The right operating model as the link between a logistics service provider's growth strategy and success

If you don't want to leave potential growth to chance, logistics service providers face the challenge of defining possible growth targets.

Geographic growth

In principle, logistics service providers have various possible directions for growth available to them. Geographic growth typically refers to the spatial expansion of the logistics service provider's operating radius. For example, logistics service providers like BLG have set out to leave their traditional home base in northern Germany and have gradually opened locations nationwide. Similarly, Honold expanding from the south or Pfenning moving from the southwest toward the north.

Looking at this one level higher, it might be about opening up new countries. In recent years, for instance, French service providers Daher and ID Logistics have gradually entered the German market; currently GXO and DP World are likewise expanding from other European countries into Germany. On the other side, German logistics service providers are opening up neighboring European countries. For example, Geis in Austria and adjacent countries, or Loxxess in the Czech Republic.

And finally, you can also look at this from a geopolitical perspective and expand into new continents, as arvato is currently doing in North America or Schenker in Asia. Regardless of whether spatial expansion is pursued on a regional, national, international, or continental scale, the goal is to extend one's geographic operating radius.

Additional services

A second possible direction for growth aims to offer additional services. For contract logistics providers, this means taking on pre-assembly in the automotive industry, co-packing and display building in the FMCG sector, assembly, software updates, and field service in the high-tech environment, or returns and refurbishment in the telecommunications industry. This is typically a more gradual process that often emerges from existing customer relationships and business dealings, and is rarely the result of a concrete strategic process. The situation looks somewhat different with the increasing verticalization of large carriers like Maersk or CMA in recent years. Their massive entry into the contract logistics business occurs through acquisition and/or market entry. This is driven more by strategic considerations about extending the value chain.

New customer groups

And finally, there is the option of opening up new customer groups. Such customer groups, often also called verticals or industries, ultimately represent a group of potential customers with relatively homogeneous requirements. Here too, two different approaches can be distinguished. On the one hand, logistics service providers can try to to transfer existing process know-how and references from one customer group to another with similar requirements – e.g., the current shift toward aviation & defense by various logistics service providers that were previously more automotive-focused. On the other hand, logistics service providers repeatedly pursue the goal of opening up economically attractive-seeming industries such as pharma or high-tech..

Figure 1: Possible growth dimensions for a logistics service provider

The identification, evaluation, and selection of growth directions to be pursued in the future can be done in very different ways, but ideally it is a structured, transparent, and fact-based process. In addition to strategic thinking capabilities, this requires concrete market knowledge (growth, customers, entry barriers, achievable margins, etc.), competitive knowledge (who, what, how, and where), and a gap analysis (how far the company is from the necessary prerequisites) so that the desire for growth eventually becomes reality..

Fun fact on the side: a popular saying goes: "Experience shows that you can grow in all directions, profitably only in one at a time..."

As previously explained, a key factor in selecting future growth directions is a gap analysis. The result of the gap analysis is not only a list of gaps that need to be closed, but also an assessment of the associated costs and time requirements, or an assessment of whether closing the gap is realistic at all. If the costs and time required to close the gaps internally are too high, acquiring a logistics service provider already active in the target segment typically comes into consideration. A classic example here is always pharmaceutical logistics. If you have no pharma experience and no GDP-certified locations with a validated IT system, you won't win any RFPs – and if you don't win any RFPs, you'll never get any pharma experience.

But expansion into new countries or even continents also often occurs through acquisitions, since this allows not only to acquire a functioning setup including customer relationships, commercial and legal awareness, but ideally also to immediately achieve a critical company size that covers the overhead costs of a legal entity.

Alongside this growth through acquisitions, there are also many cases of organic growth strategies. For example, geographic expansion within a familiar legal jurisdiction, opening up similar industries, or successively expanding the service portfolio –mostly occurring in cases where the gap is smaller and assessed as "closable through one's own efforts."

Depending on whether the company is pursuing organic or inorganic growth, very different follow-up steps emerge for implementing the growth strategy. With inorganic growth, potential acquisition candidates (targets) must be identified and preliminarily evaluated. This is followed by initial contact, due diligence in various categories such as financial, legal & compliance, HR, operations, etc., as well as one or more rounds of negotiations and ultimately signing and closing. Once this is done, the actual work of post-merger integration begins. All of these are more complex topics that could fill entire books...

