Business Plan Virtual Freight Village

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Virtual Freight Village (VFV) Draft business plan of VFV Partners

Version 3.3 18 April 2001 authors: Arjen van Klink, Flip Maas and Henri Jansen

Rabobank Netherlands Introduction This document presents VFV Partners. VFV Partners’ mission is to the Virtual Freight Village (VFV) in logistics communities - such as industrial regions, seaports, airports and fresh produce auctions – together with public and private parties.

Background Logistics deals with delivering a product to the next stage in the supply chain at the right time, place and quantity. We believe that efficient and effective logistics is crucial for sustainable competition in today’s global economy. Especially, as mass customization and individualisation stimulate the shift from ‘push’ to ‘pull’ in manufacturing and distribution. New information and communication technology facilitate new logistics concepts. Although a lot has been achieved, present logistics operations are still far from perfect:

 Shipments of cargo and trips of passengers run unplanned at junctions such as terminals of airports and seaports, thus creating unbalanced capacity deployment.  Status information regarding product components is often incomplete and too late, complicating the concept of flexible and just-in-time manufacturing  The number of empty kilometres driven by lorries is dramatically high, expressing itself in low profitability and adding to the congestion on the roads.  Warehouses are generally operated on a single company basis; frequent under- capacity and extensive land use are implications at regional level.  Communication among links in the supply chain is limited, resulting in long lead- times, failing order fulfilment and uncoordinated product development.  Staffing is considered at company level; the need for flexibility and the issue of labour scarcity cannot be effectively addressed as a consequence.  The money flow through the supply chain is highly fragmented, adding to the costs of logistics management.

Figure 1: The world of VFV Partners

Buy Ma Move ke Store ERP1 Store Move ERP2 Store DRP3 Sell to Customer DRP4 TP5 ERP6 ERP7

2 The consequences of imperfect logistics are being felt at the micro and macro level. At micro level, suboptimal logistics is detrimental for a company’s responsiveness and profitability. At macro level, the logistics behaviour is adding to problems like congestion and land scarcity. Especially the Netherlands is hit by these problems given its dense economic structure and its position as a gateway to Europe.

Without logistics excellence we expect more and more companies and regions to fail in linking up with the global economy. However, state-of-the art capability to control logistics networks offers opportunities for strategic repositioning and improving profitability at corporate level and opportunities for effective clustering and efficient transport at regional level. Figure 2 shows an uncoordinated logistics system and a coordinated one.

Figure 2: Uncoordinated and coordinated logistics networks

The pressure to reduce logistics suboptimalities ask individual companies to think out of their mental map, as the imperfect logistics world is caused by imperfect interaction. For instance, empty lag reduction in transport might ask to combine shipments from different supply chains. And flexibility in assembly operations might require to have multiple sourcing at one’s disposal.

3 The value proposition of VFV Partners The ineffective dispersion of ideas and tools within and between companies hinders the translation of new logistics concepts from theory into practice. That especially holds for concepts going beyond corporate boundaries. Many companies cannot think out of their box. Moreover, innovation at company level often lacks urgency and capacity: the impact of innovation on short term profit is unclear and people are necessary for daily operations.

VFV Partners create value for our customers with a holistic approach to logistics system innovation and (IT) tools. The approach is based on knowledge of industry dynamics, creativity for new vision, networks for partnering, capability for software evaluation & implementation, and capacity for project management. VFV Partners thus helps its customers on their route towards a new business model in which information technology enables reshaping strategic positions, controlling logistics systems and thus improving profitability and spatial-economic structures.

Our framework and horizon of action is the Virtual Freight Village. It is a business environment that optimises interaction in multiple logistics systems. We use the synonym of a village to stress its function as a community – not only in the sense of the trading relationships it supports in virtual space, but also because the concept aims to exploit common facilities in geographical space. The Village offers (technological and organisational) infrastructure for data exchange and planning beyond individual companies next to common facilities for production and distribution, such as human resources, assembly facilities, terminals, and warehousing space. Specific attention is being paid to information security; in the Virtual Freight Village a trusted third party will be incorporated to secure confidentiality and to optimise interaction among the participants.

With the Virtual Freight Village as horizon of action, we aim to generate value for our customers by:

(a) Raising awareness for strategic implications of new logistical options (b) Analysing strategic opportunities on the basis of technology and market dynamics (c) Recommending a sound business configuration for the future on the basis of (b) (d) Managing partner and software selection to create an effective group of action (e) Taking responsibility for the implementation process and the exploitation stage

The value creation of VFV Partners can be illustrated by its business philosophy. The business philosophy of VFV Partners is characterised by four principles:

- we only start projects to develop the concept of the virtual freight village in industries which business rules we fully understand. - we work bottom up and seek short term gains as a basis for long term success; implementing new software can only be a means to an end. - we believe our concept cannot be built by a single entity in a single day; it requires long-term commitment, willingness to cooperate and organising capacity. - we state that building the Virtual Freight Village is a joint responsibility of our client, our partners and ourselves and thus asks for regularly contract evaluation.

Figure 3 tells you an imaginary story of the application of the Virtual Freight Village.

