Asia Logistics Wrap

Japan Logistics Report 1

It seems appropriate that I post my first "Japan Logistics Report" this evening as today's Logistics Japan newspaper provides a summary of the trucking logistics market across the country for the month of January. This is a regular thing for the newspaper, and so I plan to bring the survey results to this blog for public consumption. The newspaper is in Japanese, so this English translation should be an added bonus.

Overall, the tons transported by 32 regularly surveyed special package hauling firms was down 98.8% of 2006 and breaks a streak of year-on-year monthly gains since May 2006. As for standard haul trucking, it was up from last year at 101.9%. More specifically, the Tokyo and Nagoya areas were down at around 98.0% while Okinawa and the Osaka regions were both over 115%.

Focusing on Tokyo, because that is where I am, the decrease was driven by reduced hauling of metal products, machines, foods, and daily goods. Next month and beyond is expected to see flat movement.

On the air cargo side, domestic (3.3%) and international lanes (2.6%) were both up over 2006 for January.  Overall, the value of exports by air was up 16.5% and imports up 10.6% over January 2006. For sea freight, the value of exports was up 20.1% and imports 10.2% over 2006. Domestic rail freight was down across car and container types.

In the future, I will be pulling from a range of articles published in Logistics Japan for this report, which I intend to do on a weekly basis except for holidays. Each day will cover a different region of Asia, except for Friday when I focus on the topics of resilience and globalization.

Upfront Investments to Relationship Building in Japan

One of my colleagues asked me the other day why projects with more traditional Japanese companies, or with more traditional Japanese employees, fail to reach decisions quickly, even after several meetings on the same subjects. I told him that the transformational change often expected by Western companies on many projects is still quite new in Japan; that Japanese have long preferred breakthrough achievements as the result of several incremental improvements.

Toyota is one example of this, with their steady rise in the USA now resulting in a seemingly unstoppable momentum and market strength. On the other hand, there is also the example of more sudden, transformative change implemented by Nissan domestically within Japan. As more Japanese return from overseas to take executive positions in Japan, the approach will change per project or initiative. But a true change in the foundation of Japanese business society will require many more years and generational turnover.

As my colleague expressed his frustration, I realized perhaps more consciously than before that a lot of the benefit of relationship building in Japan must be preceded by a comfortability with the fact that you may not know early on how any particular business relationship will develop. In Asia, this I believe is more of an art than in Western countries where written rules and contracts take precedence.

For businesses in this environment, it means investing significant resources up front for a potential deal with a very rough estimate of future cash flow. For larger, well-resourced firms, this type of investment can be creatively subsidized by other, more established businesses or contracts. But for unsubsidized smaller firms and relatively unsubsidized new business units in a market like Japan, this scenario can be taxing on the health of the overall business. Especially if the target customer and respective contract is very large, a smaller firm may end up living and dying in the short-term by the results of such a contract. The resources required to sustain momentum are significant, and yet if the project doesn't move quickly as can happen with large Japanese customers, there is not enough cash flow to sustain that momentum (assuming parallel projects are limited and running at breakeven). But to simply cut the opportunity off the books severely impacts future expected cash flow.

Thus, a firm in this situation cannot be completely dissatisfied with short-term losses associated with such an investment of resources. It is a cost of doing business in such a market and requires a combination of patience, steady determination, and a commitment to relationship development. At the same time, for a business unit evaluated on profitability, such a situation eventually requires tough choices--drop the project all together or work your tail off to find new sources of cash flow elsewhere in order to subsidize already dedicated resources.

In the end, if the strategies in place do not accurately reflect the business's market realities, customers will be selected inappropriately and resources utilized inefficiently in building a strong foundation for future success.

Updates...

Well, it has been easier to take a longer leave of absence from the blog than I first imagined. :-) There is no escaping that this is primarily due to focusing most of my time on the new job at Manhattan. Where my previous job was so mundane that the blog was my refuge for exploring the supply chain industry in East Asia and elsewhere, in addition to some very strategic and high-level topics, the job with Manhattan has been a 180-degree turn for the better. I am foreseeing that the solid hands-on project management experience and exposure to some of the best supply chain technology in the industry while at Manhattan will pay dividends for blog-writing down the road. At this time however, I am enjoying simply working on a very ground-level project and seeing how it all fits into the topics I have discussed here before: resilience, advances in the supply chain industry, and the interconnectedness of East Asia to the rest of the world and within.