With organic growth, the direction must be set internally, and the necessary conditions must be established to successfully and profitably achieve the targeted growth objective.

Let's take a closer look at what this means in the following section.

Various models can be used to describe the prerequisites for successful and profitable growth. The term "operating model" has become established as an umbrella for various aspects that need to be considered.

This term has no specific content per se and must be filled with substance. In warehouse operations, for example, the term operating model encompasses questions like make-or-buy, but also shift models, use of technology, subcontractor strategy, IT support, etc.

The operating model for implementing the growth strategy, however, does not refer to warehouse operations, but to all those company functions that must work together to successfully operate in the market:

• Marketing,
• Business Development,
• Sales,
• Solutions Design and Tender Management,
• Implementation, and
• Go-Live and Hypercare.

However, implementing the growth strategy, requires assessing their future suitability and adapting them as needed.

To avoid ending up in hopeless chaos, the following structuring of the term operating model has proven effective. Successful implementation of the growth strategy can only succeed if all six dimensions fit together.

Figure 2: Elements of the target operating model for a logistics service provider

What do these individual dimensions specifically mean from a logistics service provider's perspective?

Organization

As you can already tell from the number and type of company areas involved in implementing a growth strategy, this is a complex organization with individual goals and personalities. 

The following questions need to be clarified regarding the organization: 

• Who is actually involved here? For example, are business development and sales two roles or integrated? Is marketing an independent function or integrated with sales? Is there a split between tender management and implementation/project management or is this one employee pool?
• What does their internal organization look like? Are they organized by geographies, services, locations, customer groups?
•  How large are they, where are the employees located, how are ownership and reporting between functions, industries, and countries/regions regulated?

There is no inherently right or wrong organization. The point is to understand how the company is currently positioned and functioning, particularly with regard to these market-oriented functions, where there may already be weaknesses and conflicts today, and what can be built upon to successfully open up new markets, services, and customer groups. Depending on the growth strategy, one setup or another may be more or less helpful, and adjustments to the current state may be necessary to support growth.

People & skills

Once the picture of the future organization is clearer, it must be filled with people: how many people for which tasks with which qualifications and profiles? Are new sales staff needed, or rather experienced planners and implementers with a specific industry background? Can I get by with English as the language in country XY, or do I need locals, perhaps also because there are reservations against outsiders?

It is necessary to work out which profiles are needed in what numbers (and where) in order to conduct a comparison with the existing team. Once gaps are identified, it must be examined to what extent it is possible to develop existing employees in order to close such gaps, and where new hires make more sense.

Governance & processes

Who actually decides which customer should receive an offer and at what price?

How is continuity of information flow ensured from the initial customer contact all the way to ongoing operations two years later?

Two example questions that can cause anything from mild sweating to severe heart palpitations for many logistics service providers... But what is this about?

Especially when you want to enter new industries, services, or geographies, it can be counterproductive to stick to old rules. Perhaps you've just established a legal entity in country XY and appointed management, but a sales and tender management organization doesn't exist yet. How then do you prioritize support functions from headquarters and handle potential cost allocation? Perhaps it makes sense to "buy" one deal or another for market entry and at least reduce the markup for overhead, risk, and margin – but who determines that and what does this mean for P&L responsibility? What liability conditions can the company accept in which business, what is "standard in the market"? These and many other rules, referred to as governance, should be reviewed and, if necessary, adapted for growth initiatives.

In addition to rules, processes are also a very important building block to avoid chaos. How does the handover from business development, sales, and tender management to implementation work, and from implementation to ongoing operations? Who contributes which information during the ongoing process, e.g., local personnel costs if no locations have been operated on-site before?

Are today's processes still viable even with an adjusted organization and new profiles and roles? Every organization should be asking itself this question continuously – companies that want to grow even more critically so.

Processes, and especially the interfaces between those involved, must be questioned and adjusted if necessary – not because everything is bad today, but because what works today may no longer be suitable for tomorrow.

Tools & technology

From a contract logistics provider's perspective, tools and technology essentially encompasses two different clusters. On the one hand, it's about tools that the logistics service provider uses internally for its sales and planning processes. Systems like CRM are central here, as are planning and support tools such as workforce calculation tools, warehouse and CAPEX dimensioning tools, simulation tools, etc. Do today's tools contain the necessary functions and information to map future business? Many logistics service providers, for example, don't have their own simulation experts and corresponding software licenses. For certain more complex operations like spare parts, e-commerce, or retail, however, it is strongly advised to simulate planned processes before implementation to verify the functionality and CAPEX of the planned solution.

