GLOBAL SUPPLY CHAIN SEPTEMBER 2014 MAGAZINE

FEDEX – GREAT PLACE TO WORK

VOLVO – SUSTAINABLE FLEET A Materials Handling Consultant The answer?

Al Futtaim Logistics Full steam ahead

Reduce operating cost ENHANCING THE BUSINESS OF LOGISTICS

A manual / automated combo

34 30 16

RUSSIA – SO MUCH POTENTIAL

September 2014 Issue 07

A FUTURE WITH

MATERIALS

HANDLING Adapt to stay on top

Winner – Air Cargo Industry Customer Care Award, World Cargo Awards 2014 When it comes to our business of cargo, we are committed to taking extra care of your business across the globe. By winning this prestigious award, we are delighted to know our dedication is being recognised by those who matter most, you. Thank you for your vote. etihadcargo.com

THE WORLD IS OUR BUSINESS LET US TAKE CARE OF YOURS

New Heights in

OPERATE & INTEGRATE WORLD

RECORD

5,000 TONS

HEAVIEST ITEM BY ROAD

LARGEST FLEET

1, 800 TRUCKS 2,200 TRAILERS

2 MILLION

FREIGHT

TONS PROJECTS CARGO

EXECUTED ANNUALLY

2 MILLION

SQM TERMINAL WAREHOUSING

FACILITIES

The journey that started with a single truck seems a distant memory. Since 1965 our fleet grew over 1,800 trucks and 2,200 various types of trailers such as flatbed, low bed, extendable and semi-hydraulic. In addition to other types of trailers such as conventional hydraulic, SPTs and SPMTs. Our terminal and storage capacity is over 2 million SQM with more than 6.9 million MT of exports a year.

Our formula of success is to keep everything 'in-house' starting with employing the right calibers, owning state of the art equipment and utilising the latest technology. Then, we are left with the daily task to integrate all of our resources to offer our clients a holistic logistics & SCM solution.

Heavy Lift Transportation Freight Forwarding Terminal & Warehousing

Please visit www.almajdouie.com to find out more about our integrated services. Tel: +966 13 8198111

Success lies in how you handle it SIGNATURE MEDIA FZ LLE P. O. Box 49784, Dubai, UAE Tel: 04 3978847/3795678 Email: info@signaturemediame.com Exclusive Sales Agent Signature Media LLC P.O. Box 49784, Dubai, UAE Publisher: Jason Verhoven jason@signaturemediame.com Director: Deepak Chandiramani Deepak@signaturemediame.com Managing Editor: Munawar Shariff munawar@signaturemediame.com Art Director: B Raveendran Production Manager: Roy Varghese Roy@signaturemediame.com

Printed by United Printing Press (UPP) – Abu Dhabi Distributed by Tawseel Distribution & Logistics – Dubai

This isn’t a quote about being successful in general, although it could also make sense in that context.

However, the success of any business lies in how well its materials are handled. With us being at the point where new technology is making huge strides ahead and traditional business methods are rapidly becoming obsolete, how does a business prepare for the changes the future is bringing? By being open to change, first and foremost. By identifying the most relevant technology trends suitable to your business, by being up to date with new materials handling methods in practice in similar businesses around the world and keeping your business flexible enough to adapt to changes that may be necessary to grow, by even hiring a consultant for a period of time when an expert will add to the business’s group IQ. We’ve looked at all these major aspects of the materials handling world in this issue.

Focussing a complete issue on a single topic is usually not possible as there are many parts of the industry that cannot be ignored. As with each issue we have a mix of ideas and topics that are explored in detail - a story on HR, an analysis on Shale gas and its impact on future GCC fortunes as well as a sustainable solution for enhancing your fleet.

Do let me know what you thought of this issue. Write to me on: munawar@signaturemediame.com Munawar Shariff Managing Editor

Contributor’s opinions do not necessarily reflect those of the publisher or editor and while every precaution has been taken to ensure that the information contained in this handbook is accurate and timely, no liability is accepted by them for errors or omissions, however caused.

Articles and information contained in this publication are the copyright of Signature Media FZ LLE & SIGNATURE MEDIA LLC and cannot be reproduced in any form without written permission.

SEPTEMBER 2014 3

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September 2014 Issue 07

ENHANCING THE BUSINESS OF LOGISTICS

20 06 News 10 Russia – Untapped potential

The country needs to streamline itself to improve its economy

16 Is it time to hire a

Materials Handling Consultant?

A detailed look at the many reasons why your business may benefit from one

20 A future with materials handling

The trends to watch for – a detailed chat with SSI Schaefer’s Matthias Hoewer

30 A seasoned player

Al Futtaim Logistics is gearing up to absorb the many opportunities on the horizon

34 How your picking method

could lower operating cost

The answer lies in a combination of manual and automated methods

38 Cultivating positivity

A look at FedEx’s human resource success story

42 Sustainable transport

Volvo’s commitment to a sustainable future for your fleet

30

46 Omnicommerce and the

new supply chain paradigm

As traditional business methods change so must the supply chain

38

48 Shale Gas: Threat or

opportunity for the GCC?

Is this the future of fuel? How will the GCC countries that currently control the fuel market be affected?

42

58 Dubai Trade –

impressive growth

With a 94 per cent migration towards its e-services, Dubai Trade is on a growth trajectory

58

60 Unwind

An informal chat with RAKIA’s CEO – Rino Sabatino SEPTEMBER 2014 5

DP World Limited has positive six months of 2014 Global marine terminal operator DP World recently announced strong financial results from its global portfolio of marine terminals for the six months to 30 June 2014, delivering profit attributable to owners of the company before separately disclosed items of US$332 million, 40.8 per cent ahead of the first half of 2013 on a like-for-like basis.

“By 2015 we expect to have approximately 85 million TEU of capacity globally and over 100 million of TEU of capacity by 2020, subject to market demand,” DP World Chairman, Sultan Ahmed Bin Sulayem commented. “DP World is pleased to announce another strong set of first half results. The addition of new capacity and a pick-up in global trade has resulted in a return to robust volume growth, which has translated into an impressive financial performance. Our

6 SEPTEMBER 2014

portfolio is well positioned to capitalise on the significant medium to long-term growth potential of this industry and we continue to seek new opportunities in the faster growing markets.”

Group Chief Executive Mohammed Sharaf commented, “We have reported an excellent set of financial results for the first six months of 2014, delivering 11.6 per cent like-for-like revenue growth.

Encouragingly, earnings continue to significantly outpace revenue growth with 19.1 per cent EBITDA growth and 40.8 per cent EPS growth on a like-for-like basis.

The substantial investment programme that we initiated in 2012 is starting to bear fruit as new capacity aids in the delivery of stronger top and bottom line growth. We have made good progress at our recently opened greenfield projects in Embraport, Brazil and DP World London

Gateway, UK and we look forward to adding a further eight million TEU of capacity to our portfolio over the next two years, providing further opportunity for growth. Crucially, our balance sheet remains strong and we continue to generate high levels of cashflow, which gives us the ability to invest in the future growth of our current portfolio, and the flexibility to make new investments should the right opportunities arise as well as delivering enhanced returns to shareholders over the medium term.

“The near term outlook remains encouraging, however continued geopolitical issues may result in challenges as the year progresses. Overall, we believe our business is well positioned for medium to long-term growth and we expect to continue to outperform the market. We remain focused on delivering relevant new capacity in the right markets, improving efficiencies, containing costs and handling higher margin containers to drive profitability. Our strong first half performance gives us confidence in meeting full year market expectations.”

Etihad appoints new GM for Switzerland

Etihad Airways has appointed Gianni Tronza as its new General Manager for Switzerland.

In his new role, Gianni Tronza will be based in Zurich, where he will lead Etihad Airways’ expanded commercial operations in Switzerland following the introduction of daily flights to Zurich in June 2014.

Alessandro Liverani will continue to lead the airline’s sales team in the French part of

Switzerland, Geneva, and also take part in commercial cooperation projects with network partner, Alitalia.

Liverani will directly report into Tronza.

Bringing a wealth of industry experience to the airline, Tronza previously worked at American

Etihad’s statement on FOCA review process Etihad Airways is comfortable with the process of review by Switzerland’s Federal Office of Civil Aviation (FOCA) concerning the agreement to acquire 33.3 per cent of Darwin Airline.

Etihad Airways was advised in June by FOCA that changes to the agreement would be needed to secure regulatory approval.

Since then it has been working with FOCA and is amending the agreement to ensure it complies with regulations.

President and CEO of Etihad

Airways, James Hogan, said, “We are comfortable with FOCA’s review and understand and support the need for there to be absolute clarity that Etihad Airways does not, cannot and will not exercise control over Darwin Airline.

“While our initial agreement has required amendment, we are seeking, as any minority investor would, protection for our investment. This is about protection, not control.

“Etihad Regional was, and will

continue to be, majority owned by Swiss shareholders and operated

by Swiss management.”

A 66.7 per cent investment in the airline will be retained by Swiss investors and no Swiss interests will be compromised

by Etihad Airways’ investment.

“We have a high regard for the management of the business and its capability to build a stronger regional airline that increases competition and choice for air travellers, especially in Switzerland,” Hogan said.

Airlines for over 15 years, where he held various senior positions, including Regional Sales Director. Prior to joining American Airlines, he worked in managerial positions at Crossair (Swissair) and British Airways.

After graduating from the Swiss Business School and SAWI in Switzerland, Tronza completed his DBA/MBA studies at the University of Lancaster in the United Kingdom.

He also holds a Bachelor’s degree in Business Administration and a degree in Marketing, and is fluent in English, Spanish, German, Italian and French.

Peter Baumgartner, Etihad Airways’ Chief Commercial Officer, said, “We welcome Gianni to our global commercial team. His knowledge and experience in the aviation industry is invaluable and I am confident he will make a significant contribution to the growth of Etihad Airways’ operations in Switzerland as well as in Europe.”

Etihad Airways commenced operations to Switzerland in June 2004 with daily flights between Geneva and Abu Dhabi. In June this year, Etihad Airways launched its daily non-stop service to Zurich.

SEPTEMBER 2014 7

Saudi Airlines improves its business intelligence with Microsoft Saudi Airlines, among the largest airlines in the Middle East, has implemented a business intelligence (BI) solution with Microsoft Corp. that includes Microsoft SQL Server 2012, Power BI for Office 365, Windows Server 2012 and Microsoft SharePoint Server 2013 to analyse, visualise and share data in a unified way, which allows the company to have better business visibility, more engaged employees, and projected savings of millions of dollars per year in the process. This deployment is helping the company gain insight to better manage different aspects of the global aviation operations, and once totally completed, it will also provide management with the necessary consolidated insights into subsidiaries such as Saudi Cargo, Saudi Catering and Saudi Ground Services, and is uniting business information spanning across multiple systems at the airline.

“Before we worked with Microsoft, we had scattered information everywhere. We had many different business intelligence and incentive solutions, separate training and no standard platform to run all the environments,” said Muhammad Albakri, Executive Vice President of Finance, Saudi Airlines. “The new BI solution from Microsoft maximises the value of information coming from multiple systems.

We’ve started to run analyses and provide results to executives to help them track trends and react quickly and proactively.”

Beginning in 2007, Saudi Airlines spent five years on a major overhaul of its IT infrastructure to automate and integrate the airline’s core planning, scheduling, marketing and sales - including e-commerce, operations and back-office functions. It needed a business intelligence solution that could provide an integrated view of its data across its growing and expanding operations. By working with Microsoft Consulting Services, Saudi Airlines was able to implement the foundation of its business intelligence solution in just 90 days, which provided fast payback time to recoup the investment. In addition, the airline is using a Windows 8.1 app to give a consolidated view of the data for its highly mobile workforce.

8 SEPTEMBER 2014

Emirates SkyCargo lifts capacity to Los Angeles Emirates SkyCargo, the freight division of Emirates, has added Los Angeles to its network of freighter destinations across the United States, with the start of a weekly service to the city.

Los Angeles recently joined Chicago, Atlanta and Houston in Emirates SkyCargo’s US freighter network. In addition to freighter flights, Emirates SkyCargo also has belly-hold cargo services to Los Angeles, Chicago, Houston, New York, San Francisco, Seattle, Washington D.C., Boston and Dallas.