Specifically in relation to Japan, many of the difficult logistics industry issues I experienced while working with a Japanese logistics firm are definitely present with the bigger-name companies I work with today. Of these, the most critical is acquiring and maintaining workforce talent. A big name is no guarantee that the best people can be acquired, nor that your best people will stay on for the longer haul. The speed at which the workforce needs to adapt has never been greater, and yet, based on the talk of friends and acquaintances, this magnifies even more the shortfall of good people.

For now, I am thinking of switching modes here from article commentary (not that I have been doing any of that recently) to more of an online journal regarding my experiences here in Japan. With work being more intense, it will be a good release but also allow some time to reach another level of supply chain understanding before tackling issues in the industry.

 

SAP Japan Targets ERP for Middle Market

From the E-Logit newswire today (Japanese), SAP Japan has announced that it will deliver ERP software, titled SAP Business One 2005B, targeting the Japanese middle market. The move comes after taking into account a growing voice amongst Japanese customers for this type of package.

With typically smaller IT budgets and staff than larger companies, middle market firms in Japan are very price-sensitive and prefer change in smaller steps over larger, transformational IT initiatives. In this case, choosing an IT product from a large provider such as SAP has been historically un-attractive. Thus, as in other countries and regional markets, it is necessary for companies like SAP to maintain their large project niche or create products for the middle market at a smaller scale, lower price and shorter introduction period. Although this market may not be as profitable for SAP compared to its larger customer market, it is smart from my point-of-view as many middle market companies have larger customers utilizing, or preparing to utilize, SAP products. In an effort to maintain these larger customers into the future, and in the midst of a more competitive, globalized world, middle market companies will want to sync themselves as much as possible to customers.

Historically, middle market companies in Japan have made many IT decisions based on personal contacts rather than strategic analyses. Thus, many companies have IT applications running for financial activities and operations that are incompatible. Although there are more companies than SAP who provide application packages to solve this issue and help middle market companies better respond to changes their customers are implementing, Japanese companies may feel more comfortable going with SAP if their larger customer has already committed to the software. Again, referrals from personal contacts will always come into play resulting in the possibility of choosing a different, but SAP-compatible, systems provider.

In terms of SAP Business One, it packages together not just financial and management accounting functions, but also sales, supply, inventory, and customer planning along with sales support--all functions that support corporate growth and would be attractive to middle-market firms in Japan. The package is designed to be introduced over a short period at low cost, which as I mentioned is a key characteristic, and can respond to needs for financial compliance and internal controls, which is coming under more scrutiny in Japan.

For the design of SAP Business One 2005B, SAP took into account more than 30 functionalities that were considered top needs by Japan customers. These needs centered around system operability, Japan-unique billing processes involving the application of taxes, and data analysis tools that can be used by management in companies where IT specialists are rare or do not exist. In the future, SAP looks to deploy a business intelligence package to link to Business One.

Many of the issues will be not in implementing new software, but rather in the staff of middle-market companies being able to adapt to the software through new and more efficient work processes. This will involve new ways of training regardless of the systems provider employed.

Pro-Logis Moving Aggressively in Japan

According to Logistics Business Review, ProLogis shows it is aggressively strengthening its position in Japan through landing several new lease agreements.

The article by James Walker from October 20 starts off by noting that the company "has signed numerous leases and letters of intent for more than 1.2 million square feet of industrial space at new facilities it is developing in Japan."

Among the agreements are:

• a 292,000-square-foot distribution warehouse in Tokyo's Chiba Prefecture for an unnamed global provider of transportation and logistics services. The customer will use the facility to serve a Fortune 500 provider of footwear and apparel;
• ProLogis Parc Amagasaki and ProLogis Parc Maishima III, both in Osaka;
• ProLogis Parc Komaki in Nagoya;
• ProLogis Parc Sugito II in Tokyo; and
• a new, 1.3 million-square-foot inventory facility in Tokyo is scheduled for completion in the second half of 2008. The five-story warehouse, to be called ProLogis Parc Ichikawa, will be located approximately 16 kilometers from Tokyo's central business district and offers direct access to Tokyo Bay ports, Narita International Airport and other key transportation infrastructure. Total investment at the site is expected to exceed $200 million.