On the other hand, it should also be questioned whether the logistics service provider has the appropriate tool and technology know-how for ongoing operations. If the service provider wants to enter the chemical industry, for example, the WMS must be able to account for co-storage prohibitions and minimum distances. If the target market is e-commerce, more highly automated systems like shuttles, AS/RS, or cube storage systems are often of interest. If the logistics service provider is not familiar with such warehouse technologies, it will be difficult to dimension, calculate, implement, and test such systems, let alone operate them later.

Ultimately, it's about whether tools and existing technological knowledge are sufficient to successfully operate in the targeted markets.

Targets & KPIs

Companies today are often managed through targets and KPIs, this is no different for logistics service providers. The question that arises in connection with implementing a growth strategy is:

• What are the right targets for marketing, business development, sales, tender management, and operations, and

• Which KPIs should I measure to manage, measure, and evaluate the successful implementation of my growth strategy?

Growth typically requires investments: in people and structures, in tools and capabilities, in brand and customers. While a great many companies certainly have close-meshed financial and performance controlling for operations, performance controlling is often completely lacking, especially for marketing, business development, sales, and tender management. At best, you know how much money you spent, maybe roughly what for, but what it actually achieved is unclear for many.

Clicks and followers, the new currency in the age of social media, are not suitable KPIs for performance of marketing & business development in the B2B space.

New customer business as an indicator of successful sales activities is less controversial, but what can realistically be expected? The conversion rate from offers to order entry as a benchmark for tender management is not even known for the core business at many contract logistics providers, where should this be for growth areas, other than as high as possible?

If you believe in managing a company through metrics, you cannot exclude the implementation support of the growth strategy from this. If the company already struggles with consistent measurement and management of marketing, business development, and sales processes, it is all the more important to step up here to ensure that investments are targeted.

Network & partners

Not all requirements for current or future targeted business need to be fulfilled by the logistics service provider itself. In many places, it already relies on subcontractors or has entered into partnerships with companies that are specialized in certain fields. This is often referred to as an ecosystem.

A logistics service provider's ecosystem typically includes:

• Staffing and temporary employment agencies

• Service contractors

• IT companies for WMS, YMS, etc.

• Real estate companies such as brokers and developers

• Equipment suppliers for material handling equipment, racking systems, and automation solutions, as well as

• Logistics consultants for planning, implementation, and optimization

If the logistics service provider is now targeting new business territory, the question arises whether the partners in the ecosystem are still the right ones. Is the preferred broker active in the target country? Does the equipment supplier have solutions in their portfolio that are needed in the target industry? Does the logistics consultant have sufficient geographic or industry expertise and on-site know-how to support projects?

Some of today's partners will also be able to successfully support growth areas; others need at least supplementation, if not replacement. What good is the best salesperson if you can't find real estate or personnel on-site?

The point is not to completely turn the company upside down, but to critically question whether what exists today is still good for tomorrow, or whether adjustments can help achieve the jointly defined growth targets more efficiently.

Every company has an operating model. In most cases, it was "designed" at a certain point in time and has evolved over the years through deliberate decisions or simply through day-to-day operations.

Much of the current operating model is good and has proven itself; other parts should have been developed further some time ago. The structured examination of the operating model with regard to its suitability for supporting growth offers the opportunity to build on strengths and optimize weaknesses to create the prerequisites for a more successful future.

Figure 3: Evolution of the operating model

What is absolutely essential here is that the review and redefinition of the operating model is the starting signal for a change process that can potentially encompass the entire company. Professional project management and change support, combined with subject-matter expertise, are critical for success here. Change management without subject-matter background falls just as short here as organizational engineering or an abstract PMO. Successful implementation can only succeed when all three components come together, ideally without additional interfaces.

Follow-up support to solidify the new organization, roles, and processes in the sense of a hypercare approach is also advisable, at least above a certain level of organizational complexity. This way, what was once defined and implemented is brought to life and fine-tuned where reality and the dynamic nature of the business require adjustments.

Figure 4: Hypercare for stabilization and fine-tuning of the operating model

If you want to strategically align your operating model for growth, contact us. We will support you from analysis through implementation and stabilization.