“We have a network of 10 key cities across the United States, which enables us to provide broad access to the world’s largest economy for businesses across our network, and for American businesses in other parts of the world. The US economy is rebounding and we are seeing an upswing in the demand for air cargo services,” said Hiran Perera, Emirates Senior Vice President Cargo Planning and Freighters.

“Los Angeles ranks 14th in the world and fifth in the US in the amount of air cargo tonnage processed, and handled over 1.9 million tonnes of air cargo valued at nearly US$ 87 billion in 2012, which is indicative of its importance as an air cargo hub. We anticipate good growth out of Los Angeles,” he added.

Commenting on the new service, Gina Marie Lindsey, Executive Director of Los Angeles World Airports, the City of Los Angeles department that owns

and operates Los Angeles International Airport (LAX) and two other airports, said, “Los Angeles International Airport is the primary cargo airport serving Southern California. We welcome Emirates SkyCargo to our region’s vast air-cargo-handling network of airlines, freight forwarders, customs brokers, and cargo facilities. We look forward to the economic benefits Emirates SkyCargo’s weekly freighter service will provide.”

Emirates SkyCargo uses a Boeing 777 Freighter aircraft on the route, which is capable of carrying 103 tonnes of cargo, and with its main deck door being the widest of any freighter aircraft, it’s able to uplift outsized cargo and carry larger consignments. The top exports from Los Angeles are mainly perishables ranging from fresh and frozen fruits and vegetables, chilled and frozen meat and seafood, foodstuffs, as well as personal effects, construction equipment and electrical products, while top imports range from textiles, to perishables, electronics and personal effects.

In 2013, Emirates SkyCargo transported a total of 49,000 tonnes of cargo from the United States, equalling a 134 tonnes a day, while it carries more than 940 tonnes of cargo from the US to various points across the world each week. The top three exports from the US are machinery, construction equipment and electrical products and its three top imports are apparel, foodstuffs and pharmaceuticals.

Boeing, Qatar Airways finalise order for 50 777Xs Boeing and Qatar Airways have finalised an order for 50 777-9Xs, valued at US$18.9 billion at current list prices. The 777X order, first announced as a commitment at the 2013 Dubai Airshow, was part of the largest product launch in commercial jetliner history.

In addition, the airline announced a commitment for 50 additional 777-9X purchase rights. If exercised, that would take Qatar’s 777X order tally to 100 airplanes valued at US$37.7 billion at list prices.

Qatar Airways also announced their intent to order four 777 Freighters and options for four more, with a combined value of US$2.4 billion at list prices.

“Qatar Airways continuously builds upon its successful fleet programme, and this latest announcement demonstrates the quality equipment we acquire to deliver on our signature Five-Star service,” said His Excellency Akbar Al Baker, CEO of Qatar Airways. “The Boeing 777 is the backbone

of our fleet and is highly amenable to the standards Qatar Airways upholds. We look forward to building on our legacy with the next-generation 777-9X.” “Qatar Airways took delivery of its first 777 a few short years ago, and we are honored to see this partnership continue to grow and strengthen,” said Boeing Commercial Airplanes President and CEO Ray Conner. “Today signifies a new chapter in our relationship with Qatar Airways’ endorsement of the 777X, as well as their ongoing confidence in the value of the 777 Freighter. These orders validate the marketleading role that the 777 and now the 777X will continue to play in the Middle East’s passenger and cargo market.”

The 777X will introduce the latest technologies including the most advanced commercial engine ever - the GE9X by GE Aviation - and an all-new high efficiency composite wing that has a longer span than today’s 777. The 777X family includes the 777-8X and the 777-9X, both designed to

respond to market needs and customer preferences.

The 777-9X will be 12 per cent more fuel efficient than any competing airplane, necessary in today’s competitive environment. The 7778X is five per cent more efficient than its competitor at all ranges while providing for new network opportunities. Design of the 777X is underway and production is set to begin in 2017, with first delivery targeted for 2020. To date, the 777X has accumulated 300 orders and commitments from six customers worldwide.

Boeing, an air cargo market leader, has provided over 90 per cent of the total worldwide dedicated freighter capacity. The 777 Freighter is capable of flying 4,900 nautical miles (9,070 km) with a full payload and general cargo market densities, making it the world’s longest-range twin-engine freighter.

The airplane’s range capability translates into significant savings for cargo operators: fewer stops and associated landing fees, less congestion at transfer hubs, lower cargo handling costs and shorter cargo delivery times.

Airways Aviation’s new pilot training foundation programme Airways Aviation announced the launch of its bespoke Pilot Training Foundation programme in the United Kingdom, Australia, Malaysia, the United Arab Emirates, Montenegro, Jordan and Lebanon.

The new aviation theory classes will commence almost simultaneously in the various locations and provide students, interested in pursuing a career opportunity as a commercial pilot, a unique competitive edge and a critically important initial study pathway especially for those requiring extra help and support.

Classes for aspiring commercial pilots will commence between September 1st and October 20th, 2014. A tailored curriculum has been

professionally designed and written to provide prospective students a soft introduction while simultaneously maintaining a robust and practical launch into commercial pilot training.

The Airways Aviation curriculum is based on both European (EASA) and Australian (CASA) requirements and subject matter incorporates substantive introductions to all of the key disciplines including Aviation English, Aerodynamics, Navigation, Meteorology, Human Performance, Flight Rules and Air Law, Aircraft general Knowledge and Operations, Performance and Planning.

Over the next 20 years Boeing and Airbus project a demand in excess of 35,000 new passenger and freight aircraft with each of these requiring

numerous flight crew and a multitude of other support resources. With the expansion and upgrading of airline fleets globally, Airways Aviation is tracking growth and closely monitoring the current and projected aviation industry needs as key indicators of future pilot demand.

SEPTEMBER 2014 9

COUNTRY REPORT - RUSSIA AND THE CIS

UNTAPPED

10 JULY/AUGUST SEPTEMBER 2014 2014

POTENTIA

Russia’s low GDP figures are related to faulty infrastructure, lack of modern logistics facilities as well as border issues have all contributing to a less than perfect logistics business environment. The government needs to work with the many logistics businesses to find a solution. Frost and Sullivan’s Alexey Volostnov, Business Development Director for Russia provides a detailed picture

R

ussia is the world’s largest country in terms of area. It covers 11 time zones that have completely different geographic, cultural and climatic features. The biggest challenges are created by its faulty infrastructure and lack of modern logistics technologies. In addition, the transformation is being slowed by bureaucratic hurdles, including customs clearance. The logistics infrastructure is to be extended particularly in the hubs of Moscow and St. Petersburg. Nonetheless, Russia intends to become a hub between Asia and Europe. Russia’s biggest export partners are the Netherlands, Italy, Germany, China, Ukraine and Turkey. The most imports in 2013 came from Germany, China, Ukraine, Japan, Korea and the United States.

Brief economic outlook According to the Russian Federation social and economic development forecast through 2030 prepared by the Russian Economic Development Ministry, the country’s GDP is expected to grow on average by three to 3.2 per annum according to a conservative scenario, while prolonged stagnation is also possible. This growth – unacceptably low as it seemed recently against the required

SEPTEMBER 2014 11

COUNTRY REPORT - RUSSIA AND THE CIS

projections for Russia. In the past, the lack of comprehensive structural reforms was masked by a growth model based on large investment projects, continued increase in public wages, and transfers – all fuelled by sizeable oil revenues. Recent events around the Crimea crisis have compounded the lingering confidence problem into a confidence crisis and more clearly exposed the economic weakness of this growth model.

In 2013, frail domestic demand was a drag on economic growth. Then, anticipation that private investors would start investing more during the second half of 2013 did not materialise.

The lack of growth-supporting structural reforms and decreasing profit margins weighed heavily on business sentiments and pushed down industrial and investment activities in Russia. Consumption remained the main growth driver, supported by fast credit and wage growth, but its pace of expansion more than halved compared to 2012.

However, external demand recovered as expected in the second half of 2013, while exports grew strongly.

Logistics market

six to seven per cent today looks nearly unattainable. The reason behind it is not the dependence of the economic growth on the current pricing environment in global markets featuring Russian exports, but rather due to existing internal barriers, key among which is under developed infrastructure, including the transport and logistics backbone.

12 SEPTEMBER 2014

Russia’s economy is navigating an economic downturn with real GDP growth slowing to an estimated 1.3 per cent in 2013 from 3.4 per cent of 2012. The lack of more comprehensive structural reforms has led to the erosion in businesses’ and consumers’ confidence, which became the decisive factor for the downward revision of the World Bank’s November growth

The need for further development of the transport and logistics service market is obvious to all players. Today, neither the cost level, nor the quality of services offered (even basic ones) meets the requirements of companies and the country’s development objectives. Aggregation of companies, along with the strengthening of cooperation and partnerships across all players, serves as an important lever in improving the quality of logistics services. However, the questions remain open as to which decisions are required from the regulator and what joint efforts need to be taken by market participants to realise the potential of the transport and logistics market.

The level of logistics spending in Russia’s production sectors today is one of the highest in the world. The

COUNTRY REPORT - RUSSIA AND THE CIS

cumulative internal and external shipping and logistics costs in Russia amounts to about 20 per cent of the country’s GDP, against China’s 15 per cent and seven to eight per cent across Europe. The difference between Russian and global indicators can be partly explained by the size of the country and its vast distances, however the low efficiency of its transport and logistics system is still key. According to the World Bank, in 2014, Russia ranked 90th out of 160 countries by level of development of the current logistics system, sandwiched between Sri Lanka and Uruguay. Even more importantly, other countries with vast territories showed much better results: the United States placed ninth in the rating, Canada landed at 12th, Australia 16th, China 28th, Brazil 65th.

Russian infrastructure Road density is very thin at 40 metres of road per sq kilometre. This is the result of the sparse population of many regions in the country, among other things. Nonetheless, most of freight transports between Western Europe and Russia are done by road - through Poland and Belarus or over the northern route through

Relative logisticcs costs in Russia are higher than in other countries…

Logisticcs costs (% of GDP) 20

Russia Brazil India Italy France

15

10

China

Japan

Germany

Russia’s infrastructure is especially deficient in terms of maintenance and modernisation. The lack of multimodal goods transshipping hubs and the current transport systems generate few network The level of logistics effects for logistics service spending in Russia’s providers.

Fuelled by Russia’s production sectors economic growth, the demand for transport today is one of the services has jumped highest in the world. considerably in the 2000s.

In 2013, the market volume The cumulative for logistics totaled about internal and external US$ 80 billion. An average growth rate of 20 per cent shipping and is forecast. In particular, transports between Europe logistics costs in and Russia will continue Russia amounts to to increase in years ahead. about 20 per cent of A large share of these transports will be exports the country’s GDP of Russia’s abundant natural resources, including crude oil and natural gas. The Russian logistics market is characterised by lack of competition, little transparency and limited logistics know how. Many companies have high storage and transport costs. At the same time, the share of outsourcing in logistics is constantly rising. Experts say this share amounted to about 20 per cent in 2013.

For this reason, demands for more and more sector-specific and innovative logistics concepts are growing. Russian …While overall logisticcs efficiency is logistics service providers still focus also below global average primarily on the core services of transport and storage. The inclusion Logisticcs efficiency rasing 2014 of value-added services like assembly Germany 1 processes and packing is in its infancy.

The Netherlands Broad development potential is seen 2 for contract logistics in Russia. Some Belgium 3 logistics service providers are already UK 4 offering services that extend beyond ...... product transshipping.

Poland and the Baltic states. A growing amount of freight transports passes through European harbours like Hamburg and then through harbours in the Baltic States, Finland and northern Russia.

Once in the country, freight is transported primarily by truck and, to a lesser extent, by rail.

The Russian rail network is about 85,000 kilometres long, the world’s second largest. Within Russia, rail transport makes up the largest share of freight transport at 83 per cent. The focus of rail transport is both shipments between Russia and Europe and through transports from Europe to Asia via Russia. The transSiberian railroad plays a particularly interesting role here. Thanks to this link, shipment times of goods between Pusan and Helsinki can be reduced from about 47 days by ship to around 16 days. The potential of the transSiberian railroad is about 300,000 TEU per year. But it cannot really put its strengths to use at the moment.