4 Figure 3: Henri's story “Our lives were neatly arranged.” Talking Henri van Tilburg about the recent past in the Dutch region where his plant is located. In the area there is a number of manufacturers and service companies (banks, carriers, etc). Some manufacturers source within the region, others get their inputs from locations away. Their markets have a regional, national and in some cases international dimension. Van Tilburg: “each of us had organised its system of production in its own way. Consequently, we all bought services from carriers for moving our inbound and outbound cargoes. And we all had warehousing space to store our products. No problems at all.”

Then circumstances changed. Competition was heating up. Customer preferences diverged. Congestion undermined the reliability of transport. Van Tilburg: “the traffic jams stimulated the government to raise taxes - to curtail traffic growth they said, but I believe just to generate more income”. Economic growth led to full employment and labour was getting scarce. The extension of business sites and infrastructure was opposed in society, as the rise of welfare fostered awareness for quality of life. Consequently, the old way of life became ineffective: “some of my colleagues started to lose money, the profitability of my own company went down dramatically”.

Henri van Tilburg initiated a quick-and-dirty analysis of the situation. “We learnt that a lack of exchange was at the heart of our problems. Simply said: we did too much ourselves, optimising our own system but creating a lot of external inefficiencies. That sounds a bit academic, but you should think about trucks driving half empty to the same destinations and manufacturers having empty warehouses at different times of the week.”

The solution to improve our competitiveness was as simple as complex: consider yourself as a part of a cluster and share capacity for mutual advantage. “The complexity lies, of course, in the information necessary to decide about capacity optimisation”, says Van Tilburg. “We understood that information technology could help, but where to start?”

“Luckily, we heart from the Virtual Freight Village. They appeared to have unique concepts and tools for structuring exchange (of information and other things) in networks such as ours and to optimise collective productivity. To say it simple, they have organised us”. After some talks, they offered one of the manufactures a feasibility study to identify logistics optimisation based on some assumptions on the availability of slack capacity at his neighbours. “Indeed, the possible savings were high and the organisational preconditions seemed not to be too complex”, says Van Tilburg. Based on the study, several companies in the region became involved. A project team of the Virtual Freight Village analysed our relationships and options for sharing capacity. Transport to the port of Rotterdam (imports and exports), transport to the Munich region (export), storage of chemical products, and hiring temporary staff appeared to offer the biggest savings. “Together with Virtual Freight Village, we have invested in a website linking the companies’ IT systems to realise a simple and effective exchange platform”.

“People from the Virtual Freight Village are now running the information exchange regarding the supply and deliver process, the planning of warehousing space and the deployment of temporary staff. We pay an annual fee and have a share in the service provider of Virtual Freight Village running the information business. Combining loads to/from Rotterdam has offered scale economies to realise a modal shift to barge transport. Sharing storage capacity has made the planned extension of a warehouse of one of the participants not necessary anymore. The platform has a so-called ‘open infrastructure’ – I’m indeed talking like a consultant – so other participants can easily join our Virtual Village”.

Market We consider our market primarily to be as those companies involved in complex logistics operations with various third parties in one or more regions, adding to societal problems like congestion, land scarcity and pollution. To this category belong stevedores, logistics service providers, airport operators, manufacturers and property developers. Our secondary focus is on public agencies – like provinces and cities - working on more effective spatial planning for the logistics industry.

Today, no systems such as the Virtual Freight Village are operational. However, a lot of internet initiatives for collaborative planning and procurement have been taken recently. E-procurement is ‘hot’. For instance, several car manufacturers have taken the stap for a common platform to buy components, while shipping lines and airlines buy fuels through a reversed auction system. Many procurement sites today lack a

5 logistics component, implying that a buyer still has to arrange the shipment of its purchase in the traditional way. Next to procurement sites, in the transport industry several initiatives for collaborative transport planning have been taken. An example is ChipChem, that is meant to manage shipments of Eastman Chemicals and other manufacturers in the chemical industry. Another one is LogiGo.com, a Dutch company active in transport brokerage at the internet.

We estimate the market in the Netherlands for logistics planning systems in business clusters at € 62.5 million in the period 2002 – 2005. Our estimation is based on plans we know in the Netherlands; we have taken the probability of realisation into account to give a realistic market forecast, as the multi-actor character of the projects can delay their realisation. The market volume is related to both consultancy to facilitate the initiatives and transaction fees of realised planning tools.

The exchange volume has been derived from a rough estimate of traffic through the common planning system over a four years’ period, multiplied with an average fee of € 0.25 per operation for the planning entity. Examples of operations are the allocation of cargo to a warehouse position and the allocation of a shipment to a truck. Other operations are billing, tracking and tracing, proactive scheduling and periodical analysis.

Competitors at the market for building and operating planning systems for network logistics are mainly found in consultancy. Companies like Accenture, KPMG, CapGemini and Price Waterhouse Coopers are building their vision on network logistics and are generating exposure in the market. The same holds for major logistics service providers that aim to take activities from shippers and to create synergy from multi-client operations. Moreover, supply chain vendors like i2 Technologies and Manugistics are planning to deliver network solutions in the future. The same holds for facilitators of E-marketplaces, such as Ariba and Tradex and ERP providers like SAP. Finally, the government sponsored R&D programs KLICT and Connekt aim at the development of systems managing shipments beyond company boundaries. In the area of facilities for parc management, companies like Arcadis and Grontmij are competitor.