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Student number: SML S17099 Specialization: Shipping Management and Logistics (SML)

TYPE OF ASSIGNMENT: Individual Assignment Class of 2017 Term 2 Subject:

MGM102 Maritime Logistics & Marketing. Integrating the Supply Chain‌25 years on – Case Study.

Number of credits: 5 EC Date: 24 May 2017 Given by: Professor Dong-Wook SONG

Word count: 2200 (Excluded table of contents, list of figures, list of abbreviations, reference list, annexes and figures description.)


Table of Contents List of Abbreviations ................................................................................................................. 3 List of Figures ............................................................................................................................ 4 1. Introduction ............................................................................................................................ 6 2. Conceptual framework. .......................................................................................................... 7 3. CMA CGM – Historic integration development. .................................................................. 8 3.1. Internal integration. ...................................................................................................................... 8 3.2. External integration. ..................................................................................................................... 9 3.3. Goal directed networked supply chain. ........................................................................................ 9 3.4. Devolved, collaborative, supply chain clusters.......................................................................... 11

4. Financial Statement Analysis. .............................................................................................. 12 5. Conclusion ........................................................................................................................... 15 References. ............................................................................................................................... 16 Annex A – Integrated Service Portfolio CMA CGM .............................................................. 17 Annex B – CMA CGM Devolved, Collaborative Supply Chain Cluster ................................ 18 Annex C – eCommerce Service ............................................................................................... 19

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List of Abbreviations CMA CGM DCSCC GDNSC EU FAL IT NOL OOCL SCI SCM SCOMs TEU US

Compagnie Maritime d’Affrètement/Compagnie Générale Maritime. Devolved, Collaborative, Supply Chain Clusters. Goal Directed Networked Supply Chain. Europe Union. French Asia Line. Information & Technology. Neptune Orient Lines. Orient Overseas Container Line. Supply chain Integration. Supply Chain Management. Supply Chain Operating Models. Twenty Foot Equivalent Unit. United States.

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List of Figures Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure Annex A Figure Annex B Figure Annex C

CMA CGM Time line between 1978 and 1994. CMA CGM Time line between 1994 and 2011. CMA CGM Time line between 2012 and 2017. Supply Chain Integration Scope of consolidation. Revenue distribution by segments 2015 and 2016. Integrate service portfolio and cluster diagram CMA CGM. CMA CGM Devolved, Collaborative Supply Chain Cluster. CMA CGM eCommerce service.

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09 10 12 13 14 17 18 19


“Knowledge of the transportation system is fundamental to the efficient and economical operation of a company´s logistics function. Transportation is the physical thread connecting the company’s geographically disperse operations…Transportation add value to the company by creating time and place utility; the value added is the physical movement of goods to the place desired and at the time desired” Coyle, Bardi & Langley Jr. (2003).

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1. Introduction The journal article Integrating the Supply Chain‌ 25 years on, by Graham C. Stevens & Mark Johnson seeks to self-review the original document written in 1989. Through a conceptual approach that describes the evolution and development of the supply chain adding two new phases to the initial work, called Supply Chain Operating Models (SCOMs). Moreover, the authors found an erroneous association between the implementation of supply chain management (SCM) and financial performance. According to Stevens & Johnson (2015), the first model of the supply chain was established as a functional and independent line throughout the company missional processes. The first integration began with the functional tasks, then a full internal integration to ended in an external integration including suppliers and consumers (p.20). However, the implications of global development, leveraged by globalization, the advances of the internet and information technologies (IT), forced companies to implement more efficient processes to compete in the market. The mechanism was based on differentiation, cost advantages, resilience and dynamism, all those mentioned above through the supply chain integration. The aim of this assignment is to formulate a point of view of the SCM and the supply chain integration (SCI) of the French shipping company CMA CGM. The challenge is to identify the differences between theory and practice, despite the fact that, first, the seaborne is governed by derived demand. Thus, the generation of the service is originated by the need of the global trade to overlay the time and geographic gaps. Second, the academic literature available for research considers the seaborne trade as a simple node in the system, which can offer a cost advantage. Instead, the shipping companies’ strategies must expand the limits of traditional operation forms to offer more differentiated services assimilating the SCI and transform in a vertical integration strategy.