The reasons for this include rates and handling procedures by the Russian railroad company, bureaucratic hurdles particularly customs agencies and the introduction of a value-added tax on transport services.

EU USA

88

5

Kazakhstan ......

90

0 0

5000

10 000

Russia

15 000 20 000 Nominal GDP 2011 (SB) Logistics efficiency benchmarking in Russia KPMG, World Bank, RBC Research, BCG

Logistics centres in Russia The most important logistics centres in Russia are still Moscow and St. Petersburg. But other economic centres, including Samara, Nizhny Novgorod, Kazan, Yekaterinburg,

SEPTEMBER 2014 13

Novosibirsk and Rostov, are becoming increasingly important in the regions as logistics centres because of growth in retail and industry. The government views expansion of the transport and logistics sector as an opportunity to diversify the economy. For this reason, large investments will be made in the expansion of existing logistics centres and the construction of new ones, especially in the regions.

The transport and logistics services market is, in essence, that part of shipping and logistics activities that is performed by specialised companies. As of 2012, the volume of the Russian transport and logistics service market was estimated at US$ 80 Billion (excluding the pipeline transport).

At that, the relative weight of the market was rather low: the share of outsourcing in the overall volume of transport services remains negligibly small. For the most part, companies continue to serve themselves, performing shipping and logistics operations using their own internal divisions. The market itself is made up of independent logistics and shipping companies, as well as subsidiaries of large cargo shippers.

The Russian market is dominated by the integrated transport and logistic service model, while in the majority of mature economies (and especially the United States) players tend to focus on specific parts of the pyramid. A classic example of a Russian transport and logistics company is Russian Railways (OAO RZD). The company invests in and manages railway infrastructure, owns the rolling stock (through affiliated and subsidiary organisations), provides basic transportation and 3PL-services (through affiliated and subsidiary organisations, including Tran container and OAO RZD-Logistics).

Upon acquiring GEFCO, Russia’s largest shipper also entered the 4PL segment and strengthened its 3PL presence.

14 SEPTEMBER 2014

Over the past three years, Russia’s transport and logistics market has been growing at more than 19 per cent per annum, with the freight forwarding segment growing the fastest. Over the next 10 years, the Russian transport and logistics service market is expected to grow at some 15 per cent p.a. This growth will be supported by a number of key drivers: Growth of cargo turnover and increasing complexity of logistics chains (primarily with high valueadded cargoes); increased share of multimodal and intermodal operations Increased share of outsourced services, as a result of transfer of transport and logistic assets and services to specialised companies Transformation of the cargo turnover structure, including an increase in the share of high valueadd cargoes from 12 per cent to 17-20 per cent in the overall volume of shipping operations throughout Russia. The growth in turnover of high value-added cargoes has a multiplier effect in the transport and logistics services market, as it creates additional demand in the warehousing, 3PL, and 4PL segments. It would also be safe to assume that the commodity cargo shipping and logistics segment and the high value-added segment will show different dynamics.

Commodity shipping lies at the core of the Russian transport and logistics service market. For the basic transportation service structure, the share of commodity cargoes today is 88 per cent. In long-term perspective, this share is expected to drop to 80-83 per cent, yet commodities will continue to be the dominant type of cargo in Russia.

The currently existing offer in this transport and logistics service segment is limited basically to shipping and processing (2PL) by OAO RZD, other railway operators, freight forwarders, port operators and maritime shippers.

This trend is expected to continue in the longer term.

Complex logistics The demand for complex logistics services in the high value-added cargo segment is growing. This can be explained by both the increase in the consumption of high value-added products and the fact that shippers of such cargoes are increasingly using the services of specialised logistic companies. The saturation of traditional consumer markets (primarily in Moscow) and further development of regional FMCG markets (distributors being pushed out by producers) leads to more complex logistical setups.

At the same time, the development of the segment is hindered by a limited scope of services offered by Russian logistics companies. The level of logistics services for high valueadded cargoes remains low due to a number of factors: Low quality of the basic service (both in terms of transportation and terminal and storage infrastructure) Insufficient scale of logistics The Russian rail operations These are the reasons why network is about major players (e.g., X5 Retail Group and Magnit) usually 85,000 kilomefocused on the development of tres long, the their own logistics competences.

A lot of cargo shippers are world’s second developing their own asset bases, due to the lack of relevant largest. Within 3PL offer providing quality Russia, rail solutions for their tasks at an transport makes acceptable price. For instance, Magnit’s own truck fleet (5.5K up the largest vehicles) exceeds DB Schenker’s Russian fleet (200 vehicles) by share of freight 28 times. transport at 83 At the same time, there are many players – such as the per cent Russian FMCG companies – that do not have highly developed logistics competences.

They are waiting for a quality offer from specialised companies to further strengthen their regional presence. Essentially, in both of the aforementioned cases, FMCG companies are seeking high-quality

COUNTRY REPORT - RUSSIA AND THE CIS

Investments into transport infrastructure (% of GDP)

Gap to countries with developing infrastructure

8

-64% 6

6,1% Gap to countries with mature infrastructure

4

-27%

2

2,9%

3,0% 2,2%

0

EU

USA

Russia

China

Transport infrastructure investments in Russia ad abroad Source: Ministry of Transport BCG

logistics services. Some players would be ready to outsource only part of their logistic activities, while others would fully entrust themselves to a logistics specialist. This means that the dynamics of the transport and logistic service market in the high valueadded cargo segment depends mainly on logistics players themselves: would specialists, once the scale is right, be able to offer a high-quality service.

Today, Russia’s multimodal transport and logistics terminals are not efficient enough, which seriously hinders the development of logistics.

Such terminals are widespread across Europe and America – helping to optimise the existing logistics chains and reduce cargo processing and shipping times. Multimodal terminals serve as cargo transfer and storage points. Available storage capacity helps hold cargo until the best shipping time, as well as bundle certain cargoes. This entire put together helps significantly improve the use of transport modes, trucks in particular.

In terms of available storage capacity, Russia is also significantly behind the rest of the world. Even when it comes to Moscow, which is considered the most developed market in terms of warehousing infrastructure; its available capacities are several times below any other Western capital. Obviously the situation in Russia’s other regions is even worse.

In conclusion Logistics as a management system, through engagement of new resources, may become an effective tool to stimulate the country’s

0,4

Moscow London

0,8 0,9

Budapest

1,3

Prague

1,6

Warsaw Madrid

1,7 5,1

Paris 0

1

2

3

4

5 6 (Sqm/# of residents)

Access to warehousing capacities in different eUROPEAN CITIES kNIGHT fRANC RESEARCH 2013

economic growth. The potential to improve the efficiency of the Russian transport and logistics system is huge. If the country manages to decrease logistics and transportation costs of the national economy from the current 20 per cent to the global average of 11 per cent of GDP, the freed-up financial resources will amount to some US$ 180 Billion.

The potential to further develop the transport and logistics service market is being blocked by the following key issues: Low quality of the basic transport service Lack of competence and insufficient business scale of logistics companies Underdeveloped transport infrastructure, in part due to lack of investments Lack of a high-quality and efficient logistics infrastructure, primarily terminals and warehouses Customs, tariffs and legal barriers at the borders Shippers should focus jointly with transport and logistics companies on improving the quality of planning of transport and logistics operations and strive for stronger integration of IT systems.

Transport companies should ensure gradual change in terms of the basic service and customisation of the customer offer. Major logistics players should focus on consolidating the market and creating partnerships to improve quality, efficiency, security and the customer orientation of logistics services, as well as on developing a high-quality and efficient logistics infrastructure (primarily in the regions).

Thus, to achieve a proper transformation of the transport and freight forwarding market into an integrated logistics services market, Russia will need the joint efforts of the government, and the market players: shippers, transport players and logistics companies.

SEPTEMBER 2014 15

FEATURE

Is it time to hire a

Materials Handling Consultant At the right time and for the right reasons, a Consultant’s contributions are invaluable.

Cliff Holste, Material Handling Systems Editor with Supply Chain Digest explains why your business may need a materials handling consultant

16 SEPTEMBER 2014

A

ll too often consultants are brought in at the wrong time for the wrong reasons.

However, utilizing an internal resource person to lead the project has its own set of issues.

By considering the following questions you can determine if you’re ready to bring in an outside resource As we all know change is hard!

However, sitting on the sidelines will not move the company forward. All warehousing and distribution companies have staff members who are experts in managing and directing the company’s business. Most are familiar with typical material handling equipment i.e., forklifts and conveyors, but have little or no experience with automation. Fortunately, industry experts are readily available to fill the void. But before tapping into that resource you would be well advised to do your homework. At the very least, consider the following three key questions:

Do you know where you’re business is headed?

It’s okay to bring consultants in to help figure out where you need to go relative to DC operational improvements. It’s not okay to have them take you there before you have figured out just where“there”is. In other words – first get your ducks in a row; get educated about what the improvement possibilities are by going to trade shows and having discussions with peers from other industry related companies.

Should your own staff be doing the job?

Consultants often get asked to do things clients are perfectly capable of doing on their own. It makes no sense to hire a consultant to recommend potential improvements that in-house personnel have already identified.

This is often referred to as “low-hangingfruit”Although a second opinion from an independent source may be of some value its

way more cost effect to fix the obvious stuff before paying someone else to tell you what you already know.

Have consultants succeeded previously?

Consultants will only be as good as your organisation will allow them to be. If bringing in a consultant just never seems to quite work out there may be internal issues (strong resistance to change for example) that need to be resolved first. Many good projects go down the drain because of the FUD factor – Fear, Uncertainty, and Doubt.

Sometimes it helps to visit installations where automated technology has made substantial improvement. The point is that the equipment and system technologies that will be most beneficial are not new.

If you are seriously considering automating DC operations you will definitely need assistance from an experienced industry

SEPTEMBER 2014 17

professional. In general, the need for automation emerges out of some chronic pain such as rising cost, and/ or customer service troubles.

Evaluation and selection While some companies automatically turn to industry consultants and/or service providers with whom they’ve had success in the past, others go through a formal evaluation and selection process. There is broad range of material handling consultants to choose from. Their capabilities, scope, and experiences vary widely. They include:

18 SEPTEMBER 2014

Former warehousing and distribution operations executives.

Academics with PhDs. Industrial Engineers.

Independent supply chain logistics and materials handling industry experts (sole practitioners and large firms).

Systems Integrators whose operations range from small engineering firms to very large manufacturing companies with hundreds of employees, and everything in between.

Selecting a consultant depends on the scope of the project. If you’re

trying to put in place a network of distribution centres, you’re probably better off going with a large supply chain logistics firm that has networking and DC automation system experience.

Many small to medium size organisations don’t have the internal resources required to do network analysis, and all the number crunching that goes into system modelling and proving the viability of the overall logistics plan.

If you need a survey of your existing DC operations, looking for productivity, throughput, and/or efficiency improvements, your best bet may be an independent industry expert. APMHC (Association of Professional Material handling Consultants) is a professional society composed of individual consultants who are active in the material handling field.

Another option would be a material handling system provider with whom you, and/or others in your specific industry, have had previous successful experience.

However, when working with a system provider you may get proposed solutions that are limited to what’s in their“tool box”and not get the objectivity and diversity of thought and input that you can get from an independent consultant.

Finally, if you are looking for single source design-build responsibility there are several domestic and international system integrators who are fully engaged in developing and providing automated material handling systems on a turn-key basis. They are prepared to take total responsibility for design and implementation. See the following top 20 list as published in a 2013 article by MMH.

Be specific about goals When evaluating potential service providers, be very specific about your goals and objectives. Find out what they have done for similar companies,

FEATURE

and what results they’ve achieved.

When interviewing consultants pay close attention to what they know about your company.You want to be sure that they are familiar with the peculiarities of your business model.

For example, as a minimum, have they; studied your web site, know your customers and competitors, visited a typical retail outlet (if applicable).

Also, it’s equally important to pay attention to how well the consultants, system integrators and other service providers listen to what you say. For sure they will want to impress you with how clever they are, but they should listen carefully to explanations of your problems before giving you the benefit of their wisdom.

Not given the impact a consultant can make on your business you must dig much deeper than reviewing their sales brochures and bound proposals to get a true picture of a potential consultant’s character and capabilities.

