3.

0 BUSINESS CASE

3.1 Enhancement needed for current system

As the global leader in supply chain management and a third-party logistics, DHL
offers several solutions and services including warehousing, transporting, and
managing. DHL has two separated systems which are Order Management System
(OMS), Warehousing Management System (WMS) and Transportation Management
System (TMS) to create an effective ecosystem of supply chain. However, according to
the Council of Supply Management Professionals, customers prefer the services of
multiple logistics services are integrated or bundled together by the provider (Liu &
Wen, 2012). The separated systems are becoming insufficient and incompetent to fulfill
the customers’ needs for an end-to-end supply chain service especially when e-
Commerce companies’ clients are increasing tremendously. To devote sufficient
resources to running its supply chain effectively and to deliver the high levels of service
expected by its customers, there is a need for DHL to enhance its system to deliver
more values to its customers.

As in DHL, the systems are remained separated and this indeed affect the linear
flow of goods and services. Having separated systems decreased the effectiveness of
data sharing between the two systems delayed in the synchronize of information.
For example, when there is disconnected disruption from order escalation, the
information may not be updated on another system in-time. As a result, warehousing
and customer service errors would arise and forms a barrier for business to respond
rapidly to customers. Build ups of obsolete goods and increase in inventory holding cost
would also arise when the recording of goods quantity and information are having
discrepancies in the process of transferring to the another system. There is a need to
increase its supply chain flexibility and resilience by increasing the velocity of its supply
chain’s response to rapid product changes.

To fulfill the aftermarket supply needs, consumers are seeking for a more
comprehensive services to cover their aftermarket services. Getting their required spare
parts within a short time after demanding is a critical mark to meet their customers’
aftermarket expectation. For example, a customer who provides a one-hour repair
window will need the necessary spare parts and accessories in-time to perform their
business. Therefore, inventory management across the end-to-end aftermarket, both
forward and reverse direction, is needed for third-party logistics (3PL) like DHL.
However, DHL’s OMS, WMS and TMS are not comprehensive to cover the reverse
directions of logistic operation as there is lack of solutions on monitoring the returns and
the low time-sensitive transportation offerings in all systems. DHL could only make least
adjustments for last minute send-offs for certain products and goods, unable to satisfy
the customers who are looking to receive their orders as quickly as possible. Besides,
the traditional WMS needs a lot of implementation of tight procedures and control in
arranging the many of warehouses for the system to work well and therefore would
delay the process in supporting partners needs in fulfilling their customers’ expectation.
Hence, there is a need for DHL to implement a system that provides smoother end-to-
end supply chain planning and design.

In the explosion of Internet technology and the growth of e-commerce, more

frequent, smaller deliveries and shorter lead time services are demanded. True real-
time tracking of freight as it moves across land, ocean and air has proved to be elusive
in the systems of DHL in this case. Separation of systems makes real-time decisions
difficult as warehouse constrains in real-time is unable to deliver. Planning,
coordinating, scheduling and designing the process also becomes ineffective as the
facilitation and oversight of DHL’s internal and lateral storage facilities are not
comprehensive. Fresh management opportunities are often loss due to the
interoperability between these systems is not promoted. Workflows are not smooth
enough and there is little control over the entire network to have efficient operations.
Hence, there is a need for DHL to enhance its transparency of system for better work
force planning from better horizon or unload or load plans.

Besides, the cost of operating different systems is huge for DHL. The training
for employees in all different systems can easily exceed the cost of devices. Not only
that, the unalignments of the company’s system have made DHL to have difficult
strategic planning, either long-term or short-term. Due to the poor planning and
scheduling capabilities, 50% of trucks travel empty on their return journey and
warehouses are either overfilled or standing idle. Inventory inaccuracy which leads to
poor space utilzation also increases its warehousing expenses. The labour cost is also
one of the biggest operating expenses which eats up 50 to 70 percent of the company’s
warehousing budget. Labour consumption for separated systems are indeed higher
than the integrated system and with the poor monitoring, productivity inefficiency costs
more to DHL. Therefore, there is a need for DHL to reduce associated operating costs
by optimising its distribution network and logistic activities and through enhancing and
aligning its systems.

3.2 Justification for Proposed System

After evaluating the current system of DHL, we would like to propose Logistic
Management System (LMS) to DHL which is a complete system with modules of order
management, transport planning and transport management systems that would
enhance the operation of DHL to meet customers’ demand that emphasize on after-
market service.

LMS is the combination of software tools to optimize all processes including

order and transportation, inventory management, monitoring and visibility, and the
reverse logistics. It elevates the critical inventory supply chain with the ideal
combination of service, locations and technology from making an order and delivering it
to a customer’s door. The system not only include the forward processes that are
already in place in DHL, but also the include the reverse processes. The forward
processes includes receiving and processing orders, checking and preparing inventory,
packing and picking items, dispatching and selecting a transportation route will deliver
the product to customer efficiently while the reverse processes includes the operations
with managing damaged or incorrect shipments, repairing items, and reusing or
recycling.

