The Swiss-based freight forwarding and logistics company is best known for its air and freight forwarding business, but has successfully added warehousing and distribution, along with related outsourced services, to its portfolio over the years.
Source: Panalpina | Julian Salinas
Panalpina CEO Peter Ulber
Global third-party logistics provider Panalpina is best known for its air and freight forwarding business, but has successfully added warehousing and distribution, along with related outsourced services, to its portfolio over the years. It is a Top 10 3PL, by most estimates, and the sixth largest cargo agent in both air and ocean freight.
Now the Swiss company is reaching further up the value chain, pursuing opportunities in manufacturing and reverse logistics, and expanding its footprint in refrigerated transportation.
“We are looking at business that has a high degree of value-add and exiting the normal pallet in/pallet-out business,” Chief Executive Officer Peter Ulber said in a recent interview at Panalpina’s office in the port city of Charleston, S.C. “If it’s just a commodity, or matter of having a big shed with people, forklifts and pallets and that’s all we do, I’d say that is strategically not what we want. From a profitability viewpoint, that will definitely have its limits because everybody can do it.”
The changing business mix is even more important in light of the sluggish global economy, which has slowed freight management activity. The biggest financial drag, however, is from Panalpina’s logistics unit that supports the oil and gas industry, which is in a severe slump due to the plunge in global commodity prices. About 15 percent of the 3PL’s business is related to the oil and gas vertical, such as transporting sections of pipelines or oil platforms for new projects.
From an earnings perspective, the first quarter of 2016 wasn’t much different than 2015. And Ulber, who was recently named chairman by Panalpina’s board and will relinquish his CEO duties on Sept. 1, said the freight outlook doesn’t look much better for the remainder of the year.
Panalpina reported that operating income last year ticked up to 117.2 million Swiss francs ($117.5 million) from 116.7 million Swiss francs in 2014, with an operating margin of 8 percent (up 0.6 percent) despite a challenging freight environment.
The company’s air freight volume decreased 2.5 percent to 836,200 tons, primarily due to lower shipment orders from customers in the energy and automotive sectors. Gross profit per ton decreased 5.8 percent to $700 and air freight’s gross profit decreased to $585 million from $636.5 million the year before. Overall operating profit for air freight fell to $90 million from $112.5 million in 2014.
On the ocean side, volumes decreased 0.8 percent in a flat market. The company said it transported almost 1.6 million TEUs. Gross profit per TEU decreased 1.5 percent to $301.5, resulting in a gross profit of $481 million compared to $492 million the prior year. Ocean freight’s earnings before interest and taxes (EBIT) was $27 million, up from $13 million in 2014, and the gross profit margin doubled to 5.5 percent.
On a positive note, Panalpina said its contract logistics division gained operating income for the first time, despite a 10.7 percent decrease in gross profit. The profit was achieved by exiting leases for warehouse facilities that were losing money. Panalpina’s logistics EBIT stood at $2.15 million, compared to an EBIT loss of $8.5 million in 2014.
Source: Panalpina
Panalpina warehouse
During the first quarter, Panalpina’s earnings before interest and taxes slipped 5 percent $24.6 million from the first quarter of 2015. Net forwarding revenue fell almost $200 million from $1.5 billion to $1.3 billion, with a 10 percent drop in ocean freight volume. On the bright side, air freight volume grew 5 percent in a market that shrank an estimated 3 percent. Shipment volumes contracted substantially for oil and gas, but grew in perishables and other industries. And the logistics business posted its fifth consecutive quarter of operating profit.
Panalpina’s operating profit lost about 15 percent of its value due to currency markets and the strong Swiss franc.
Ulber said 3PLs will have to temper growth expectations because the globalization and outsourcing trends that drove the market have plateaued.
“I think it’s quite likely that we’ll have to get used to an environment that is flattish as far as air and ocean growth is concerned,” he said.
Source: Panalpina
Panalpina airfreight station at Huntsville Airport in Alabama
TMS.
One of Panalpina’s new growth opportunities is in logistics manufacturing services. Contract logistics typically includes services such as assembly and kitting of products, but in the past 18 months Panalpina has begun offering fairly sophisticated manufacturing services for customers in the telecommunications industry and plans to expand those offering to other sectors.
Consumer demand and technology change so fast that many manufacturers increasingly want flexibility to configure and customize products at the last possible moment and cut down deployment time, compared to placing a static order at a plant in Asia and receiving the goods weeks or months later when customer requirements may have changed. Panalpina wants to take advantage of its proximity to consumer markets, with about 100 warehouse facilities around the world, to do the final manufacturing and arrange for transportation to the final destination, Ulber said.