It’s crucial to clearly set expectations and deliverables from the get-go. Even so, it’s almost guaranteed that the scope of the consulting engagement will expand as new requirements emerge. Therefore, if you are

concerned about this possibility, you might want to consider negotiating a not-to-exceed or fixed price agreement instead of an open ended pay-as-you-go deal. Either way, there should be an escape clause just in case premature termination becomes (for whatever reason) necessary.

If you have decided to hire an outside, independent consultant for your changeover project the following guidelines, extracted from Logistics Resources International, Inc. (http:// logisresources.com/ ), may be helpful in your selection process: Insist on solid, experienced, and well-qualified consultants: When hiring a consulting firm, get a high degree of commitment from the firm on the skill level of consultants to be used in the project. Otherwise a senior partner can come in, sell the deal, but then you get IEs and/or MBAs fresh out of school who barely know what a forklift is. Once you know who you will be working with, make sure there’s good chemistry between the consultants and your team.

Look for individuals who fill in any gaps that your team may have.

Don’t look for a clone of yourself: Look for expert advisors that think

differently than you do. Try to find individuals who will bring up potential solution that you would not normally consider and by doing so contribute to a much stronger result.

Establish an open atmosphere: To successfully work with consultants, establish a strong relationship and set an environment and tone where, not only are you free to challenge, but where you are expected to challenge each other. There has to be a real open environment of sharing and feeling that you’re in this together.

Keep the executive staff informed: It’s critical that information flow back and forth between the planning team and the executives. This will help to promote ownership and buy-in and greatly reduce the chances of getting off track and consequently presenting a project that they will not support.

When interviewing consultants pay Final thoughts In its booklet“Your close attention to Secret Weapon”, Deloitte Consulting (www.deloitte. what they know com/us/consulting) about your comsuggests making this speech to your selected pany. You want to consultant prior to signing the agreement: be sure that they I want ultimate candor. are familiar with the This means that we are peculiarities of your on the same team. We will act that way and share business model information. There is no

problem you can bring to me that will get you fired.

If we have a problem, and you believe that I am the source of that problem, you must tell me. Not my team. Not my boss. Just me!

In the event that we have a problem and you go over my head without bringing it to my attention and telling me that you feel I am not responding, I will fire you – period.

Perhaps the above provides a clue that consulting engagements are serious business not to be taken lightly. -www.scdigest.com.

SEPTEMBER 2014 19

COVER STORY

20 SEPTEMBER 2014

COVER STORY

Materials handling is an essential part of industry, businesses and eventually the economy. SSI Schaefer, the world’s top materials handling company would then be the best company to target to talk about trends and the future

M Matthias Hoewer

aterials handling is an integral part of the logistics and supply chain industry. GSC spoke to Matthias Hoewer, Managing Director of SSI Schaefer, Middle East with a different set of queries relating to a few top factors (either challenges or trends) facing the industry and affecting its future in the region. Definitely an interesting read.

When we take a look at the materials handling industry in the region what with its transient workforce, the many companies involved face daily challenges in the form of inadequate labour pools for many reasons, one of them being the industry’s lack of appeal, an undersized

SEPTEMBER 2014 21

COVER STORY

and poorly connected training and education network in addition to inadequate skills in the existing and entering workforce.

Perhaps it is time for companies to create some kind of ideal initiatives with possible involvements with government/s in the country and region to undertake collectively to solve these issues? Matt Hoewer, Managing Director, SSI Schaefer says,“Looking at the area that SSI Schaefer Middle East and Africa is covering in terms of projects, there is a significant difference in the requirement of the quality of workforce from country to country. To find the right solution for our customers in the respective countries, we also evaluate this as a factor for the decision making process and the assessment of which system we are going to propose. Training and documentation of a project prior to the handover is the key to a successful operation E-commerce is still for our customers.

With a growth beginning to start of e-commerce up and it remains companies, businesses have to adapt their secondary with ways of servicing the major retailers their customers and eventually how their at this point. The products are handled typical Middle East Hoewer says,“We are a strong position customer still enjoys in within our group to be one of the the “event” of a leading suppliers for shopping experience e-commerce solutions globally. This helps us to adapt solutions for the Middle East that are working successful in other similar markets for a number of years. At this point e-commerce is still

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COVER STORY

24 SEPTEMBER 2014

COVER STORY

beginning to start up and it remains secondary with the major retailers at this point. The typical Middle East customer still enjoys the“event”of a shopping experience.

Being a veteran of the region sets SSI Schaefer apart in a number of ways, it is ranked number one in the materials handling world internationally, Hoewer says,“Our strategy is clearly a one-stop-shop solution for our customers. Of course in selected projects we are also combining specific products from third party suppliers into our solutions, but overall we do believe that a single point of contact has the biggest benefit for our clients. It is easy to share cost or split contracts on a monetary basis but impossible to share How real would responsibility within a a possibility of project.

“Regionally SSI having robots in Schaefer Middle East the warehouse be uses the same tools and and an affordable resources than we use globally to design and robotic order plan the facilities for our clients. Every product picking system that is available for our to support high clients in Europe or the US is also available in throughput the regional markets.

In regards to retail applications which require diversified handling systems within a warehouse facility, we are in the luxurious position to be able to pick from a wide range of already standardised and well proven solutions. This ranges from conventional storage systems or integrated conveyor solutions and ends with fully automated warehousing facilities.

Moving forward, there is an industrial outlook that envisions a more densely populated country as it grows and develops and coupled with the promise of all the good things the Expo 2020 hopes to do for the country’s economy, companies are preparing themselves for providing a wider variety of products to

SEPTEMBER 2014 25

COVER STORY

consumers in smaller quantities and a high percentage of home delivery with full knowledge of the high cost of ‘the last kilometre distribution’. The future would call for an open-shared, self service kiosk that could be operated and used by multiple retailers. How would the materials handling industry be able to support a future possibility of the above option? Hoewer says, “Similar exercises have been done in Europe about eight to 10 years ago with very limited success. To create automated pickup or returns stations in urban areas sounds interesting but creates a number of challenges in terms of packing sizes and weights (a CD or DVD requires different handling from a larger box with shoes or clothing), peak performance

26 SEPTEMBER 2014

requirements (we all work from eight in the morning to five in the evening, which creates large peaks for pickup in the evening hours) and lastly also health and safety requirements (untrained users will have to operate automated machines).

Ultimately the service levels that could be provided to customers with conventional pickup locations in malls or supermarkets succeeded the experience from automated locations.

As the industry is big on embracing technology, with the advent of Google glass and other wearable computing equipment poised to become mainstream very soon, can we expect a warehouse with wearable technology as commonplace. Hoewer says,“I see a very limited number

of applications that could allow wearable computers to be used in the warehouse environment. It is a very long way from a consumer product that is used for one to two hours a day to an application that is used for more than eight hours. Battery life, wearing comfort, light conditions in a warehouse, working conditions at 25°C and more all have a major impact on the lifetime of these systems and applications. Just recently released research data indicates that over 50 per cent of the users that operated under Virtual or Augmented Reality felt sick or uncomfortable after continuous use of just 60 minutes. Questions of health and safety with reduced peripheral vision also need to be addressed. So you see I am a bit skeptical on this new technology entering the warehouses any time soon also due to the fact that I wrote my university thesis on this exact topic over 10 years ago and it was considered a“hot topic” back then as well. Ten years on we are still doing the order picking in the non-virtual reality.

How real would a possibility of having robots in the warehouse be, then and how real is an affordable robotic order picking system to support high throughput? “SSI is definitely one of the leading suppliers of robotic warehousing solutions worldwide. In markets with very high cost for warehouse operators and staff, robotic solutions are an alternative to conventional picking. Robotics can be very efficient in an environment with standardised processes. This is why for example automotive manufacturing today is a highly robotised process.

The moment where flexibility and exceptional processes are required, a robot cannot beat the human.

Fortunately nine out 10 processes in the logistics industry still require human interaction. Will this reduce over the coming years? Absolutely yes, but robots will never be able to ultimately replace human knowhow for every single task within a warehouse facility.

600 55 55 54

customercare@dubaitrade.ae

28 SEPTEMBER 2014

COVER STORY

SEPTEMBER 2014 29

FEATURE

d e n o s a A se

lp ayer

30 SEPTEMBER 2014

Al-Futtaim Logistics has been a part of the logistics industry for a while now. With businesses moving ahead at an increasing pace in the country, the company is gearing up to ensure it manages to stay on top of competition when it comes to acquiring all that is coming up

FEATURE

becoming a hub, and its position in the global fashion arena is only going to become more central day by day.“When you consider the fact that the UAE is expected to host over 25 million visitors by 2020, the Emirate’s growth will be exponential for the general advantage of all. We expect to grow accordingly, and have started focusing more on fashion logistics specifically, with the aim of becoming a major logistics player in line with the growth prospects.”The recent announcement of the India Fashion Week being moved to Dubai is just an example of how close to the ground the company’s ear for business is. Here is an excerpt of the conversation GSC had with AlFuttaim’s Kumar.

What is the current status of the materials handling business in the region?

The GCC region always has an edge over others due to the fact that it strategically connects the globe for business and with the 2020 Expo and FIFA World Cup 2022 in Qatar on the horizon; demand for materials handling business has noticeably increased.

E

xpo 2020 is a major event, and clients across all sectors, have already begun to make preparations to leverage their businesses.“We expect the event to increase the visibility of Dubai, as well as of the entire region, and the number of people expected to visit will definitely help the already booming retail market. In

addition to this, what we hope to experience with Expo 2020 is the growth of fashion logistics, especially in light of the fact that top fashion designers are now coming to Dubai,”says Raman Kumar, Acting Managing Director and Finance Manager, Al-Futtaim Logistics.

Although Italy and France remain the home of the fashion business, Dubai is

How much would you say is dominated by older more established materials handling companies?

Established materials handling companies definitely have leverage over the newer ones as they already have strong equity in the market. But at the same time, with business increasing and considering the growth factor being high, lots of new materials handling companies have emerged in the market. Dubai, being the epicenter of business in the Middle East enjoys the bulk of the business with a significant proportion of inflow and outflow of trade. It is very important that the materials handling company makes a strong and valued contribution to industry growth, whilst simultaneously raising the benchmark for excellence.

SEPTEMBER 2014 31

Where are the industry’s needs headed?

With so many players around the market, the client is spoilt with choice. Hence, to make a significant mark in the market we need to crucially address over and above the client’s expectation through reduced lead times, innovative solutions and smart customer service (which is Al-Futtaim Logistics’ particular forte). Technological upgrades to our business systems have enabled us to deal better with this expansion and effective handling. The business should always provide value added solutions with cost effective.

32 SEPTEMBER 2014

Could you tell us in detail about the process from start to finish about customising a solution for a potential client?

Customising our services as per the client’s requirement has always been a core area of our business. At Al-Futtaim Logistics, we are well equipped with outstanding talent

and resources who advise clients and their key role is to understand the actual needs of the clients and devise a solution which is cost effective and adds value to their respective business. Al-Futtaim Logistics has implemented innovative solutions to the third party logistics industries. AlFuttaim Logistics has received Integrated

We expect to grow accordingly, and have started focusing more on fashion logistics specifically, with the aim of becoming a major logistics player in line with the growth prospects

FEATURE

Management Systems (IMS) certification, in accordance with international industry standards, ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007.

There are two methods in place that provides regular customer feedback across both business to business (B2B) and business to consumer (B2C) markets, as well as individual clients and the end customers.

This allows us to have a very clear idea of what needs to be improved or changed in order to achieve our objectives. The B2B surveys are conducted independently by a third-party research services company. The two independent surveys research customer satisfaction at different contact levels; the first is the decision-maker, and the other, the end user. It is critical for Al-Futtaim Logistics to have feedback from customers who are decision makers, as they would have commercial interests in mind, and of course, the end user must have a sense of user efficiency. Leveraging the results of these surveys allows us to benchmark our performance and work toward exceeding customer expectations.

Moving forward, how does Al-Futtaim Logistics research the regional market to know what are the new solutions you need to start offering your clients?

Al-Futtaim Logistics invests significant time in research to evaluate the ongoing trends and demands in the market whether it is a technological advancement, or improving the range of services offered to our customers which leverages our ability to provide competitive solutions to our customers.

