DHL’s prescription for success

DHLÆs prescription for success Sees stable rates in 2010, seeks to grow health care business.

By Chris Dupin

   DHL Global Forwarding and Freight Chief Executive Officer Hermann Ude said he does not expect a systematic decline in transpacific air or ocean freight rates this year.
   Capacity concerns have been good for the forwarding industry though, he said.
   'More and more shippers see the value of a forwarder coordinating their whole transportation,' Ude said. 'It's wonderful if you have a perfect, lowest possible full-year rate with a carrier. But if he doesn't honor that rate when the rates on average go up and says, 'well, at that rate I will move it with the next vessel '' The value of a good supply chain is not completely defined just by the price for the box and I think that message has got through.'
   The global forwarding and freight division which Ude heads ' one of Deutsche Post DHL's four major divisions ' employs about 40,000 of the parent's 460,000 employees.
      An asset-light forwarding company that manages supply chains for customers but does not own planes or ships, it is a global market leader in both air and ocean freight. The division punches above its weight, gathering 104 billion euros or 27.8 percent of Deutsche Post DHL's overall sales in the first nine months of 2010, despite employing less than 9 percent of its employees.

Capacity. Amid an uptick in aircraft deliveries, reduced air freighter capacity by carriers such as Delta and Japan Airlines, and an increase in aircraft orders, 'if you look at who buys these planes, it's a pretty targeted arena. So a lot go to Chinese carriers, some to Middle East carriers,' Ude said.

Hermann Ude Chief executive officer, DHL Global Forwarding and Freight
'More and more shippers see the value of a forwarder coordinating their whole transportation.'

   While intra-Asia business continues to increase, he said European carriers widely used by many forwarders are 'shying away from major investment.'
   In addition, during the economic crisis, orders for many freighters were converted into passenger orders, he said.
   At the same time, the structure of landing rights is still very complicated in the transpacific, he added. 'Not everybody can operate China to the U.S. or China/U.S./Latin America, so that is why we still expect there to be relatively high rates throughout the year. So we don't expect major decline,' though he noted there was a slight rate decline before Chinese New Year.
   'On ocean freight, I think everybody is rightly impressed on the capability of the industry to manage capacity,' Ude said. 'That has never been seen before the last year. With slow steaming, taking out vessels, and warm and cold parking of vessels, that has induced an enormous scarce capacity on many trades, specifically the transpacific.' Rates in some cases leaped from $500-$600 to $4,000 per container, he added.
   'Demand and capacity have not been in sync. I have had a lot of meetings here in the U.S. and I think the key concern, specifically of transpacific customers, is still the availability of capacity,' with customers wanting to make sure their cargo is loaded in Asian ports, he said.

Health Care. Ude was in the United States in early February to visit customers in the health care industry, one the division has been engaged with for at least 15 years. About 10 percent of the division's staff is devoted to the sector. Customers include not only big manufacturers of proprietary pharmaceuticals, but also makers of generic drugs and medical device manufacturers.
   DHL's services run the gamut, operating large distribution centers for some companies, arranging air, road and ocean shipments, also using its express network to move products used in clinical trials (These often involve the movement of smaller shipments that are sometimes temperature sensitive on a timely basis).

Orfanos

   Interest by logistics companies in serving pharmaceutical manufacturers and other segments of the health care industry increased during the economic downturn, said Ude who talked with American Shipper at DHL's office in Newark, N.J., with Angelos Orfanos, global president of life sciences and health care at DHL.
   Orfanos said life science and health care is one of the three major segments that DHL forwarding and freight focuses on, along with energy and technology. Other segments that the company has a major interest in include fashion, automotive, and engineering and manufacturing.
   Ude said there was no downturn in the pharmaceutical business during the recession, and over the long term drug shipments are growing at about 10 percent per year compared to an average of about 5.5 percent for air freight generally.
   'Somebody who needed a beta blocker still wanted his beta blocker. He wouldn't stop it just because there was a crisis,' he said.
   One attraction of health care is that serving companies in the sector 'raises the bar,' he said. 'It is most certification-intense and most complex from supply chain perspective,' such as the need to store and transport projects within narrow temperature ranges.
   If DHL can serve the health care industry's needs in India, for example, 'you should be able to serve everybody's needs in India. We have always appreciated the opportunity to serve these customers because they help us grow our capabilities quite substantially.'
   Commodities as seemingly far-removed as cheese and apparel have something to learn from the health care industry, he said.
   'There is a lot in common because they have this element of being perishable in a way. If you have a swimsuit and you sell in June you may get $100; if you sell it in August you may get $50; if you want to sell it at Christmas, it's a Christmas tree decoration, nobody wants it,' Ude joked.
   DHL has built a large infrastructure for the pharmaceutical industry, he said, including a number of what it calls 'competence centers' with a specially trained workforce where products can be stored at a variety of temperatures.
   The first wave of those centers was built in Europe and the United States, and the company has since opened one in Shanghai, a number in India, and one in Dubai. It continues to add centers in the United States, announcing the establishment of one earlier this year in Brisbane, Calif., near San Francisco.
   'In a service industry, everything is people and process. So the key challenge that we are faced with is that our customers want to go into developing countries with production and distribution of product, and in those countries the infrastructure is not as developed as it is here or in Europe. We have to deliver a sustainable service in these places.'
   Ude is based in Bonn, but he said German business for global forwarding accounts for just 6 percent of revenue, compared to 40 percent for Asia and 20 percent for North and South America.
   While production of products such as electronics and toys were the first to move to Asia, Ude said pharmaceutical production is following, 'with a little bias toward India versus China. India has a much stronger structure there, know-how and also pretty strong Indian companies in that space.'
   Even the U.S. Food and Drug Administration has even set up offices in New Delhi and Beijing.
   'Everybody thought they would do it to control these shippers and keep them small, but it's just the opposite,' he said. 'They want to support the health care cost saving programs in the U.S. so they want to build a cheaper supply base in other markets.'
   While there has been a push by health care companies to move more product by ocean, Orfanos said about 75 percent of health care products move by air.
   Movement is determined, in part by the value of a product. While high value biopharma product that is sensitive to changes in temperature and humidity will most likely move by air, a lower-value nutritional product or diagnostic kit might move by ocean.
   Orfanos and Ude said movement of some high value products create issues with ocean carriers. A shipping line may only be able to obtain a certain amount of insurance for cargo and will refuse to accept a container with a value of $800,000 or $2 million because it would leave less coverage available to the owners of other cargo on the ship.
   Ude said DHL has chosen to focus on sectors 'where you need a specific sales approach and a specific product offering, infrastructure and dedicated people who do nothing else. Life science is one of those sectors.'
   This is also true of oil and energy business where there are heavy demands for compliance with laws such as Foreign Corrupt Practices Act and special knowledge, he said. For example, DHL Forwarding has arranged the transport of windmills for remote copper mills in the Andes.
   'People always look at the rates, they don't look at the value of the supply chain,' Ude said. 'An interesting question to ask a shipper is 'how much less-than-containerload do you have.' You wouldn't believe how many say they don't have any. Then if you ask, 'what is your average loading factor for containers,' you see that they send hundreds and hundreds of half-filled containers.'
   DHL can help those company by consolidating and creating LCL opportunities, he said. 'We are growing LCL significantly above the market.
   'The imperative we have is to improve logistics, we have to have smarter people. We have to educate them better, because the value sits not in getting the container cheaper across the ocean, the value sits in filling it moving it smarter.'