The effective data sharing within the system allows DHL to better plan and execute
the movement of goods. They turn synchronize data into actionable, value-added
information and thus increase the visibility and enhance efficiency. For example. DHL is
able to see more accurately stage outbound goods and plan accordingly within its
warehouse, saving space by proxy when the information is updated in-time in all of the
systems. This increases the flexibility of DHL’s supply chain and increase the DHL’s
response to changing customers’ demands. Not only that, LMS streamlines the
workflow and improve the speeds in delivery. This cut short any large extent delays as it
interferes from managing goods from the placement of orders to dispatching further.
The system works in two-directions, giving the full visibility and control to DHL. It brings
value by automating processes and utilizing data to make informed decisions. Certain
functions like creating shipment routes, load planning, and tendering of load to carriers
are easily automated in LMS. This enables DHL to manage orders effectively and avoid
double handling of errors through this synchronization of data in one system.

Besides, implementing LMS aligned with the objectives for the engagement
between DHL and the customers over the long term, which is the lean logistics
processes. Customers could rely on DHL and focus on their core business as the
system is comprehensive to cover the inventory management, distribution network,
warehouse space and human resources which consistently support customers’
aftermarket service. The organized logistics system supports the partner company’s
requirement and service by maintaining control of the asset or part throughout the entire
process. It supports the partner companies in process from manage orders entry to
delivery to returns that is help the company to look closely their aftermarket. For
instance, LMS provides order tracking which allows the clients to gain full visibility into
product movements. This location tracking involves subsequent reports in a real-time,
vehicles position database. The insights enable the clients to track the progress of the
demanded goods in a corresponding application and alerting to transit exceptions or
unforeseen delays and thus support the company’s time-sensitive and high-value
service parts inventory in better managing delivery time and packaging. The LMS could
make the global parts distribution operation more efficient and improve client’s
transportation networks and provide long-term solutions. It creates a transportation
optimization platform that allows company to make quick decisions on critical shipments
on the aftermarket. In short, LMS provides solutions to the company that brings knees
in a world where customer expectations are at all-time highs.
LMS also lowers the expedited shipments through improved shipments planning.
The system collects a huge range of data which will minimize logistical cost. The
reporting capabilities of a logistic analytics software (LAS) in LMS contribute to better
visibility and control over the future logistics outcomes. For example, reducing shipment
delivery times by analyzing the shipping history in the analytics and big data collected
from the integrated software in the system. The carrier reports produced also can
identify least-cost carriers, track the performance like on-time pickups and deliveries,
and routing compliance which is a cost saving opportunity. In addition, LMS helps DHL
drive the costs out of their business by monitoring orders and managing inventory
stocking levels by centralizing all the data in a single location through an inventory
management system. This system tracks and reports inventory changes, maintains
balance in replenishing avoiding stock-outs and excess stock. The system better
utilizing clients’ existing inventory while keeping the “safety stock” reserves to the
minimum. This not only in turn helps DHL in avoiding the customer service issues when
the critical parts are out of stock or unavailable, but also increase the number of goods
DHL can move by its fleet because DHL can see just how much room is left for each
trailer or truck. After doing so, DHL will gain access to new, more adaptable, and
cheaper workflow.

LMS also helps in labour management by supervising the human side of

warehouse operations. This is by integrating a labour management system into WMS. It
allows DHL to track the productivity and identify the underperforming shifts or workers,
analyzing the peak labour, optimizing workflow and finding solutions for obstacles. In
the long run, this increases the productivity and efficiency while lowering the labour
costs.
3.3 Factors that affect the system

Internal factors

IT Resources

Implementing the modules in Logistic Management System requires some basic

connectivity with the company’s business process management software. For example.
Enterprise Resource Planning (ERP) that integrates processes essential to running a
business including inventory, order fulfillment, accounting, human resources, customer
and supplier relationship management. This connection is critical for the sharing of
database and the synchronize of reporting and automating of various back-office
functions. The smooth integration would allow DHL to fit the various functions such as
order monitoring of orders, delivery and returns of LMS right into the organisation.

Strategic Plan

The four most important trends – Globalization, Digitalization, E-Commerce and

Sustainability have been impacting logistics in recent years and this shape the industry
going forward. DHL has set its “Strategy 2025 – Delivering Excellence in a Digital
World” to response to these. In the effort of forming a foundation for Strategy 2025, LMS
as an digital automation system that contribute to the service to E-Commerce is a
potential for DHL’s profitability long-term growth within its core logistics business. This
step up the digital transformation that is already underway across the entire Group.

