certainly may have long-term potential earnings. But he must position himself correctly in those markets and offer top line service to his customers if he is to succeed.
One must be mindful, however, of the pitfalls in each of these three choices.
Basics: To many customers, back to basics means back to even lower rates. This is a false assumption. Moving a shipment swiftly and expeditiously whether to a nearby city or a distant continent requires a combination of skilled personnel and high quality technology. Neither comes cheap. One must impress upon the customer this blend of superior personal service and advanced technology is an integral part of his entire distribution system.
The forwarder also must be careful in assessing his own, internal operation. In providing a no-frills approach, the forwarder may feel he can venture into a widespread cutting spree, reducing staff and facilities to dangerous levels. In his zealousness to reduce overheads, he may well cut into the muscle of his operation - lowering the quality of service his customers expect.
Diversifying: The forwarder choosing to add a number of services, in addition to his primary task of moving freight, faces a number of financial, personnel and organisational obstacles. Unlike the Clint Eastwood film For a Few Dollars More, costs to diversify operations will be substantial. Funds will flow outwards at a prodigious rate. Personnel who are genuinely skilled in modern management systems and know the logistics business are rare and expensive. Grafting a new division onto an existing operation inevitably will cause stress and strain among current employees.
The principal problem in this new endeavour, however, will be gaining the acceptance of existing and potential customers. Will they be willing to pay the additional costs of new, value-added services? Will they be willing to try the new service when they already have an existing carrier or forwarder who in their eyes is performing adequately?
Perhaps a more prudent and far less costly strategy in these circumstances would be to align forwarding operations with an existing business management or business consulting company that knows the logistics business.
Niche forwarding: Becoming a specialist in certain types of commodities involves a good deal of guesswork. The forwarder is gambling to a large extent on choosing those markets with long-term growth potential. Also, the consolidator must have the mental stamina and financial resources to ride out the inevitable short-term declines in demand for specialised services.
Becoming a niche player minimises the forwarder's ability to "break out" of the image he is creating for himself while building his reputation in the particular niche he chooses. Even when the guesswork is correct, a change in the market can disrupt your niche, destroying your model.
Whatever the forwarder's decision today, it will be critical to his success or failure tomorrow. It should be made only after careful consideration as to the benefits and the costs. It is not an easy decision to make amidst the complexity and uncertainty in today's forbidding economic climate. It is also a decision which will have an enormous effect not only on the forwarder, but staff as well. It is not a decision to be taken lightly.
Do one genuinely have to make a change? Perhaps not. One may be in fine shape if he has done a good job in the past positioning himself to customers and carriers. So he should stay where he is and "stick to his knitting" and perhaps he can ride out the economic storm. But no one, from Warren Buffet to your local banker, foresaw the severity of the current downturn. And no one truly knows when it will end. Following the same path in these very perilous times may be disastrous if the projected rewards do not match your efforts over the long term.
The services of a forwarder are too important to wither away. His role, however, is evolving. The path he chooses to take will impact his business for years to come.
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