Increasing the Profitability of Logistics

Despite increasing revenues, only a small number of logistics services providers are seeing increased profitability. Companies that want to grow their logistics business profitably must do more than just adjust a few cost levers, or hope to achieve scale or synergy effects by way of acquisitions. They must be willing to pursue fundamental change and challenge how things have been done in the past. Oliver Wyman has identified six levers that can help logistics services providers unlock greater profits in a growth market.

The top logistic companies face a significant gap between revenue and profitability

An analysis of 100 leading global logistics companies – which has been ongoing since 2005 – found that these companies are achieving impressive revenue growth of 7 percent per year on average.At the same time, however, their profitability has significantly declined, from 6.8 to 4.2 percent EBIT during the 2005–2012 period.

1Why are logistic companies in such a difficult position?

There are several reasons. An important one is that providers are not working as a network but rather as independently operated subsidiaries. Traditional mindsets with a focus on “silo” thinking are still very typical and prevent companies from realizing scale effects. Even profit and loss are usually measured at the local subsidiary. As a consequence, every subsidiary strives to optimize itself at the expense of the others. This practice prevents companies from realizing scale effects, professionalizing their core functions, subcontracting appropriately, and optimizing their networks. What’s more, complex matrix structures, which complicate decision-making, as well as the duplication of functions and responsibilities, will increase these effects. Other important reasons can be found around a lack of standardization and professionalization of processes.
2Will more optimization activities help companies to improve their profitability?

In recent years, the logistics industry has optimized existing business models down to the smallest cost lever. As a result, in road transportation, logistics services providers have been increasingly using route optimization systems, relocating truck fleets to regions with lower labor costs, prioritizing network-compatible shipments, implementing the latest technological innovations, and increasing their truck capacity utilization rates. There’s a little room left in terms of the potential of traditional cost levers - such as implementing lightweight construction, improving aerodynamics, and increasing the efficiency of engines - but not much. The situation in other logistics segments is more or less the same. Achieving profitable growth in the future will require logistic service providers to undertake a thorough overhaul of their traditional business designs.
3How can logistic service providers grow profitable again?

To become profitable, logistics services providers have to fundamentally rethink their future business designs. This includes standardizing and streamlining structures and processes, developing industry oriented and innovative solutions, thinking and acting in terms of networks, as well as professionalizing core functions like tender management. The traditional “local entrepreneur” culture, i.e., of focusing on transactions and making “gut decisions,” will no longer suffice to produce profitable growth. While an entrepreneurial orientation of the subsidiary still is important, there also must be an overall perspective on the business, greater systematization, and a stronger team orientation. Last but not least, it is important for logistics companies to align their individual employees’ values and targets with this perspective.