Innovation in transport and logisticsOn the road to a globally competitive industry

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Innovation in transport and logisticsTransport and logistics operators face consistent demands for greater reliability at lower total cost. Without

constant innovation, providers in this sector struggle to meet those customer needs.

Carting goods from one place to another and storing them are not essentially high-technology tasks. However,

the processes that support these activities are increasingly becoming streamlined, automated and integrated.

From interconnected supply-chain systems and track-and-trace technologies to route optimisation software

and radio frequency identity (RFID) tags, innovation suffuses the transport and logistics sector. The industry

is also a leading proponent of innovative business models, with companies having learned over the years to

reassemble themselves to suit customer needs.

Although Australia’s transport volumes are fairly low by world standards, they are set to increase as more

local manufacturers and retailers source components and products from overseas. The local market has so

far been relatively protected from foreign competitors, but this may not always be the case. And while very

few Australian transport and logistics firms try to compete outside the domestic market, they may look to

expand their operations overseas.

All these points raise an essential question: is the Australian transport and logistics industry innovative

enough to be globally competitive?

The Innovation Index of Australian IndustryThe Innovation Index of Australian Industry,

published by IBM Australia and the Melbourne

Institute, thoroughly examined the changing levels

of innovation in Australia’s transport and logistics

and other industries. It is the first study to reflect the

complex nature of innovation using inter-industry,

multi-indicator analysis.

Innovation is widely accepted as a key driver of

economic growth and productivity. The Innovation

Index of Australian Industry addresses the many

contributors to industry innovation by analysing

six data groups: research and development

intensity; patent intensity; trade mark intensity;

design intensity; organisational and managerial

transformation; and productivity.

The index captures innovation trends across transport

and logistics and 12 other categories of Australian

industry over 15 years from 1990–2005. It tracks the

evolving innovation performance of the Australian

economy to give business leaders, analysts and

policy makers a rigorous and insightful measure to

assess industry and national economic performance.

Transport and logistics compared to other industriesThe Innovation Index of Australian Industry found

the transport and logistics sector closely followed

the general trend of Australian industry. This sector

has achieved significant gains in efficiency through

the application of information and communications

technology, leading to lower transport costs.

The years 2004–05 showed a significant upturn in

research and development (R&D) activity, according

to the index. However, some of this activity may

represent implementations of new technology

– which can be classified as R&D under some

government funding schemes – rather than genuine

research. The B-double vehicle was probably the

last great innovation in the transport industry and it

is 15 years old.

The index also found intellectual property-related

activities were volatile over the 15 years from 1990–

2005. Trade mark registrations were consistently

high, but patent and design registrations were highly

variable. The high level of trade mark activity may

not represent genuine innovation; it might have

more to do with the large number of mergers and

acquisitions in the industry. For example, the Toll

Group has acquired more than �0 companies in the

last five years.

Contents

Innovation in transport and logistics ............................................... �The Innovation Index of Australian Industry .......................................................................... �

Transport and logistics compared to other industries ........................................................... �

Opportunities for innovation ................................................................................................... 4

Technology innovation .................................................................... 4Promising technologies .......................................................................................................... 4

Business model innovation ............................................................. 5

The component business model .................................................... 6Combining the model with service-oriented architecture ..................................................... 7

Case study ...................................................................................... 7

Conclusion ...................................................................................... 8

2

4 5

Annual productivity growth in the transport and

logistics sector averaged 2.8 per cent over the 15

years covered by the index. This was above the

national average of 1.8 per cent. Especially in the

later years of the study, the transport and logistics

sector has consistently improved productivity

while many other industries have fallen back.

IBM attributes this primarily to technological

improvements and changes in business model.

Opportunities for innovationThe Australian transport and logistics sector is

traditionally not a major innovator and tends to follow

the lead of other countries.

This is for very sound reasons of size and scale.

Australia has a land mass the size of North America

but a population of 21 million, compared to �00

million. The port of Singapore handled 2�.2 million

transport equivalent units (TEUs) of container cargo

in 2005, according to American Association of Port

Authorities (AAPA) data. Melbourne was Australia’s

highest-traffic port, but it only handled 1.8 million TEUs,

making it the world’s 50th busiest container port.

While this volume is set to increase as imports grow

and more Australian firms move towards offshore

outsourcing, there is still a massive difference. The

higher scale of operations in Singapore and other

countries also provides greater opportunities for

innovation. This gives, Australian firms the opportunity

to cherry-pick the most helpful technologies

developed elsewhere and apply them locally.