The GCC logistics sector represents about USD$35 billion, with the major contribution from Saudi Arabia, the UAE and Oman. In the UAE, there is an air-sea concept when it

comes to logistics, whereby a company that brings a product by sea can warehouse on location. In the second leg of the journey, the product is air freighted to other destinations in Europe and the rest of the world. Sea-air shipment is growing in the region at a rapid pace due to the lead time and efficiency gains and Al-Futtaim Logistics is able to contribute to this requirement with our local presence in key ports and airport locations in the UAE. There is also growing interest in Egypt and the Levant, and our facilities at Jebel Ali is another factor that that gives us an edge to extend our offering to Middle East, North and East Africa.

SEPTEMBER 2014 33

FEATURE

How your picking method could lower

operating

cost The key to lowering cost is deploying a combination of manual and automated picking methods.

Stationary pick and pack methods outperform walk and pick operation, says Cliff Holste, Material Handling Systems Editor with Supply Chain Digest

34 SEPTEMBER 2014

A

t a time when the focus is on adopting more automated processes in the DC, it’s important for system planners and managers not to lose sight of the benefits improving manual picking methods can provide. For example, in discrete order fulfillment operations that ship product to the same locations on a recurring basis, Product-to-Person technologies may offer a greater range of control, accuracy, and efficiency at a minimum cost.

In a typical Product-to-Person system (also referred to as put system) instead of pickers frequently walking past products that are not needed, lift truck drivers

retrieve containers and/or pallet loads of required products and deliver them to a put order fulfillment zone. Each zone is equipped to serve several different store/customer orders. The operator assigned to that zone is directed to “pick and pack” the required quantity of the

product into customer specific, bar coded shipping cartons. RF scanning, Put-toLight, and Voice Directed technologies (or some Multi-Modal combination thereof) can be used to direct the operator and to insure inventory and order fulfillment accuracy.

In large facilities (+300K sq. ft.) it may be cost effective to deploy some type of integrated mechanised or automated delivery system, i.e., conveyors, automatic storage and retrieval system (ASRS), or automatic guided vehicle (AGV) network.

The simplicity of computer directed Put Systems yield many benefits The major benefits associated with put systems include greatly reduced picker walk time which equates to higher picker productivity, and increased product storage capacity. In a put configuration,

SEPTEMBER 2014 35

FEATURE

required products are brought to the operator. Therefore, the order fulfillment staff does not need to travel throughout the facility.

Further, by eliminating dedicated pick faces there is no need for slotting and re-slotting.

Batch picked items are directed to a consolidation/sort area, which employs a put type system. Here case/item quantities are distributed across multiple positions following the display unit “put to” instructions, thus building discrete orders in their respective pack locations.

There are several well established standardised Product-to-Person systems that are available such as, horizontal carousels, vertical carousels, vertical lift modules, miniload ASRS, and Automatic Guided Vehicle (AGV) which can virtually eliminate all picker travel time.

Note: In the past few years a new generation of AGVs has come to market with flexibility improvements that make them much more suitable for DC deployment including case (and piece) order picking as well as basic transport functions. These

advances include much more sophisticated controls, allowing flexible and dynamic movement paths, and in some cases “optical” guidance systems that enhance flexibility and safety.

Pick rates for put systems are typically higher than conventional discrete order picking systems where there is a pick face for every SKU. Based on industry statistics, operations that migrated to put order fulfillment can increase picking rates from 1.5 to three times depending on the system configuration.

However, while a put system may be great for slow movers, it may not be ideal for fast movers.

Still, based on the Pareto Curve, where 20 per cent of the SKUs equate to 80 per cent of the volume, improving picker productivity for the remaining 80 per cent of the SKUs would most likely prove to be a good investment strategy.

In some cases distributors are deploying horizontal carousels to handle slow movers. For example – Coty Inc., the world’s largest

fragrance company, found that while its 900 slowest moving SKUs amounted to only about two percent of total volume, they led to substantial bottlenecks in order processing. Coty implemented two 65 Deploying a foot long, five-shelf, combination light-directed horizontal carousels, which led to of manual and much more effective automated order picking operations and fulfillment methods storage density for those slow movers. may be the key to It is noteworthy that carousels are used obtaining the extensively in service lowest overall parts distribution – an environment often operating cost. characterised by huge numbers of mostly slow moving SKUs. Logistics Consultants, Industry Experts, and/or System Integrators can do the ROI analysis.

Light-directed Put sortation system Put-to-light and/or Pack-to-Light are variations of put order fulfillment systems. Put-to-light commonly refers to the distribution of a product across multiple locations, where each location contains a pallet load, container or tote that is associated to an order. Pack-to-light is more specific because it implies that the location holds the shipping container that is delivered to the store/customer.

Conclusion So while put systems offer excellent benefits for many general merchandise distributors, automated technologies that bring products to the picker/packer can provide enhanced benefits for specific operations. It does not have to be an either or situation. Deploying a combination of manual and automated order fulfillment methods may be the key to obtaining the lowest overall operating cost.

-www.scdigest.com

36 SEPTEMBER 2014

INTERVIEW

Cultivating positivity FedEx really puts its people where they are supposed to be in a business - first. David Ross, Senior Vice-President of FedEx Express Middle East, Indian Subcontinent and Africa Operations tells Global Supply Chain why this policy is the reason behind the company’s success 38 SEPTEMBER 2014

INTERVIEW

the Great Place to Work list internationally and regionally a number of times, it only made sense to find out the nitty gritty on their people first policy.

What is the secret behind making the “Great Place to Work” list both internationally and regionally?

David Ross: It is always an honor when FedEx is named a Great Place to Work in the UAE or any other country in the world. In a service industry, you are only as good as the people who deliver the service. We know that it is our 300,000 team members across the world that really set us apart.

FedEx was founded on the concept of“people first” which is emphasised in our People-Service-Profit (P-S-P) philosophy. The company takes great effort to uphold the P-S-P culture, which is based on the strong belief that team members come first not just because it is the right thing to do, but because it is good business practice. When the needs of our people are taken care of, they in turn will serve customers passionately and make every FedEx experience outstanding.

We at FedEx always strive to create and maintain an environment that brings out the best in our most important resources – our people. Our people have helped us earn many prestigious awards, from providing outstanding service to being a world-class employer. This really is a testament to our ability to integrate best practices at a local level while instilling the global FedEx culture and ‘people first’ philosophy.

W

hen was the last time you heard someone praising his or her company because of all the care they take of its employees, where their needs are given the validation they deserve and the work environment is not just how many hours you put in. Somewhere where human

beings are treated as they are supposed to be treated - as human beings. Honestly, it’s rare in this part of the world. You’ll only find multinational companies that go the extra mile in understanding the needs of their most important resource and accommodating their lives into the work environment for a better future together.

FedEx is one such employer. Having made

What is the work culture at FedEx? The people first philosophy significantly contributes to the FedEx reputation as a great place to work and has been the key to providing a safe, diverse and rewarding environment where our people have opportunities to grow and succeed.

At FedEx we have a very open culture and our two-way open dialogue with team members constantly tells us what

SEPTEMBER 2014 39

is working and where we need to improve.

Managers listen to their team members and provide them with various opportunities to ask questions and share opinions through our ‘Open Door Policy’ and regular meetings.

Team members can also voice their concerns and opinions using internal communication tools such as the annual ‘Survey Feedback Action’ questionnaire, which gives them the opportunity to evaluate and provide feedback on the leadership, different workgroups and the company overall. The ideas and remarks communicated through the survey have been the catalyst for various employee programmes and policy changes. Moreover, our Guaranteed Fair Treatment policy ensures that any employee grievances are dealt with fairly and objectively.

FedEx strongly encourages a culture of camaraderie within its team members, and constantly promotes cross departmental education through a variety of initiatives.

40 SEPTEMBER 2014

FedEx is as diverse as the world we serve, yet we share the common belief that our varied backgrounds, skills and experiences combined help create a stronger corporation This helps foster better cooperation across functions to ultimately accomplish objectives and goals more efficiently.

The people first philosophy significantly contributes to our rewarding and balanced work environment. Team members who demonstrate exceptional performance that enhance the customers’ experience by

going above-and-beyond their set roles and responsibilities are continuously recognised.

We have launched many formal recognition programmes to enable managers to reward their team members. This can be done within their respective teams or across different departments.

What is the spend on an employee whether financial or social, in terms of training and improving the skill set?

What is the direct effect of this activity?

FedEx invests time and resources to develop our employees and give them the opportunity to acquire knowledge and new skills across all divisions, from technical to managerial. Most of our training is done in-house by our Learning and Development (L&D) department. This department provides resources, job aids and soft skills training to enable employees to develop and grow with the company. Each department

INTERVIEW

80 per cent of positions are filled by internal promotion and 75 per cent of managers at FedEx Express entered the company as entry-level team members. Last year, FedEx promoted nine per cent of its employees in the UAE, while four per cent benefited from a career progression - giving them the opportunity to broaden their experience through a job role in a different department.

Our effort to develop our employees and provide unparalleled opportunities was also recognised at the INSIGHTS Middle East Call Centre Awards when FedEx won the ‘Best Career and Skills Path’ category in 2013.

How many employees work at your regional offices?

Our regional headquarters in Dubai oversees operations in the Middle East, Indian Subcontinent and Africa (MEIA). With our recent acquisitions of the Supaswift businesses across Southern Africa, we now have over 9,000 employees working at FedEx across the MEIA region.

has structured training programmes with mandatory courses that ensure that team members have the necessary skills and training to successfully fulfill their job roles.

The L&D team also provides team members with a variety of training materials and courses that can be completed on their own to further their personal development.

For example, our Virtual Academy is an online portal open to all team members that offers computer- based training and puts employee’s personal development on the track to success.

Moreover, we encourage team members to benefit from the FedEx tuition assistance programmes of up to US$3,000 annually, as a contribution towards external training and educational courses that aid their career progression.

Employees not only benefit by enhancing their skills, but are then considered first for job openings as part of the ‘promotion from within’ policy that FedEx maintains. Globally,

What are strategies to hire the best talent and then to train and retain them?

FedEx is as diverse as the world we serve, yet we share the common belief that our varied backgrounds, skills and experiences combined help create a stronger corporation.

Our recruitment policies encourage application from candidates across all walks of life. In addition to relevant qualification and past work experience, we look for people who are self-motivated and demonstrate a passion for the service industry.

Each job in FedEx has specific and defined skills, knowledge and behavioral competencies. The recruitment process and assessment methods are designed to gather information about how the candidate’s skills, knowledge and competencies match the role. Panel interviews are conducted using a behavioral interviewing approach, which include standardised questions reflecting a wide range of competencies and skill / knowledge matrices.

FedEx managers are committed to filling positions, whenever possible, with qualified candidates from within its current employee workforce through the ‘Promotion from Within’ policy. All job openings are first posted internally for

employee consideration before engaging with outside applicants.

Once a new hire has joined the FedEx family, they are immediately taken through the process of on-boarding, including a New Hire Orientation programme. The onboarding programme helps new hires adjust to the social and performance aspects of their new jobs smoothly, and ensures that they feel welcomed and prepared in their new positions. This gives them the confidence and resources to make an impact within the organisation. Additionally, the Purple Passport is a unique gift given to new hires to be used for an employee’s learning journey at FedEx. The passport is updated each time an employee attends a training session and serves as a souvenir of all courses and trainings conducted.

What challenges are specific to the region in terms of employee hiring?

The logistics industry in the region is growing rapidly, and one of the main challenges is the limited availability of specialised resources. At FedEx, we are making a strong effort to create awareness among both Emirati and expat students about the sector. We have developed training programmes that provide students with internship opportunities to help them start a career in the logistics sector, and in turn ensure that the number of qualified candidates who enter the workforce meet the industry demands.

How do you plan on getting to the top of the “Great Place to Work” UAE list moving forward?

FedEx has been involved with the Great Place to Work® Institute survey since its inception in the UAE four years ago. The programme greatly complements our internal tools to measure employee satisfaction and identify their needs, and also helps us benchmark ourselves against other leading employers in the country. Every year our internal Great Place to Work action team analyse the results from both internal and external surveys. This action team is responsible for identifying and launching new initiatives based on the GPTW survey results, as well as our internal ‘Survey, Feedback, Action’ process, which ensures that management are aware of employee concerns and provides actions for continuous improvement throughout FedEx.