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2. Conceptual framework. To make a comparative analysis between the article of Stevens & Johnson (2015) and a shipping company like CMA CGM. It is necessary to understand the conceptual approach explain by Robinson, 2002 (as cited in Baird, 2015) that the theoretical studies related to SCM are more focused on the first demand industry and their logistical control of networks, IT, and market positioning. Therefore, the approach to compare the conceptual framework will be oriented around three criteria of integration, defined by Musso et al (as cited in Baird, 2015) like ship operation, port terminals and intermodal transport services. Hence, it can be assumed that the application of SCM and SCI strategies can be achieved through vertical integration. Also, shipping companies develop consolidation strategies along the transport chain and logistics services, to reduce costs, differentiate service and diversify portfolios due to the fluctuation of the shipping industry itself (Baird, 2015, p 172). According to the integration criteria mentioned above, the explanation of the conceptual framework will be developed through two research lines. First, based on the historical analysis of the company since its creation. Second, through the descriptive interpretation of the financial statements published in 2016.

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3. CMA CGM – Historic integration development. Why choose the third company in TEUs capacity with a 10.8% stake in the container transport market? The answer is focused on the possible late application of Supply Chain Operating model (SCOMs) based on devolved, collaborative, supply chain clusters (DCSCC). This assumption is made, based on Panayides, Wiedmer, Andreou & Louca (2015) who by the date of their study, CMA CGM had not shown consolidation strategies through port control activities (p. 157). Similarly, Baird, A. J. (2015) classified the company within the Tier Nº3 of logistics service provider. (p. 187). These facts allow a more critical analysis of the vertical integration strategy through the supply chain that the company has implemented in the last years.

3.1. Internal integration. Founded in 1978, CMA started providing transportation services in Beirut, United States and subsequently opened offices in the UK, Belgium, Netherlands and Germany (CMA-CGM, 2017, March 10). CMA starts operations following the industry trend concerning change functional separation model, to business resource planning. The first logistic strategy was through empty container inventory management, based on replenishment using re-order points (Stevenson & Johnson, 2015, p.30). To achieve this, the company acquired PROGECO, to integrate the physical supply and demand of containers and the empty container logistics, using 14 warehouses located in France, Germany, Belgium and the Netherlands. Thus, the company optimized the empty container handling in Europe and their primary route via the Mediterranean and the Near-East. It can be assumed that, due to the challenging market conditions in the 80s, and the dynamism demanded by the maritime business, to be agile, flexible and responsive, the transition between the internal integration SCOMs and the external SCOMs, was leveraged by the interaction of processes between customers, ports, suppliers located in different parts of the world, and not by the isolated optimization of performance in the Marseille office. However, the organization and governance was maintained hierarchical and centralized.

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3.2. External integration. The acquisition of PROGECO can also be considered as a performance frontier towards external integration due to this acquisition aforementioned is clearly defined as supplier integration focusses. Furthermore, in 1981 the SCI was materialized with a distribution integration focus, establishing intermodal rail transport service in the Near and Middle East market to generate cost advantages and differentiate services. Moreover, the company opened the Europe-Red Sea-Asia route, to project the service coverage to Asia and create a more efficient flow of cargo and reduce empty containers movements. The customer integration approach was developed influenced by the war in Lebanon. The company to add value to the transport service, develops the concept of cargo transshipment, unloaded the containers in Cyprus, and then loaded in small vessels to move it into Lebanese ports extending the company's outbound logistics chain to reach the customer's needs. See in figure 1.