In an increasingly global market, local providers will

find themselves threatened by low-cost overseas

competitors who innovate to provide better services

at a lower cost. As a result, there are many potential

benefits of adopting ideas from overseas and

developing more home-grown innovation in the

transport and logistics industry.

IBM believes the greatest rewards can be gained

from improving productivity through the intelligent

application of technology and changing business

models. These approaches can be combined

into a new way of looking at business called

the component business model, which will be

discussed later in this paper.

• Yield management. Dispersingcustomerloads

withinconstrainedcapacitytoincreaseasset

utilisation,raiserevenue,reducecostsand

increasemarginsperasset.

• Pricing.Developingananalyticalapproachto

pricingtoconditiondemand,makebetteruseof

availablecapacityandcreaterobustprocesses

thatbettermanagebuyerconformancetothe

volume-priceequation.

• Equipment and asset management.Automating

keyprocessesanddevelopingaglobalviewof

equipmentpositioningtolowerassetmanagement

expenses.

• Network optimisation. Analysingcustomer

demandandtradeforecaststodevelopoptimal

networkroutingusingtechniquessuchasempty

repositioningstrategies,intermodalnetwork

managementandloadoptimisation.

• Customer relationship management.Refining

customersegmentationandclearlydelineatingthe

degreesofserviceofferedtoparticularcustomers,

becomingmoreresponsivetoclientneeds.

• Document processing.Simplifyingdataand

reducingerrorsforgreateroperatorproductivity,

datavolumereductionandprocessoptimisation.

• The environment.Optimisingtransportand

logisticsprocessestoimproveefficiency,thus

reducinggreenhousegasemissions.

• Chain of responsibility.Inanincreasingly

regulatedenvironment,developingsystemsto

helpcomplywithstateandfederallawsand

leveragingtheseinvestmentsforfinancialand

corporatecitizenshipbenefits.

• Human capital management. Movingbeyond

thebasiccost-effectiveadministrationofhuman

resourcestowardsbuildingamoreresponsive,

flexibleandresilientworkforce.

Technology innovationThrough the adoption of advanced technologies

such as wireless networking, track-and-trace

systems and RFID tags, the transport and logistics

sector has achieved significant productivity gains.

Technology is transforming the business of storage

through more efficient warehouse management

systems and changing the nature of transport

through vehicle and load optimisation and systems

that reconcile loads with invoices.

However, for some companies in the transport and

logistics sector, the productivity benefits gained

from implementing technology do not stack up

against the costs. In markets where labour is already

cheap, or where there is the option of importing

cheaper labour from overseas, the potential savings

may not be worth the investment.

For example, IBM studied how one major Australian

transport organisation could streamline its track-

and-trace systems by putting RFID tags on the wire

cages it uses to move goods around the country.

The tags were relatively inexpensive at $15 each,

but each cage could go through 60 gates on a

single journey. The cost of wiring up all its gates with

RFID scanners would have exceeded $7 million,

which made it difficult to justify the investment.

Promising technologiesHowever, there are many areas where the equation

is favourable. IBM is helping businesses in the

transport and logistics sector use technology in

applications such as:

• Application portfolio management.Bridgingthe

gapbetweenbusinessneedsandtechnologyto

prioritiseinvestmentinsystemsthatenablecritical

businessprocesseswhilereducingoverallIT

maintenanceanddevelopmentcosts.

• Legacy application management.Unlocking

thebusinessvalueoflegacyapplicationsby

documentingthem,writinginterfacestothemor,

ifnecessary,rewritingtheminamoreadaptable

codebase.

Business model innovationThe transport and logistics industry has proven itself

particularly good at restructuring and becoming

more flexible to meet changing client requirements.

Particularly over the past three decades, the

industry has expanded in scope and grown in

stature. Companies at first provided basic trucking

and warehousing services, then moved into

providing core and extended services – combining

a range of execution capabilities to improve the

value proposition for customers.

Many companies have turned to third-party

logistics providers (�PLs) to outsource a particular

segment of the supply chain. More recently, lead

logistics providers (LLPs) have entered the market,

which operate multiple parts of a supply chain.

LLPs often use a combination of their own assets

and those of other �PLs.

A few very large companies have offered themselves

as complete synchronised supply-chain providers,

capable of executing all activities across the entire

supply chain, combining their own resources and

those of third-party managed services.

Despite the emergence of LLPs and full-service

supply-chain providers, many companies still

procure logistics services on a piecemeal basis.

However, an increasing number of customers are

starting to recognise that to realise the full value of

the potential trade-offs from outsourcing, they need

to broaden their span – from purchasing many small

transportation and warehousing services to fewer,

bigger contracts with much wider scope.