According to the article, "all the facilities are either currently in planning stages or are undergoing construction."

A quote from ProLogis management in Japan:

""We remain extremely pleased with overall market dynamics in Japan," said Mike Yamada, co-president of Japan operations for ProLogis. "New facilities in the ProLogis development pipeline are often substantially pre-leased prior to completion, a trend underscored by the exceptional marketing activity we experienced in the last quarter.""

I met with ProLogis at the recent Tokyo Logis-Tech conference. They seem to work heavily with foreign logistics firms, but there is no doubt that they have the ability to compete for Japanese business as well.

Aichi Prefecture Logistics Survey Results

For those unfamiliar with the geographical placement of Japan's industries, a logistics survey from Aichi Prefecture might seem of little consequence. However, Aichi is home to Japan's manufacturing sector, most famously the automotive manufacturing sector. More specifically, this area contains Toyota City (see map), the home of--you guessed it--Toyota. Of course, Toyota brings with it a dense network of suppliers that start at 1st Tier with companies like Denso and Aishin Seiki. As can be inferred, the logistics necessary to support this concentration of business must be equally robust. As a result, a logistics survey from Aichi provides a window on how logistics firms are faring in Japan.

The survey I will touch on is from the September 18th issue of Logistics Japan. It is a survey that I had noticed right away, but haven't gotten to blogging due to other distractions. Conducted by the Aichi Prefecture Trucking Association, it focuses on responses from members in reflection of July business results. Of the 740 companies surveyed, 323 companies replied providing a sample of 43.6 percent the total.

Comparing with data from July of last year, 22.5% of companies said freight movement increased, 35.6% said it stayed the same, and 41.8% said it decreased. Looking ahead three months (from the survey date, which would be October and November), 55.0% of companies foresee flat movement, 24.6% foresee a decreasing trend and 20.3% foresee an increasing trend.

Other interesting data is in regards to pricing power towards clients. Of the companies surveyed, 44.3% said they hadn't negotiated rate increases; 32.7% said they had negotiated, and 22.9% said they had plans for negotiations. Of those that have seen a shift upwards in rates, only 1.5% answered affirmatively. Another 17.8% had seen a partial shift. However, an astounding 80.5% have not been able to affect an upwards shift in rates.

These poor results in negotiations could be caused by such things as the quality of negotiating ability, pressure from long-term traditions in pricing, small relative size as compared with clients, an increase in industry competition/fragmentation that dilutes pricing power, amonst other reasons. Looking ahead, some firms will not be able to survive and the question is whether the transportation industry can restructure itself through consolidation efficiently enough to reorganize and concentrate pricing power to the degree that clients must begin to accept higher rates for logistics services, while at the same time easing margin pressures for transportation providers. A long, drawn-out restructuring is bound to have negative effects on the Japanese logistics industry.

Logis-Tech Tokyo 2006 Exhibition

Blogging might be a bit light here over the next couple weeks as my home laptop is in for repairs. However, I wanted to make note of the Logis-Tech Tokyo 2006 exhibition that is coming up from September 12 to 15. It will be held at Tokyo Big Site and costs 1000 yen for entry. There will be approximately 312 logistics-related companies there. Below is the description offered by the event:

"LOGIS-TECH TOKYO is held once a every two years and is well known as one of the largest logistics exhibitions in Asia. Each edition is packed with more than 300 exhibiting companies and over 100,000 visitors. Leading distribution companies from Japan as well as enterprises from all over the world are on hand.

"A huge variety of goods are all exhibited under one roof, including: forklifts, storage systems, pallets, conveyors, casters, containers, third-party logistics products, and software. In addition, recent editions have seen local government groups present, looking to expand their commercial activities and find interested companies. The exhibition site is always a flurry of excited exhibitors and visitors."