Figure 1. CMA CGM Time line between 1978 and 1994. https://www.cma-cgm.com/the-group/about-us/history

Elaborate by S17099. Note:

from

3.3. Goal directed networked supply chain. CMA CGM following the global trend of change of physical to information flow and recognizing the concept described by Harland, 1996 (as cited in Stevens & Johnson, 2015) the importance of the supply chain as a network of relations. The company opens the first office in Shanghai and implements the FAL service, eight ships of 3,400 TEUs now make regular return trips between Europe and East Asia (CMA-CGM, 2017). Establishing relationships with second and third level suppliers/customers such as logistics providers, warehouses, distribution

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centers, and land transportations systems. In 1999, the organizational structural adjustment was started, to give greater network flexibility and reduce the information delays and distortion. Hence, the company decentralized the levels of authority through the subsidiary companies to handle more efficiently the multiple nodes in the supply chain. The CMA CGM Supply Chain Strategy (SCS) established the guidelines for operational coordination, planning, and governance of subsidiaries in Asia, US, EU, and Oceania to achieve market differentiation with add value service, adaptability, and effectiveness. In 2001 CMA-CGM Logistics and Terminal Link was founded, looking for process optimization, multi-tiered relationships and partnering/sourcing, leading to prepare the organization to the next integrations challenges. The breaking point for the development of the consolidation strategy in the transport chain was after the acquisition of the companies ANL, MacAndrews and Qualitair & Sea International in 2004. The company's initial strategy was to increase the container flow transport in the Asian continent, thus increase the shipping services and ocean transport; subsequently, the company, understood the need to differentiate the costs and services through vertical integration, specifically controlling intermodal transport services, see figure 2. Since then, the consolidation of the SCI has been a priority in the high-level management strategy.

This approach demonstrates that CMA CGM developed vertical

integration late in comparison to their competitors APM-Maersk, NYK lines among others, who developed consolidation patterns such as port terminal control and intermodal transport jointly since the early 1990s.

Figure 2. CMA CGM Time line between 1994 and 2011. https://www.cma-cgm.com/the-group/about-us/history

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Elaborate by S17099. Note:

from


On balance, from 1994 until the end of 2004, the company only focused their expansion strategy on enlarging its container transportation services; making few investments in vertical integration, probably to reduce complexity and instability to their core business. The different acquisitions, agreements and port terminal concession allows CMA CGM to cross the performance frontier towards the next phase in supply chain management in sequence with the trend demonstrated by the other top 5 shipping liners companies.

3.4. Devolved, collaborative, supply chain clusters. By the end of 2010, the integration strategy is progressing more efficiently, creating more independent and decentralized geographic clusters, such as the Middle East, Europe, and the US. The scope of services includes other logistic activities such as documentation and customs, supplier and customer site activities, warehousing vendor management among others. These regional clusters are connected through CMA CGM Log; this subsidiary develops all the operational coordination, planning, and connection of the entire services network through the eCommerce solutions, see in Annex C the eCommerce concept. In 2012, the company reduces the complexity of the different multimodal transport networks, making a structural adjustment concentrating all the efforts of that service in a single logistic operator called Greenmodal Transport. Additionally, in 2012, CMA CGM creates CMA Terminal, to integrate the owned port strategy with the former Terminal Link. The CMA Terminal was created as a simplified company and has a capital distribution of 51% to CMA CGM and 49% to China Merchants Holdings International. Probably this late development in 2012 is the reason why Panayides, Wiedmer, Andreou, & Louca (2015) did not include terminal activities in their study. Other important milestone was the Ocean Alliance, this operational agreement allows coordinating approximately 40 logistics needs and activities, optimizing waiting times and reducing costs due to standardization of processes and increasing levels of coordination with port authorities through decentralization (CMA-CGM, 2017). The above mentioned are specific characteristics of the devolved, collaborative, supply chain clusters model. Reducing the complexity due to the collaboration and multi-partnering relationships between shipping companies. Also, the final goal of the agreement is consolidated the door to door service via the intermodal transport connectivity and frequency. This alliance can be defined as a strategic

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cluster where CMA CGM integrates seven main transport routes to Asia. The management of the alliance should have been integrated vessels from 4 different shipping lines like COSCO Shipping, OOLC and Evergreen Marine, and charter and exchange space on other's ships. And enter into cooperative working agreements in international trade lanes between Asia, and ports in the US and Northern Europe, the Mediterranean, the Middle East, Canada, Central America, and the Caribbean (Berman, 2016). Hence, it can be argued that CMA CGM achieves a vertical integration in specific geographic clusters since 2014, with restricted or limited logistics service, been classified in Tier NÂŞ3 according to Baird (2015). See figure 3.