Unfortunately, many logistics providers are trapped

by their existing business models, which prevent

them from scaling their offerings to deliver end-to-

end supply-chain integration. IBM believes these

providers must reinvent themselves once again so

they can profitably maintain as broad a footprint as

possible across the large commodity segment and

the growing, but more demanding, high process

conformance segments.

6 7

The benefit for providers will be tighter integration

with customers along the supply chain, delivering

increased value and lock-in. Greater complexity

offers more opportunities to sustain higher margins.

Customers will recognise the ability of more

integrated supply-chain providers to increase

reliability and overall service performance at a

reduced total cost.

The further up the integration path a provider travels,

the greater its internal requirements for innovation

across technology, business models and many

other aspects of its operations.

However, there are still a large number of Australian

companies that don’t want an integrated service

– they just want goods transported from A to B at the

lowest cost. For example a major Australian retailer

recently put out to tender for a no-frills approach

to transport; a basic, reliable service without the

traditional large-company overheads and price tag.

Other transport and logistics customers are looking

to take back direct ownership or control of segments

of their supply chains where it makes more sense to

in-source. Some customers are breaking state- or

nation-wide contracts into regional deals, where

smaller local providers could provide a more cost-

effective service.

Companies that have established themselves as

specialist, low-cost or regional providers may be

better off sticking to what they do best or further

increasing their specialisation.

The component business modelAn emerging approach to innovation in the transport

and logistics sector is the use of IBM’s component

business model. This model is a way of representing

an entire business in a simple framework that fits on

a single page. It is a step beyond the traditional ways

of viewing an organisation such as dividing it into

business units, functions, geographies or processes.

Using this methodology, companies can identify the

basic building blocks of their business. Each building

block includes the people, processes and technology

needed by this component to act as a standalone

entity and deliver value to the organisation.

Components are arranged by columns representing

the broad capability areas of the business. The rows

represent actions: “direct” for the components that

set the company’s overall strategy and direction,

“control” for the elements that translate those plans

into actions and manage the day-to-day running of

activities and “execute” for the parts that actually

carry out the detailed activities and plans.

This model shows activities across lines of business,

without the constrictions of geographies, internal

silos or business units. The single page perspective

provides a view of a business free of the barriers

that could hamper its ability to make meaningful

changes. This makes it much easier to see which

components of the business create differentiation

and value, and identify capability gaps that need to

be addressed.

Combining the model with service-oriented architectureThe component model can identify opportunities

to improve efficiency and lower costs across the

entire enterprise. It is particularly powerful when

combined with a service-oriented architecture.

SOA is a business-focused approach to IT

architecture that supports integrating a business

as a set of linked, repeatable business tasks or

services. It helps companies build composite

applications that draw upon functionality from

multiple sources within and beyond the enterprise

to support business processes.

Combining the component business model with

SOA allows companies to build customised

services for each client. Companies can choose

a variety of internal services and bundle them

as an integrated client offering. Having already

implemented SOA, the company can easily link

together the technology systems supporting those

components and build a systems architecture

based on business processes. IBM has

successfully implemented this approach with

local transport and logistics organisations such as

Australian Air Express and Sydney Airport.

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ConclusionThe transport and logistics industry relies on innovative technology

and business models to deliver the continually better services and

reduced costs that customers demand. However, the Innovation

IndexofAustralianIndustry, published by IBM Australia and the

Melbourne Institute, found the industry was close to the national

average on innovation.

The relatively low volume and small size of the Australian transport

and logistics sector is a possible explanation for its middle-of-the-

road approach. However, the danger of merely following the lead

of other countries is that in a global marketplace, more innovative

overseas competitors will present a significant threat.

IBM believes Australian transport and logistics providers need to

continue along the path of transformation in their use of appropriate

technology and business models, using approaches such as IBM’s

component business model.

While the benefits need to be balanced against the costs,

technology still has the potential to deliver sustained improvements

in productivity. Providers also need to tailor their business models

to meet the needs of more demanding customers, whether by

increasing integration and complexity or simplifying to deliver a

no-frills, low-cost service.

For further information please contact:

Gordon Silvey

Practice Leader, Transport & Logistics, ANZ

IBM Global Business Services

IBM Centre, Level 19, 60 City Road

Ph: 0� 8646 527�

gsilvey@au1.ibm.com

Douglas C Robinson

Partner and Travel and Transport Leader

IBM Global Business Services

Ph: 02 9478 8589

doug.robinson@au1.ibm.com

ibm.com/industries/travel/

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