SEPTEMBER 2014 41

Sustainable

transport 42 SEPTEMBER 2014

Volvo is committed to providing a sustainable transport solution to all its partners in the region. Its new models launched

FLEET MANAGEMENT

V

olvo Trucks Middle East supports company’s global aim to become world leader in sustainable transport solutions.

Following the launch of its three new state-of-the-art models in January of this year, Volvo Trucks Middle East

has optimised its transport solutions around the new models to provide regional customers with the best the market has to offer in terms of care packages that help increase productivity and truck efficiency.

Ian Drury, Transport Solutions Development Manager, Volvo Trucks

Ian Drury

Middle East, says,“Volvo Trucks’ aim is to become the world leader in sustainable transport solutions, so its total transport solution offer goes hand in hand with the brand’s vision.

Each one of our customers is unique, and we strive to create the most suitable solutions for their specific

SEPTEMBER 2014 43

FLEET MANAGEMENT

needs. Our service and maintenance contracts can be tailor-made to meet specific customer requirements, according to their business, application and usage.

“We are one of the world’s largest heavy-duty truck brands and we use our global resources to ensure that customers in the Middle East reap the benefits of our global expertise.

Volvo Trucks operates across 2,300 dealers and workshops, in 140 countries, with 17,000 dedicated Volvo Trucks employees, on five continents; this gives us the scope to provide the best of the best when it comes to transport solutions.”

With demands in the maturing Middle East industrial manufacturing and transport market intensifying, business owners are becoming increasingly aware of the total cost of ownership for their businesses, and are seeking ways to maximise utilisation of their products to ensure the best possible value for money.

The transport solutions offered by Volvo Trucks Middle East, includes a mix of pioneering the very latest product technology whilst enhancing customer’s productivity, allowing them

44 SEPTEMBER 2014

to increase uptime and optimise service and maintenance for the duty cycle.

Drury, continued,“Our regional customers benefit from service agreements which give them peace of mind and allows them to have a clear and Via our Dynafleet transparent visibility on the total cost of ownership system, also when it comes to available as a free service and parts.”While application for smart running their day-to-day businesses, they want to phones, customers avoid any unplanned stops, retain a high resale value, can reduce wear and be able to rely on quick and tear whilst and efficient service.

“Volvo Trucks has also increasing safety, developed the Dynafleet telematic system. This web and maintaining based system allows our profitability and fuel customers to track their efficiency essential vehicle’s position 24 hours a day, 365 days of the year, for a successful while also monitoring the driver, his driving business patterns and habits, and offer coaching and training when needed. The Dynafleet system allows business owners to pin-point areas challenging profitability while

ensuring that their drivers operate in the safest and most efficient possible conditions.

“Via our Dynafleet system, also available as a free application for smart phones, customers can reduce wear and tear whilst increasing safety, and maintaining profitability and fuel efficiency essential for a successful business. This system in now operational in several markets within the Middle East and more and more customers are seeing the added value of Dynafleet in their business.”

The Dynafleet is part of a wider package that Volvo offers its customers. The complete offering includes i-shift technology, airflow package, driver training and Dynafleet. This package promises fuel savings of up to seven per cent, making Volvo trucks one of the most fuel efficient in the industry.

The new i-shift technology will help improve fuel efficiency from day one, replacing the manual gear stick. The driver training will in turn help drivers to utilise the new technology, while the training will also give guidance on other factors that reduce fuel consumption.

The airflow package alone offers the latest in aerodynamics - consisting of air deflectors on the roof and sides, as well as chassis skirts and side underrun protection - meaning a fuel saving potential of up to five per cent.

In addition to its world-class transport solutions, Volvo Trucks Middle East recently announced the introduction of flexible financing options for its customers in an effort to support the region’s surging industry.

The introduction of the financing programme comes at a time when the regional construction industry is set for rapid growth thanks to heavy government investments and diversified market drivers, including; a growing population, infrastructure development, an increase in tourism, and preparations for the upcoming Dubai World Expo 2020 and FIFA World Cup 2022.

ISUZU BUSINESS AIRPORT ISUZU TRUCKS ARE READY TO TAKE OFF!

Our fleet of light & heavy duty trucks and pick-ups are all set to take off at your command, to fly your business to new horizons.

Being the distributor of ISUZU Vehicles in the UAE, GENAVCO invites you to visit its showrooms and choose the best from ISUZU model range (N-Series, F-Series, C-Series, E-Series, Q-Series) that suits your business requirements. If you are a performance enthusiast, then check on ISUZU flagship pick-up (D-MAX).

Let us help you land the right truck for your emerging business.

Best Quality . Best After Sales . Best Value

Omnicommerce and the new

supply chain

paradigm

O

mnichannel, driven by e-commerce, is the dynamic way to do business. It is a way firms market and sell across channels for B2C and B2B. E-commerce and omnichannel - omnicommerce has become a new business model that extends markets and industries. Even more, the new model has created the new supply chain paradigm, global in scope and impact.

Disrupter. This new way of doing business is both a strategic, competitive force and a disrupter to traditional business. Bricks and mortar firms have to deal with it to compete for local, national, and international business. Omnicommerce has redefined and expanded markets, customers, and opportunities. Its role and value applies not only to retailers; manufacturers and middlemen must also adopt and adapt to it. Part of the issue is change related and moving beyond the corporate comfort zone with the new business model.

Divergence. For years, there has been a standard view of supply chain management (SCM). Despite many discussions and terminology, SCM has been static. Now there

46 SEPTEMBER 2014

As the traditional way of doing business changes, so must the traditional supply chain.

How can companies adapt to consumers’ many new channels of purchasing?

Well by adapting to trends.

Tom Craig, President, Ltd Management explains the new supply chain paradigm

is the reality of supply chain divergence and segmentation. Many traditional supply chains: Are defined by functions Are measured by costs Are monolithic Focus on orders Work with and around organisation silos, both internal and external Outsource activities based on lowest price bids as the key selection criterion Carry more inventory and working capital than is required Struggle to deliver orders complete, accurate and on-time Create little or no competitive differentiation Utilise technology for warehouses and for “track and trace” transport Engage 3PLs and logistics service providers that may be nominally dissimilar from rivals.s Omnicommerce has created a hidden divergence from the standard supply chain approach. It necessitates distinct ways to service each channel’s customers.

Supply chains often have a single focus and are an amalgamation of discrete actions by internal and external parties; and this adds to time. Time is critical for

service, performance, inventory levels, and customer satisfaction.

Supply chains, for best costs, are not designed to effectively handle multiple, distinct channel needs, especially those that are speed sensitive. Supply chain management, as presently practiced, is becoming out-dated by omnicommerce customer service demands.

The e-commerce component has immediacy to its service; and that service demand grows with performance expectations. Even supply chains that originated with e-commerce firms are falling behind in performance. They were designed along customary lines with focus on pulling orders and shipping, and mask service issues and shortcomings, with website design and shopping cart technology.

New paradigm. There are new supply chain dynamics to meet the innovation in business. Omnicommerce

ANALYSIS

This new way of doing business is both a strategic, competitive force and a disrupter to traditional business

and its e-commerce have become competitive forces for supply chain management. This new way of doing business forces changes to inside and outside inhibitors. Accelerated velocity is a key element with the contemporary supply chain paradigm.

New supply chains: Are defined as process Are measured by performance and service Are segmented Focus on customers Reduce the number of organisation silos, both internal and external Outsource activities based on performance bids with cost for service Increase inventory turns Deliver orders complete, accurate and on-time in consistent manner Create competitive differentiation Utilise integrated supply chain execution technology across supply chain

Engage new breed of best-in-service 3PLs and logistics service providers Time compression is important for the needed service velocity. This must be done across the entire supply chain, both inside and outside the company. Inventory positioning; network, both technology and logistics, redesign; complete supply chain visibility; reduced redundancy and conflicting risks; coordination, both internal and external, of interrelated activities around the world; inventory velocity; and a fresh breed of logistics players are vital, both as benefits and needed, to the compression. As a result, products flow more and more quickly through supply chains.

What must be done? Those who implement omnicommerce with traditional supply chains will struggle to achieve maximum benefit.

Using old supply chain ideas with a new business model is shortsighted.

Companies using the new supply chain paradigm will dominate omnicommerce.

Underlying this supply chain is how it is designed. Many supply chains are built from the company out to customers and are based on pushing orders out. That is an attempt to meld costs and service.

That approach will no longer work.

Supply chains must be designed from customers back to what is required to meet their demands.

The change for supply chain management has begun. There is a new way. The power of the better supply chain will not be limited to omnicommerce. It will flow back and transform supply chains for many channels, industries and markets who will want the same service.

Supply chains must be built on a structure of process and technology. The total supply chain, and its underlying organisation which negatively affects time, must be streamlined to facilitate the paradigm. Outsourcing and supply chain logistics providers - be they 3PLs, transport firms, warehouses, forwarders, and others - must be used based on the ability to drive the needed performance.

Changes to doing business and to supply chain management bring risks. Risk mitigation and aversion are important topics. These create hesitancy to do what must be done, to start fresh to service markets, to stop what no longer works. But, there is also the risk of standing still or moving too slowly and dealing with the impact of that choice.

SEPTEMBER 2014 47

ANALYSIS

48 SEPTEMBER 2014

ANALYSIS

Shale Gas:

threat or opportunity for the Shale gas has upended the North American natural gas and chemical markets, and its effects are propagating.

Profiting from the new opportunities will require flexibility and swift action. This A.T.Kearney report analyses the pros and cons of this gas revolution

GCC? N

orth America’s development of shale gas has triggered a revolution in the gas market that could have a major impact on other energy sources and on the petrochemical footprint. The effects are spreading to the rest of the world and are even affecting the hydrocarbon-rich countries in the Gulf Cooperation Council (GCC).

A full appreciation of the potential threats and opportunities that shale gas brings to the GCC’s oil and gas and petrochemical industries requires an understanding of the impact of shale gas in North America and other international markets.

We look at the impact of shale gas from two angles. First, we focus on gas markets, and then we examine the impact on the global chemical and petrochemical markets.

IMPACT NATURAL GAS MARKETS The natural gas market comprises regional markets, connected through liquefied natural gas (LNG). Regional natural gas markets have traditionally been rather stable and predictable; shale gas has caused a fundamental shock to the North American natural gas market. We first provide an overview of the shale gas revolution in North America. Then we analyse its potential to propagate to other regional natural gas markets and impact the global LNG market.

Finally, we explore the implications for the GCC’s oil and gas industry.

The shale gas revolution in North America High gas prices in the 2000s prompted the development of shale gas, which is now emerging as a main source of natural gas in North America. Shale gas is bringing the United States close to self-sufficiency and could turn the country into a net exporter of gas in the near future.

US production of shale gas grew from two trillion cubic feet (Tcf) in 2008 to more than eight Tcf in 2012, accounting for more than a third of total domestic natural gas production. Shale gas is projected to grow to 14 Tcf by 2030, representing almost half of US natural gas production.

Shale gas has triggered a sharp drop in natural gas prices and decoupling from oil prices. Shale gas has upended the natural gas market. In 2012, natural gas prices dropped to between US$1.82 and US$3.77 per million British thermal units (MMBtu), down from

SEPTEMBER 2014 49

ANALYSIS

Figure 1

Natural gas prices have decoupled from oil prices Spot and future prices for oil and gas $ per MMBtu

$ per barrel

Note: MMBtu is million British thermal units.

Sources: US Energy Information Administration, Chicago Mercantile Exchange; A.T Kearney analysis

between US$5.82 and US$13.31 per MMBtu in 2008, and natural gas and oil prices decoupled, having traditionally been strongly correlated (see figure 1).

In the past, significant global demand shocks and natural disasters have caused temporary divergence from the oil and gas

energy equivalent ratio, but this time it looks as if the split is here to stay.

There is consensus on the upward trajectory of North America’s natural gas prices, which will be required to make dry shale gas developments economically viable. A.T. Kearney’s scenarios predict equilibrium in the

Figure 2

Signs indicate natural gas and oil prices are decoupling in Europe Spot prices for oil and gas $ per MMBtu

Note: MMBtu is million British thermal units. NBP is the national balancing point. LNG is liquefied natural gas.