I will be going at least one day to the event and plan to take several pictures as well as report on any interesting products or services that I haven't seen before or that may be unique to the Asia region. I am also hoping to take part in one of the forums if I can swing it. Whatever happens, I will be reporting on my experience here.

If anyone from outside Japan plans to make it, please let me know. I would enjoy meeting up!

Model Businesses in "Green" Logistics Named

Japan, due to its small size and yet high population density, is intensely focused on facilitating environmentally friendly business practices in its many industries, including logistics. As a result, the Ministry of Economy, Trade and Industry (METI) is active in promoting those firms that take leadership positions in what is commonly called "green logistics" here in Japan. The title of this program is called "Green Logistics Partnership."

As reported recently in the August 7 issue of Logistics Japan, METI recently named 10 logistics companies as model businesses in terms of green logistics and awarded them with supplemental funds to support further green initiatives. The 10 firms/partnerships are listed below (partially linked):

1. Ryoshoku Ltd.
2. Collabo-Delivery
3. Fujitsu/Excel Japan (part of DHL Worldwide)
4. Sumikin Bussan and Hankyu Travel
5. Japan Pallet Rental
6. Confectionary Loginet
7. Diakeito Co., Ltd. and Kyonan Warehousing
8. Fuji Film Logistics and Nittsu
9. Nihon Butsuryu and Nihon Kamotsu
10. Yamato Transport

Firm Highlights:

Besides its efforts in condensing logistics activities into a full-line, chilled logistics center catering to processed foods, confectionaries, and alcoholic goods, Ryoshoku has built a conveyance system of transport boxes utilizing RFID. Also, by sharing standards, the center aims to improve capacity utilization and targets logistics efficiency via mutual transport that comes with such a logistics integration center. Indirect benefits include a reduction in CO2 emissions due to better capacity utilization in transportation.

Collabo-Delivery stands out by focusing on the efficiency of internal logistics for large buildings, implementing shared collection and distribution via an established stock point. While reducing the number of delivery trucks inside buildings, delivery in basement level parking structures is improved and sitting times shortened.

Fujitsu/Excel Japan (DHL), in centralizing logistics information extending from parts supply shipping to product distribution, has built a "Focused Dispatch Control Support System" designed for supply chain optimization. Based on the application of the new system, the environmental burden across the supply chain is lowered and CO2 reduction in progress.

Sumikin Bussan/Hankyu Travel are focusted on the efficiency of apparel logistics between Japan and China. Both have established a logistics foothold in China with work separated by store and bring product into ports close to areas of domestic Japan where consumption is high. Via an effort to optimize logistics across the entire supply chain, the firms are able to bring about logistics efficiencies and reductions in CO2 emissions.

The first phase of supplemental funding will total approximately $4.3m based on the current exchange rate of 117 yen/$.

Japan Trucking Association on Rising Fuel Prices

Starting the beginning of this month, there was another rise in fuel prices that has put even further pressure on the trucking industry to take effective countermeasures towards alleviating the impact of fuel price volatility on trucking companies. The recent increase was an exceptional 6 yen/liter (approximately 20 cents per US gallon) and in the August 7 issue of Logistics Japan, the subtitle beneath the headline was "Increase Exceeds Trucking Association's Room for Patience."

Until now, the dramatic rise in fuel prices has been counteracted in Japan in primarily two ways: 1) take internal action within company to reduce any waste in fuel usage and 2) join with other companies to form a purchasing cooperative to bring additional discounts. However, this only focuses on the supply-side and fuel usage levels, which eventually provide diminishing returns in terms of reduced costs. The Japanese trucking industry as a whole hasn't been able to successfully pass along these fuel price increases to customers as has been the trend in the USA. Especially the "long tail" of the trucking industry--the small- to mid-sized companies--face the greatest pressure in terms of maintaining margins.

As the article states, gradually industry voices are saying that the trucking industry "now can't help but approach customers anew for negotiation on rates." Whether this can happen will mean the life or death of some companies unable to keep pace with the business changes necessary to counteract higher fuel prices. These companies typically do not possess the economies of scale to gain pricing leverage nor the management systems to develop and diversify new ways of doing business. The Trucking Association is encouraging the entry of more smaller firms into fuel purchasing cooperatives to receive discounts, but pressure is coming from fuel suppliers suggesting that these discounts can go only so far. Eventually, it is my opinion, these increases need to be pushed on to the end-consumers.