Figure 3. CMA CGM Time line between 2012 to 2017. Elaborate by S17099. Note: from https://www.cmacgm.com/the-group/about-us/history

4. Financial Statement Analysis. CMA CGM has two primary revenue segments container shipping activity, which represents 92% of total income; other services such as terminal operations, logistics, and transport by rail, road, and river, representing the remaining 8%. The net revenue demonstrates a strategy oriented in ocean deep container transport (CMA-CGM, 2017). It can be identified after studying the financial statements, that the scope of consolidation, i.e., vertical integration, was adopted strongly since 2014. See figure 4. Business combination strategies show how through the location of clusters in places where they do not manage competitive advantages.

For instance, the acquisition of LCL Logistix, one of India's

independent third-party logistics leaders reinforces its position and leverage integration strategy through door-door services in that specific market. This SCI plan undoubtedly extends the coverage within the transport chain but also increases the complexity of the networks

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making necessary supported with robust investments in IT, communications and decentralization. The administrative management of the subsidiary companies still has a high dependence on the principal office in Marseilles, the power of decision and authority is entirely centralized for activities that significantly affect the investee's returns and the ability to use its power over the entity (CMA-CGM, 2017). This managerial principle marks a limitation for the transition from goal directed Network Supply Chain to Devolved, Collaborative Supply Chain Clusters. See Annex A – Integrated Service Portfolio.

Figure 4. Supply Chain Integration Scope of consolidation. Elaborate by S17099. Note: Adapted from Panayides, Wiedmer, Andreou, & Louca, C., 2015, p. 163 & https://www.cma-cgm.com.

According to Figure 5, the consolidated balance of earnings at December 31, 2016, compared to the fiscal year 2015, is observed. The percentage of profits related to logistics services only increased by 1.4%, with a total for 2016 of 6.4%. If the evaluation criterion set by Baird (2015) is used, a top-tier company, it must have the capacity to provide logistical services globally with almost total coverage (p.186). However, this coverage criterion may present ambiguities; therefore, it is considered the percentage of profits derived from logistic services, being consistent with the evaluation given by the author mentioned above, who classifies CMA CGM with a rate below 10% of the total profits. However, taking into account, the NOL acquisition at the end of 2016, could be assumed that being classified at level 1, this could leverage the

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CMA CGM ranking. Indeed, derived from the information provided by Panayides, Wiedmer, Andreou, & Louca (2015) who describe NOL group, with coverage in fully owned port activities and six logistics and multimodal transport subsidiaries (p.158). Contradictorily, the financial statements shown in figure 5 show a net profit from NOL logistics services of only US$ 145.2MM, that is to say, 5.5%, being well below from the minimum 20% to be ranked in Tier Nยบ1.

Figure 5. Revenue distribution by segments 2015 and 2016. Elaborate by S17099. Note: Adapted from https://www.cma-cgm.com/static/Finance/PDFFinancialRelease.

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5. Conclusion It is possible to conclude that the CMA CGM vertical integration strategy is at an early stage of development, and it is necessary to advance taking into account external forces such as globalization, technology, structural adjustment and government regulations. The projection of the company about the integration of the supply chain is well structured through the IT and web portal systems, which helps the customer to carry out all the steps immediately and guarantees the customer preferences customization.

