In terms of the contract logistics market DHL Supply Chain (DHL SC) is enormous. Although the sector is fragmented DHL SC, estimated by Ti to hold 8% of the global market, is by far the largest company. In contrast, the nearest competitor has around 2% of the market. These figures also disguise the fact that DHL SC competes for larger contracts, suggesting that its presence in many key markets is far greater than the 8% number implies.
Yet this size has not necessarily proved to be a strength. In the past profitability has been weak with the division of Deutsche Post barely breaking-even in some years.
Its size has resulted in higher costs combined with less responsiveness and an apparent inability to leverage its scale particularly in terms of its global reach. Smaller rivals appear to have been more nimble, with the ability to capture market share without losing profitability. Since 2011 DHL SC has, admittedly, dragged itself out of the red and into the black, yet at a 3.2% margin its profitability is still hardly class leading.
In order to address this DHL SC has created a programme called Strategy 2020 with the aim of improving, or continuing to improve, DHL SC’s returns. The objective is a 4-5% EBIT margin by 2020 with a 10% compound annual growth rate. If achieved this would place it towards the top of the sector in terms of profitability.
Fundamental to the realization of Strategy 2020 has been the re-orientation of the senior management at DHL SC. The management board has been re-organized to enable cross-functional focus on both geographical markets and product innovation. Replacing the previous organization based around three large regions, the new structure has both the heads of Asia Pacific and Latin America and the head of ‘Life Sciences Logistics’ represented at the strategic policy level. This is designed to enable the company to be responsive to the specific market requirements of Latin America and Asia Pacific, as well as the very different imperatives of what is perceived as an industry vertical of strategic importance; Life Science. Adding further complexity to the management structure is the role of a strategy team based in the UK, which is responsible for coming-up with ideas for new services.
The different geographies of DHL SC’s network have contrasting demands. The company’s approach in Latin America and Asia Pacific is about securing market-share in order to leverage its physical assets. The strategy in Europe and North America must be almost the opposite, with a highly selective approach to business. The latter approach to developed markets reflects a fundamental tenet to the success of ‘Strategy 2020’ – discipline over what contracts DHL SC competes for. Discussing this with Ti the company’s CEO, John Gilbert, said that DHL SC has, in the past, bid for contracts that were insufficiently profitable and that diluted margins. Stopping this habit is central to improving margins.
Of course any new approach will change the nature of the business. DHL SC already focuses on big clients to drive its business in emerging markets. The best example is the automotive sector, where DHL SC has expanded its business because it can deliver solutions to major vehicle manufacturers in these economies where few others can. It is also worth noting that the energy sector is gradually expanding in the portfolio of the business because it too demands complex solutions in often difficult locations.
The implication though is that DHL SC is reducing its exposure to other sectors. Traditionally DHL SC has been heavily involved with the consumer sector and John Gilbert is clear that it will remain core to the company’s business. Rather the change will be one of emphasis. For example in emerging economies with difficult logistics markets like Brazil, DHL SC will continue to develop its shared-user capabilities for large FMCG companies. DHL believes that the combination of high volumes, market knowledge and reliability gives it a competitive advantage that delivers both revenue growth and profit margin.
What may change is that aspects of the ‘trucks and sheds’ business in traditional markets will become less important in the DHL SC portfolio. This is not explicit, indeed it seems that DHL SC is making up its mind on a case-by-case basis. Or as John Gilbert puts it, “We spend almost as much time discussing what we are not going to do as what we will do. If you’re not prepared to say no, yes doesn’t mean much.”
Gilbert is still looking to gain scale in the business and he is clear that this will enable DHL SC to amortise fixed costs more efficiently. DHL SC is also looking to drive efficiencies in IT by creating a flexible architecture that can adapt to different applications requirements, described by John Gilbert as, “a Windows type approach”. But most of all he is looking to impose more commercial discipline on the organization.
The financial numbers clearly stated that a new strategy was needed at DHL Supply Chain. Strategy 2020 is a common-sense approach to this problem. However even within this new approach tensions exist, still driven by DHL SC’s size. For example the demands of markets such as those in Asia Pacific and those in Europe and North America are quite different and DHL SC will have to continue to absent itself from many economies even if customers are asking it to support them there. As John Gilbert admits, execution will be key to improving its performance with the discipline to turn-down unprofitable business central to this. Doing this in an organization as large as DHL Supply Chain will not be easy.