Improving Profitability in Japanese Trucking

For those working in Japan's logistics industry, it is not news that the trucking industry is facing a perfect storm of high fuel prices, tightening environmental restrictions, driver shortages, low pricing power, and growing competition due to deregulation--all placing unprecedented pressure on profit margins, especially for the small- to mid-sized players leaning heavily on their trucking business to sustain revenues. As a result, the Ministry of Land, Infrastructure and Transport has been running a series of research seminars aimed at "up-and-coming" trucking managers.

One of the recent reports from the participants in this seminar series is titled "Prescription for the Profitable Success of Small- to Mid-sized Trucking Businesses" and a summary appears in the 7/31 issue of Logistics Japan (as you might have noticed, there are many interesting articles in this issue). The report attempts to lay out points and hints for success and presents a stance and countermeasures aimed at profitability improvement. It bases its direction on three areas:

1. Improvement of transportation profitability and onsite, logistics facility management
2. Advancement in customer business and rationalization of customer-aimed logistics
3. Acquisition and cultivation of talent

In the thumbnail to the left, the major themes are illustrated (in Japanese). Basically, the goals of strengthening competitive ability in transportation and improving profitability as well as added-value are at center. Extending from this center are specific activities:

• Creating a specialized strategy around core competencies; grabbing a niche market
• Acquisition and segmentation of winning customers
• Planning together with similarly positioned companies and customer strategies
• Creating alliances with similarly positioned companies
• Creating higly profitable transportation/distribution operations; optimization of via integration
• Improving strategic skills; improving value added
• Application of information systems

One of the things further emphasized was the need for an ability to make proposals that illustrate a service portfolio rather than separate proposals for different services. In this way, the firm must show the strength of their ground operations in addition to the ability to integrate the handling of various goods from a number of different customers.

In terms of people and talent, what was introduced is a successful business example showing how drivers were given an "existence in the firm that enabled them to grasp the keys to improving the value-added of transportation services." In this instance, a system had been deployed designed to increase motivation and the wide range of training leadership. An interesting addition were ideas discussed on the issue of Japan's aging population and bridging the gaps related to utilizing female employees as drivers.

Despite the fairly difficult operating environment for these small- to mid-sized transportation firms, the Ministry suggests that "there are certainly niches in the transportation market where such firms can be profitable and where larger firms won't venture." In the end, the Ministry asks these firms to "bear down and make the effort."

I believe these targeted areas for improvement are very important, but I believe this initiative ignores a critical component to succeeding with the implementation of these initiatives. That component is every firm's leadership and the strength of that leadership's vision and will towards bring about organizational change.

Firms in the face of difficult circumstances, especially small- to mid-sized firms in Japan's transportation sector, may find their natural reaction to be in making decisions that seek to recover past performance and in the process attempt to preserve the long-standing organizational culture. This is the conservative approach and a strategy mismatch for volatile periods, certain to prolong harder and more dramatic choices for another day. This is a strategy for no change.

Yet, even if the primary leadership of these smaller transportation firms has the vision and will for dramatic and positive change, without the proper management tools in place to enable the change strategy, employees will not know what the strategy explicity means for the role in the organization and how via their daily responsibilities they can contribute to positive outcomes for the firm, their department and themselves.

Convincing a smaller Japanese firm of this criticality will be particularly difficult if the critical mass of a firm's leadership is entrenched in a status quo enshrined many years in the past. In such a scenario, the firm will be prepared to defend the status quo via "this is the way the industry works" excuses rather than engage in vigorous and objective self-reflection that challenges such long entrenched assumptions and practices.

For the change agents looking to drive transformation in this sector of the transportation industry, the key will be in maintaining a solid patience while developing the ability to identify those industry leaders with the true vision and will to bring about positive change via transformative decision-making. Combining the change agent's tools and knowledge with the experience of these industry leaders will provide a foundational start to a potentially disruptive yet positive development for Japan's transportation future.