Sources: US Energy Information Administration, Bloomberg; A.T Kearney analysis

50 SEPTEMBER 2014

$ per barrel

range of US$4 to US$8 per MMBtu by 2020, with the reference case in the US$6 toUS $7 per MMBtu range. However, there are no signs that natural gas prices will go back to the pre-shale correlation with oil prices.

Shale gas has the potential to turn the United States into an LNG exporter in the near future. Abundant domestic resources and low prices are displacing natural gas imports to the United States and creating the potential for the country to become a net exporter of natural gas by 2020 and a net exporter of LNG by 2016. LNG import terminals in the United States, built on the expectation of substantial future LNG demand, are all suffering from low capacity utilisation and are looking for export opportunities.

At the same time, LNG importers are trying to secure supplies of North American shale gas linked to the Henry Hub price. Japan, the largest LNG importer, has already signed agreements with the United States and is working to secure shale gas from Canada.

By 2020, North American shale gas could represent 30 per cent of Japan’s demand, with 17 million tonnes per annum (MTPA) coming from the United States and nine MTPA from Canada. GAIL (India) recently signed a 20-year contract with the U.S. Sabine Pass terminal linked to the Henry Hub price.

Shale gas is turning North America into an important LPG exporter. The exploitation of wet shale gas plays, which give producers higher returns, is not only fuelling the renaissance of the North American chemical industry but also lifting liquefied petroleum gas (LPG) production for domestic and export markets. The increasing production of LPG has already turned the United States into a net exporter with the potential to capture a growing share of the market currently dominated by the GCC. Shale gas impact on international markets North American shale gas has created uncertainties in natural gas markets. Despite the fact that shale gas production is still confined to North America, its impact is being felt around the world. Shale gas has created more uncertainties in natural gas markets and has added a new dimension to the already complex and fluctuating global flows of natural gas, making it even more

Figure 3

Shale gas resources are present around the world Shale gas production and resources

Selection Unproven, technically recoverable shale gas resources

*Annual estimate based on daily US production Sources: US Energy Information Administration study of 42 countries; A.T Kearney analysis

difficult to forecast the evolution of the natural gas markets, the supply-and-demand balance for each regional market (domestic conventional and unconventional resources versus pipeline gas versus LNG), and the international flows of natural gas. This amplified uncertainty is at the heart of the mounting pressure on natural gas producers to move away from long-term contracts and gas prices indexed to crude oil.

The price of natural gas in Europe and

Asia remains substantially higher than in the United States, but some signs of decoupling are emerging in the European market (see figure 2).

The duration of new gas contracts signed over the past five years has become significantly shorter, and the LNG spot market has grown to represent 30 per cent of all LNG trade in 2012, favoured by the need to reallocate LNG flows originally directed to the US market and by new uncertainties in the natural gas market.

Figure 4

The Middle East is the most competitive for ethane-cracking expansions Ethylene cash cost – regional feedstock plaforms ($ per MT of ethylene produced)

Note: MT is million tons. MMBtu is million British thermal units.

Sources: A.T Kearney analysis

52 SEPTEMBER 2014

The development of shale gas resources could reshape the global natural gas market.

Large developments of shale gas and aggressive expansions of LNG capacity have the potential to fundamentally reshape regional and global gas markets. Most of the unconventional technically recoverable resources are outside of the United States (see figure 3).

Development of the vast unconventional resources in China and Latin America will take at least another five to 10 years because of the need to better understand shale formations, adapt technology, build the midstream infrastructure, and create a supporting political and regulatory environment. But it’s just a matter of time and when it happens, it could have a major impact on the regional market balance and on regional and global natural gas prices.

China has vast unconventional gas resources, and their exploitation could cause another major shock that reshapes the entire natural gas market. China recently started assessing and exploring its shale reserves in cooperation with more experienced international players. The government has set ambitious targets for the production of shale gas and is releasing several policies to encourage the development of indigenous unconventional gas. However, we believe more time and effort will be required to meet the government shale gas targets because of the concentration of shale gas reserves in mountainous or densely populated areas with technical challenges and insufficient infrastructure, a lack of capabilities, and an unfavorable political and economic system.

By 2020, shale gas is expected to account for three to nine per cent of China’s domestic demand and further grow thereafter. Whether domestic unconventional gas displaces rapid natural gas import growth or coal used for power generation, it will have a huge impact on the regional and global gas market.

This will largely depend on environmental considerations and regulations.

Large projects under development to build natural gas import capacity (pipeline infrastructure to connect Central Asia, Russia, and Myanmar gas to China and relevant LNG capacity creation) suggest a strong expectation that China’s demand for natural gas will grow.

ANALYSIS

Europe has about six per cent of the world’s technically recoverable shale gas reserves.

However, European shale gas developments will likely require more time because land resources and the political and regulatory environment are not expected to favour any significant shale gas production before 2020.

Based on A.T. Kearney scenarios, European shale gas production in 2035 could account for two to 10 per cent of total domestic consumption. Europe is therefore expected to continue to rely on imports of both piped gas and LNG to meet its internal demand.

Shale gas impact on the GCC The impact of US shale gas on the GCC has been rather limited so far, but shale gas could represent both an opportunity and a threat for the GCC countries in the future. The effects vary widely across the region. The challenges faced by gas-rich Qatar are substantially different than those faced by the other gasshort GCC countries. We expect shale gas will cause no major disruption to the GCC before 2020, but the scenario could be fundamentally different in the longer term.

Qatar faces potential threats. Qatar, the world’s largest exporter of LNG with a capacity of 77 MTPA, enjoys long-term gas contracts linked to the price of oil. However, the contract structure is coming under pressure as customers, encouraged by new natural gas supplies, are looking to end the indexation to oil prices and seek shorter, more flexible agreements. For example, Asian customers, currently representing almost half of Qatar’s LNG exports and paying a price premium of US$5 to US$7 per MMbtu, are trying to secure natural gas supplies from North America. As mentioned above, Japan and India have already signed agreements with North America linked to the Henry Hub price. In Europe, where the gas supply is more diversified and prices more competitive, Qatar is facing the same issues. For instance, the United Kingdom recently signed a contract with Qatar for only five years.

The biggest threat for Qatar in the medium to long term is major unconventional gas developments and over investments in LNG capacity, potentially resulting in overcapacity and pressures on the price of natural gas in all major markets. Future shale gas exports from North America, and shale gas developments

Figure 5

The world’s ethylene capacity is expected to rise well above demand Global ethylene capacity vs. demand (in million metric tons)

Sources: A.T Kearney analysis

in China and other markets, are still uncertain and are not likely to have any relevant effect on Qatar until after 2020. The realisation of all the announced LNG projects could result in an oversupply in 2015-2020, creating favourable demand-side economics.

However, project delays and cancellations are likely because the uncertainty in the natural

gas market is making buyers increasingly reluctant to sign the long-term contracts that have traditionally underpinned large LNG projects and is resulting in more difficulties in achieving the final investment decision.

The Qatar National Development Strategy is based on an LNG price (cost, insurance, and freight) of US$9.60 per MMBtu. In 2012, the average price of Qatari LNG was about 40 per cent higher, with substantial differences across markets. (For example, Japanese LNG prices averaged US$17 per MMBtu while European prices have been more restrained at US$11 per MMBtu.) A drop in the price of LNG would directly impact Qatari GDP and net government savings. For example, a price drop of 30 per cent to US$6.90 per MMBtu would cause a reduction of Qatar’s GDP by about US$100 billion over a five-year time frame and a decrease in net government savings from 5.7 to two per cent of GDP. The other GCC countries could benefit from shale gas but also face threats of natural gas substitution for oil. GCC countries other than Qatar face natural gas shortages as a result of sustained growth in domestic energy consumption. The UAE and Kuwait have recently turned into net importers of natural gas, and Saudi Arabia is burning an increasing amount of oil to meet its growing domestic demand. Both the UAE and Kuwait

Figure 6

Armed with a supply of ethylene, North America is poised for explosive polyethylene export growth North American ethylene derivative supply (% of installed capacity)

North American polyethylene export (million metric tons)

Sources: A.T Kearney analysis

SEPTEMBER 2014 53

already import LNG to cover their summer peaks but are planning more investments in LNG facilities to cover growing domestic demand. For example, in the UAE, Mubadala Petroleum and International Petroleum Investment Company recently established a joint venture, Emirates LNG, to develop a new LNG regasification facility on the UAE’s east coast to supply 1.2 billion cubic feet of natural gas per day from the international market. In parallel, GCC countries are aggressively pursuing exploration and development of new non-associated gas fields, in addition to other sources of energy such as nuclear and solar. The costs of all new energy sources are substantially higher than those of domestic conventional gas.

Gas-short GCC countries could benefit from shale gas in two ways: exploiting the domestic unconventional gas potential and profiting from better demand-side economics on natural gas imports. All GCC countries except Qatar are assessing their indigenous shale gas potential. Preliminary estimates indicate that unconventional gas resources in the GCC could amount to more than 700 Tcf, with Saudi Arabia accounting for more than 600 Tcf. Saudi Arabia is highly committed to exploring its large shale gas potential because of the unsustainability of the growing

domestic consumption of oil that could affect its export capacity and the country’s wealthfare in the longer term. It is still too early to predict the role of unconventional gas in the energy mix of the GCC countries, but this should become clearer within the next three to five years.

IMPACT OF SHALE GAS ON THE CHEMICAL AND PETROCHEMICAL MARKETS We now turn to a review of the impact of shale gas on the global chemical and petrochemical industries and then zoom in on the implications for global polymer producers. Finally, we conclude with the implications for GCC players.

How shale gas will affect the global chemical and petrochemical industries The renaissance of the North American chemical industry, driven by shale gas, will affect the global market in the short to medium term. The US chemical industry is taking advantage of liquid-rich shale gas, shifting from naphtha to lighter natural gas liquids feedstock, and planning to increase its capacity substantially. If all announced expansion plans are realised, more than 10 MTPA of ethylene production will be added

Figure 7

North America is expected to rise among the ranks of polyethylene resin exporters Global demand and supply for polyethylene (unconstrained capacity build-out scenario, million metric tons)

Sources: Global Data; A.T Kearney analysis

54 SEPTEMBER 2014

in the United States by 2020, an increase of 40 per cent over current capacity. Part of the increase in North American production will most likely foster some reshoring of manufacturing activities, while the rest will be directed to the export market, creating challenges for the less cost-effective producers. If announced capacity is realised, North America will become a major exporter of chemicals alongside the GCC by 2020.

Aggressive plans to expand ethane crackers in the United States are likely to determine overcapacity in the market by 2020 and lead to the potential shutdown of less competitive production in Europe and Asia.

This situation would deteriorate significantly if China drives for self-sufficiency. In the longer term, new shale gas developments outside North America could further affect the chemical industry.

The US ethane-cracking expansions benefit from cheap feedstock availability, similar to the Middle East in the past few decades. The Middle East will remain the most competitive on a global scale, thanks to the advantageously priced feedstock, supported by world-scale assets (see figure 4).

However, this will impact profitability when supply outpaces demand as a result of increasing global ethylene overcapacity by 2018. Assuming all announced ethanecracking capacities will be fully built out, capacities will far exceed demand, putting tremendous pressure on operating rates and profitability (see figure 5).

Implications for global polymer producers Expected polymer capacity expansions will drive a global battle for polyethylene demand. The North American investments in ethane-cracking capacity will likely result in subsequent ethylene derivative investments, in line with the current North American ethylene derivative profile.

Ethylene producers will want to capture the value further downstream with a more integrated asset base. These downstream investments are a low-risk approach for an ethane-cracking player to secure off-take while protecting revenue streams from downstream conversion steps. Polymer investments are likely, as the resins can be much more easily exported globally as

ANALYSIS

containerised products, as opposed to many other derivative options. In addition, logistic costs associated with exporting ethylene are high when compared to distribution costs for polymer resins, making downstream conversion of ethylene at the cracking site even more likely. Although most North American ethane cracking investors have not yet finalised or announced their downstream plans, we believe several polyethylene capacity projects will emerge from the planned ethane-cracking investments.

North America is already a net exporter of polyethylene resins. Assuming a full build-out of the announced cracking capacity, polyethylene exports from North America are going to explode (see figure 6). Even in a conservative 50 pervcent build-out scenario, North America will still become a much stronger exporter of polyethylene resins and will compete head to head with the Middle East for market share (see figure 7).