Another factor that will ensure a

differentiation in the logistics service inside the transportation chain is the correct interpretation of the re-shoring trend. Due to the reduction in costs benefits, the higher time gap and long geographical gap, the industry its moving the manufacture facilities closest to the point of consumption (Ellram, et al., 2013, as cited in Stevenson & Johnson, 2015). The situation that directly affects the company core business, whose primary generator of income is the segment of ocean transport. The company's orientation to reduce the risk of supply chain disruption, uncertainty and instability are mitigated through the CMA CGM Log, which integrates all the subsidiary companies of CMA CGM. Seeking individual consumer satisfaction following the two major driving forces, internet and logistics, characteristic of the globalization trend 3.0 (Song, 2017). The question then arises about the B2B orientation or should the web platform service be so friendly that they can supply both B2B and B2C? Should CMA CGM starting a partnership with an online retailer like their competitors? CMA CGM fulfills satisfactorily with the key component in maritime logistics described by Lee & Song, (2015). However, the differentiation factor for sharing norms, values and behaviors with the client (Stevenson & Johnsons, 2015) will materialize in the agility to adapt to the economic changes, besides reliability, resilience, and the need to exploit the "Architectural Knowledge" Tallman et al., (as cited in Stevenson & Johnson, 2015), through IT investment and big data analysis, such as the key factors to compete in the consolidating the worldwide logistics services portfolio competition.

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References. Baird, A. J. (2015). Logistics strategy in container shipping. In P. M. Panayides & D. Song (Eds.), Maritime Logistics: A guide to contemporary shipping and port management (2nd ed., pp. 171-190). London: Kogan Page Limited. doi:10.1108/IJPDLM-07-20150175 Berman, J. (2016, October 24). Ocean Alliance gets formal FMC approval. Logistics Management. Retrieved May 8, 2017, from http://www.logisticsmgmt.com/article/ocean_alliance_gets_formal_fmc_approval CMA-CGM. (2017, March 10). History. Retrieved May 7, 2017, from https://www.cmacgm.com/the-group/about-us/history CMA-CGM. (2017). Statutory Auditors’ report on the consolidated financial statements (Rep.). Marseille: KPMG Audit, Deloitte & Associés. Retrieved May 8, 2017, from https://www.cma-cgm.com/static/Finance/PDFFinancialRelease/FY%202016%20%20Annual%20Consolidated%20Accounts.pdf. Coyle, J. J., Bardi, E. J., & Langley Jr, J. (2003). The Management of Business Logistics: A Supply Chain Perspective (7th ed.). Quebec: South-Western. doi:1 2 3 4 5 05 04 03 02 Robinson, R. (2002). Ports as Elements in Value-driven Chain System: The New Paradigm, Maritime Policy and Management, 29(3), pp 241-55. Song, D. (2017, April 28). Maritime Logistics and Marketing Review. Lecture presented at MGM102 Maritime Logistics & Marketing in World Maritime University, Malmö. Stevens, G. C., & Johnson, M. (2015). Integrating the Supply Chain ... 25 years on. International Journal of Physical Distribution & Logistics, 46(1), 19-42. doi:10.1108/IJPDLM-07-2015-0175 Panayides P.M., Wiedmer, R., Andreou, P. C., & Louca, C. (2015). Supply chain integration of shipping companies. In P. M. Panayides & D. Song (Eds.), Maritime Logistics: A guide to contemporary shipping and port management (2nd ed., pp. 149-168). London: Kogan Page Limited. doi:HE571.M367 2015 387.068´7-dc23

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Annex A – Integrated Service Portfolio CMA CGM

Figure Annex A1. Integrate service portfolio and cluster diagram CMA CGM. Elaborate by S17099. Note: Adapted from Panayides, Wiedmer, Andreou, & Louca, 2015, p. 163/Stevens & Johnson, 2015.


Annex B – CMA CGM Devolved, Collaborative Supply Chain Cluster

Figure Annex B. CMA CGM Devolved, Collaborative Supply Chain Cluster. Elaborate by S17099. Note: Adapted from Stevens & Johnson, 2015.

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Annex C – eCommerce Service

Figure Annex C. CMA CGM eCommerce service. cgm.com/ebusiness/our-offer

Elaborate by S17099. Note:

Adapted from https://www.cma-

Maritime Logistics & Marketing. Integrating the Supply Chain…25 years on – Case Study.  

The aim of this assignment is to formulate a point of view of the SCM and the supply chain integration (SCI) of the French shipping company...

Maritime Logistics & Marketing. Integrating the Supply Chain…25 years on – Case Study.  

The aim of this assignment is to formulate a point of view of the SCM and the supply chain integration (SCI) of the French shipping company...

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