The company is helping telecommunications providers roll out 4G and 5G networks in Latin America and the Middle East by configuring close to the installation point base stations made in China. The work can also involve cutting fiber optic cable to the exact length required or downloading and installing the latest software just before delivery.
In addition to logistics manufacturing for mobile network infrastructure in Brazil, the 3PL recently launched a hub in Panama with 19 engineers and 32 technicians where it configures and distributes components throughout the region for a Chinese telecom company, as well as a supply center in Dubai for Ericsson. Panalpina employees configure, assemble and test network cabinets with the latest software uploads before inspecting and packing them for delivery to end-customers in the Middle East. And it is now expanding the service to mobile phones, with postponement services in Amsterdam and repair services in Amsterdam and Dubai, spokesman Sandro Hofer said.
The manufacturing services can help customers reduce lead times from 90 to 15 days because products are configured close to the end-user and allows them to reduce the amount of forward stock need to meet service level commitments because material is only figured to order, he added.
Ulber said that having a 3PL do the customization also improves supply chain visibility compared to the alternative of sending the units to a third-party contract manufacturer for configuration. The same postponement process could be applied to apparel tied to sporting events such as the Super Bowl so that pre-staged shirts, hats and memorabilia can get printed with the winning team’s banner immediately after the game and rushed to stores, he added.
“If you want to have sustainable growth and sustainable profits you have to specialize in a few things and be really good at them,” he said.
Panalpina, in partnership with Cardiff University in Wales, is also exploring additive manufacturing, or 3-D printing, as an offshoot of this manufacturing service capability. The aim is to help Panalpina customers identify products that could be switched from traditional manufacturing to 3-D printing. The company is running several test sites to learn how to use the technology, Ulber said.
The relationship with Cardiff is more than three years old and previously resulted in the development of a new inventory forecasting application. Cardiff researchers used Panalpina’s data to map customer inventories across product lifecycles and create an algorithm that allows the company to forecast demand, and help customers reduce inventory levels. The 3PL said it can now accurately predict inventory inflection points for all kinds of products across different industries and estimate the maximum and minimum inventory holding a customer requires. That, in turn, allows Panalpina to predict how much space is needed at its distribution centers, where to position facilities and what services to offer.
The algorithm essentially decides for each type of scenario which forecasting model to pick, much like weather forecasters pick from several computer models to determine which one is best suited in a particular case to make a prediction.
Another information technology differentiator, according to Ulber, is Panalpina’s new Transportation Management System from SAP. The $200 million global platform is the largest investment in Panalpina’s history. The first version, limited to ocean freight, went live a few years ago. The latest version includes air freight and refreshes SAP’s ERP system that works in tandem with the TMS, which is specially designed for forwarders. The project experienced some delays, as often is the case with global logistics platforms, but is now live.
Ulber said the new system, over time, will make Panalpina much more productive because it will take less time to process shipments. Plus, different offices around the world can work on the transaction because they will have full access to all communications and operate with standardized tools. That means Panalpina can route certain tasks, such as dangerous goods handling, to virtual centers of excellence where experts in certain commodities can handle customs clearance and other requirements.
Panalpina is also increasing its global reach in perishables transport. Late last year it acquired a majority stake in Airflo, which specializes in exporting fresh cut flowers, plant cuttings and vegetables, and is the second largest air freight forwarder in Kenya. It organizes up to 1,500 temperature-controlled shipments per week from Kenya, totaling more than 40,000 tons of flowers and plants each year. Exports of Kenyan flowers are projected to grow annually by about 5 percent, Panalpina estimates.
The move has helped Panalpina expand its foothold in Africa.
Ulber said the company has been studying trade flows for various types of perishable products to identify where it should get involved. One of the benefits is that perishables can help counterbalance trade in dry goods, which typically are shipped from more developed countries in the north to less developed ones in the south.
Another new area of emphasis for Panalpina is reverse logistics. Many 3PLs now offer returns management, but Ulber said Panalpina wants to take the concept further by managing distribution throughout a product’s lifecycle all the way to repair, recycling or disposal.
“Some of these activities at certain companies have been done in isolation, but to do this whole product lifecycle concept,” and predict obsolescence, “I think that is fairly new,” he said.
Mobile phone providers, for example, have to decide whether to refurbish or recycle many used phones, or send them to another market where they have value when consumers return them or the company bought more phones than needed in a particular market.
In addition, Panalpina is taking advantage of new opportunities to do business in Iran since international sanctions were dropped last year.
The Swiss forwarder has an exclusive agent in the country that it used for non-sanctioned shipments.
“There’s huge demand from companies that want to do business with Iran and need advice on how to set it up,” Ulber said.
Freight movement to Iran could pick up in 2017, officials said.