Implications for GCC players The US shale gas revolution provides both risks and opportunities for the GCC’s petrochemical sector: The US ethane cracking expansion will result in increased polyethylene overcapacity and shortages of propylene, butadiene, and aromatics. Opportunities are emerging in liquid cracking and its derivatives.

Opportunities will emerge for GCC players to convert propane exports to propylene.

GCC players will face fierce competition in the traditional polymer export markets and will need to reassess their sales and supply chain strategies.

Many international players’ high debt and low margins create attractive potential for mergers and acquisitions, provided vertical integration and complementarity of assets, intellectual property, and skills are high.

Let’s take a deeper look at each.

Increased polyethylene overcapacity and shortages of propylene, butadiene, and aromatics Europe’s ethylene supply is largely naphtha-based, which also results in a good supply of propylene, butadiene, and aromatics (see figure 8). The planned US petrochemical investments are driven by the availability of shale gas, and thus ethylene capacity

Figure 8

Ethane crackers yield much more ethylene than naphtha crackers Steam cracker yields by type of feedstock (in weight %)

Note: Percentages may not rsolve due to rounding.

Sources: A.T Kearney analysis

expansions are fully ethane-based, which results in very limited secondary yields.

The cheap ethylene supply from strong expansion of US ethane cracking will put severe pressure on European and Asian naphtha cracking capacities, pushing for accelerated closure of older, less integrated assets. As a result, a significant shortage of propylene, butadiene, and aromatics will emerge, the size of which is difficult to predict.

Even if liquid cracking on its own were not to take a significant hit, still-older and smallerscale naphtha-based infrastructure is likely to be impacted by new, world-scale, and possibly more flexible, assets.

This opens opportunities for GCC players because liquid cracking will become more attractive for several reasons. First, the global shortage will drive up prices for butadiene and aromatics. Second, U.S. competition will be low because of a lack of heavier yields from the ethane-cracking capacity additions.

Third, liquid cracking opens opportunities in higher-value specialty chemicals, currently less available in the Middle East region.

Fourth, technology improvements and larger scale of new assets allow greater economic returns for new investments compared to older petrochemical capacities in Europe or Asia. And last but not least, the potential for creating jobs increases, which fits well with local government agendas.

However, liquid cracking comes with two main risks that potential investors should

carefully assess. First, feedstock competition is continuously increasing from internal demand for fuels in the GCC. Public policies that are geared to reduce fuelbased electricity generation and stimulate fuel efficiency in transport and process and manufacturing industries will still surely benefit the GCC petrochemical industry in that respect. Second, liquid cracking yields substantial additional ethylene, for which margins will be low and finding demand will be difficult. Vertical integration of assets, flexibility of feedstock, and selective use of on-purpose technologies, especially to find alternatives for ethylene output, will be a must for any solid business case.

Opportunities to convert propane exports to propylene US shale gas is wet as dry plays are uneconomical at current prices. This has resulted in substantial propane capacity expansion plans that will help the United States become a net exporter of propane (see figure 9). The GCC has been a major exporter of propane, driven by Saudi Arabia and, more recently, Qatar and the UAE. A global surplus of propane will emerge that can only be absorbed by the petrochemical sector, as other demand for propane is much less elastic.

As global propane prices will come under pressure and propylene will likely be short from reduced output from naphtha cracking, an opportunity emerges to convert propane

SEPTEMBER 2014 55

ANALYSIS

to propylene. GCC players could create significant value through this conversion and further reduce their dependency on less attractive propane exports.

Fierce competition in the traditional polymer export markets The biggest impact for polyethylene producers can be expected in European and Chinese markets, the traditional export markets for many GCC players. Polyethylene exports from the Middle East to Europe will likely see strong competition from US exports, particularly in light of the ongoing free trade agreement discussions between the United States and the European Union. China, on the other hand, is driving for self-sufficiency and is unlikely to regain previous manufacturing double-digit growth thanks to rapidly increasing labor costs. In the next few years, there will still be substantial exports to China, but in the longer term, GCC petrochemical exports will likely require some redirection of volumes to other markets. A strong sales and distribution presence in emerging markets such as Southeast Asia, the Indian subcontinent, or Africa will help absorb the impact of a reduced market share in China and Europe.

A need to shift the sales footprint of many GCC polyethylene players can be expected as competition becomes fiercer. New trade

patterns will emerge eventually, but a period of higher uncertainty and variability is likely to set in. Sales and associated supply-chain strategies will need to be reassessed. Players with a specialty portfolio are more protected in the battle for lower costs and better service levels, but in a commoditizing market, these advantages could be more short-lived than anticipated. A strong, flexible, and costconscious sales and marketing organization is a must for any serious polymer player aiming to sell out its assets.

Attractive potential for mergers and acquisitions The US shale gas investments in petrochemical conversion are resulting in much higher debt on the balance sheets. When such investments are not 100 per cent backed by downstream off-take, these debts are open and put investors at high risk. There are definite opportunities for cash-rich GCC players to support these investments and acquire a complementary asset base from international players that need debt restructuring or fresh cash injections for capacity expansions.

Capacity expansions are also putting tremendous pressure on players with older, less efficient asset bases, particularly when feedstock is secured from liquid cracking.

This can result in some players offering good

Figure 9

Middle East propane exports will face strong competition from North American suppliers GCC propane exports (’000 barrels per day)

Note: GCC is the Gulf Cooperation Council.

Sources: A.T Kearney analysis

56 SEPTEMBER 2014

Estimated US propane export capacity (’000 barrels per day)

intellectual property at discounted value.

These opportunities will not last long, and now is the time to move. Waiting a few more years will increase the equity value of potential targets, especially if they have a strong U.S. base, while debts will have been refinanced or old assets discontinued to clean up the balance sheets. To capitalize on these opportunities, vertical integration of the asset base can secure high asset utilization both upstream and downstream.

This would be particularly attractive when assets, intellectual property, and skillsets are complementary. A downstream player with established global sales and marketing presence could be the perfect catalyst for an upstream player looking to substantially expand its petrochemical activities. When the strategic planning function is strong and centrally steered, the impact on the top and bottom line can be especially positive.

PREPARING FOR THE FUTURE GCC countries and organisations operating in the region would be wise to prepare for the major challenges that lie ahead.

Forward-thinking national oil companies and petrochemical players should make four moves: Improve their cost positions and competitiveness of domestic productions Strengthen sales and marketing capabilities and the ability to quickly react to demand shifts and changes in buyers’ behavior Reassess the downstream integration strategy in light of possible future scenarios and the priorities for increasing economic development and employment opportunities Rethink the international strategy to secure market access, benefit from cheap hydrocarbon resources, and build a balanced portfolio All GCC countries should become less energy-intensive, freeing resources to fuel further industrial development. Those that are short on natural gas should focus on gas exploration and development of economic conventional and unconventional gas resources while fostering the development of a regional natural gas market.

As the shale gas revolution continues, addressing the risks and capitalizing on the emerging opportunities will require a global mindset and timely action.

–A.T.Kearney

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COMPANY PERFORMANCE

Dubai Trade – impressive The first half of 2014 has seen an astounding 94 per cent increase in migration to Dubai Trade’s online services by companies. This is a move by the organisation to blend with Dubai’s move towards smart government

D

ubai Trade recently announced a promising 94 per cent increase in the number of its services accessed online in the first half of 2014 compared with the same period last year. The massive growth has happened as Dubai Trade has worked with customers to encourage online use with training courses and support through its call centre. This is in line with its strategic goals to be a single window for trade in Dubai by offering customers a seamless and streamlined trade facilitation process through its 720 e-Services.

The organisation’s 24-hour Contact Centre, which supports the dramatic growth of registered companies and users in multiple languages, handled more than 261,000 calls in the first half of the year, working with companies to assist them to effectively and efficiently use the e-Services.

58 SEPTEMBER 2014

Similarly, the demand for the Certified Trade and Logistics Professional (CTLP) training course that covers the end-to-end import and export process exceeded expectations with a growth rate of 20 per cent compared with Dubai Trade’s 2013 half year figures. General training aimed at enhancing massive growth users’ knowledge of Dubai Trade’s online services is in line with its surpassed the 40 per cent strategic goals to mark with representatives be a single window of 1,330 companies from a diverse range of job roles and for trade in Dubai by functions in trade and logistics offering customers making use of the service.

The first half of 2014 also a seamless and saw a 27 per cent growth in new companies joining the streamlined trade Dubai Trade Portal, resulting facilitation process in 8,985 new registered companies, taking, numbers through its 720 from 79,083 in 2013 to 96,889 e-Services so far in 2014. This generated a 12 per cent growth in transactions with a total of 9.1 million transactions processed by users on the Dubai Trade Portal. The increased

activity also had a positive impact on the secured e-Payment gateway ‘Rosoom’, which handled 549,000 payment transactions valued at 440 million dirhams – a 39 percent growth rate.

H.E Jamal Majid Bin Thaniah, Chairman Dubai Trade said,“We are very pleased with the positive performance in the first half of the year and optimistic about the future.

Our growth figures are on the rise

COMPANY PERFORMANCE

H.E Jamal Majid Bin Thaniah, Chairman Dubai Trade

across all segments as anticipated and we are pleased to see how rapidly online services are being embraced by the trade community. We remain committed to providing our customers with easy and efficient online services to help them save time and further develop their businesses.”

Eng. Mahmood Al Bastaki, CEO, said,“It is overwhelming to witness the continuity of growth in the first half of 2014; such figures reflect the confidence

and trust of traders in our e-Services.

We at Dubai Trade design our services around the needs of the customer hence we work hard to meet their expectations.

We are working with all stakeholders to introduce Dubai Trade’s services on a mobile platform and will continue following our strategic plan and focus on growing and diversifying our online services with the adoption of the latest technologies to assure more impressive records by the end of the year.”

SEPTEMBER 2014 59

UNWIND

Empowering his team Rino Sabatino, CEO RAKIA (Ras al Khaimah Investment Authority) shares his leadership style and management principles Which school and university did you go to?

I received my Bachelor’s degree in Economics from the University of Toronto (Canada), with Honours. I followed that with a Master’s of Arts in Economics from the University of Windsor (Canada), and a Master’s of Business Administration from the University of Notre Dame (USA).

What was your first job?

At Tridel Corporation, one of North America’s largest real estate developers, I was fortunate to report directly to the Chairman and CFO working on special projects both domestically and globally - much like a “minister without portfolio”. This experience afforded me exposure to all facets of corporate and financial management and cemented my interest in international business.

What do they not teach you in business school?

They do not teach you that truthfulness and directness, much more than diplomacy, will always provide you with much more credibility for achieving your goals.

Who is your role model? Why? In 1904, AP Giannini founded the

60 SEPTEMBER 2014

Bank of Italy in San Francisco.

While the likes of JP Morgan catered to the Carnegies, Rockefellers and multinationals, AP focused on providing banking services to immigrants and the common man, who at this time could not secure any type of banking support.

In time, the Bank of Italy morphed into the Bank of America that literally invented and defined banking as we know today. Upon his death in 1949 B of A was the world’s largest commercial bank. AP was the consummate“anti”Gordon I find stories of Gekko, proving that good ordinary people guys do finish first. I could speak for hours doing incredible on AP.

things with dignity and self-sacrifice in the most difficult situations to be encouraging

What is your leadership style?

Hire the best.

Establish extraordinary goals. Delegate, delegate, delegate.

What do you think is most important for being an effective manager?

To know what you do not know and to trust your managers’ business instincts.

How well do you handle stress?

What is your foolproof method of de-stressing?

I’m Neapolitan, and by nature am very passionate about everything I do. I also accept stress as an absolute and part of life. To de-stress, I try to keep up with my wife in the gym.

What do you find encouraging?

I find stories of ordinary people doing incredible things with dignity and selfsacrifice in the most difficult situations to be encouraging.

How do you spend your free time?

As we have recently moved to Ras Al Khaimah, whenever the opportunity presents itself, my wife and I get in the car and deliberately get lost exploring the magnificent natural features of this great Emirate.

What is at the top of your agenda right now?

I am proud to say that the team at RAKIA has achieved impressive quantitative and qualitative successes since the beginning of this year.

Achieving excellence is the easy part; maintaining and continuing the evolution of excellence is the hard part.

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