External factors

Business Trend

The rise of the digitalization of business environment, especially the widespread

popularity of e-commerce, has peaked the acceptance and needs for logistics
management and supply chain. Emphasis on improving collaboration and promoting
resilience in the supply chain has become the aim of 3PL like DHL. As a result, there is
a need for DHL to constantly evolve to accommodate the rising demands of each
industry that depends on it. This increases the dependence on the logistics software in
governing on the logistics and supply chain to deal with the processes more effectively
and efficiently.

Competitors

The industry has become increasingly competitive. The new entrants to the industry are
finding ways to carve out more lucrative elements of the value chain by exploiting digital
technology or new ‘sharing’ business models. While some of the DHL’s own large
industrial or retail customers and suppliers have become the players in the logistics
market themselves, turning that expertise into a profitability model on top of managing
their own logistics. Therefore, DHL must maximize the intelligent use of its expertise
and utilize technology to breakthroughs the way the industry works. Providing lower cost
and higher efficiency is the attractiveness of experienced companies in the industry
such as DHL to attract the customers. LMS that can fulfill the requirements of DHL and
the expectations of the consumers indeed is valuable in this business environment.

Customers

Customer expectations are increasing greatly and constantly changing. Both

businesses and individuals expect to get their goods faster, more flexible and at lower
cost. Besides, consumers are seeking for a more comprehensive services to fulfill the
aftermarket supply needs, Thus, resilient system such as LMS is critical for logistic
provider such as DHL that provides end-to-end service to meet the customer demands.
3.4 Software Acquisition Alternative
In-House Building

With the database of the current systems, DHL has the capability to design and
engineer LMS in-house. This acquisition method gives full ownership to DHL over the
scope and scale of the platform. For in-house development team to be capable in
developing delivery logistics technology solutions, DHL will need to consult and recruit
professional personnel to tap into know-how of how experts build and maintain the
system. This will give DHL an insight on the future issues or challenges. The modules of
LMS should include:

Order management: Synchronize orders, inventory, supplier and customer data

Receives and monitors orders from all the sales channels, from their placement until
delivered. Display all information of the orders including routes, location, inventory,
warehouse connectivity and integrate with accounting to create invoices and accept
payments.

Inventory Management: Control, document and centralize the product information

accurately

Automating the tracking and reporting of inventory changes from classic spreadsheets
to inventory management systems for rapid respond to changes in the process of
receiving, storing, and tracking inventory. Maintain the balance in replenishment and
estimate product demand to avoid stock-outs and excess stock.

Warehouse Management: Design warehouse, pick and pack items and manage
labour.

Maintain, control, automate and streamline the workflow from warehouse to dispatching
further through storage and stock tracking within the location to order management.
One important criterion is to seek for massive storage area for an organization’s
products. Besides of receiving and moving items, it should also have the ability to
maintain safe work conditions, manage warehouse staff using KPIs, and use software
and hardware to locate and track items.
Strategic transport planning: Optimize the shipment

This should include the choosing of shipping method that best fit the freight needs,
connecting to the carrier network, defining customs fees and documentation for global
fulfillment.

Transport Management: Address freight transportation needs and manage all shipping
details

The module should have the capability for delivery management and scheduling, cross-
docking, last mile logistics, order tracking and transportation accounting.

Reverse logistics: Manage returns from the consumers

Help streamline repairing, returning and product reallocating process. The module
should include information tracking, return status and quality assurance tracking.

Logistics analytics: Analyzing shipping history and improve clients’ operations

Minimize logistical costs and reduce shipment delivery times using analytics and big
data. The system should be able to predict supply chain issues by applying Business
Intelligence. Important reports such as freight accruals, carrier reports and KPI reports
are important in running this system.

To ensure the system success in the long run, there is a need for DHL to provide
training program to employees as well as hire monitoring analyst and data analyst. On-
going maintenance costs and the resources needed throughout the entire lifecycle of
the system will also be considered into the budget, viewing the logistics management
software as a strategic, long-term solution. The cost that will be incurred are:

Outsource: Leasing

The modules of LMS would be the same as in-house building and both need training for
staff and installation of hardwares and softwares. The differences will be that the
software is developed by vendor and regular upgrades as well as new features
developments will be supported by the outsource party under the subscription. This
acquisition method saves the time along with volume tiers that allow businesses to
rapidly expand their usage without rewriting the software. However, DHL will have to
share its database to the outsource party. Therefore, DHL has to be aware of data
outsource party that will be able to assess to.

There are several logistics software developers in the market that provide products and
services to 3PL company such as DHL. For example, Ramco, Soloplan, Jaix,
AssignmentPlus Dock Scheduling and Loginext Mile. However, except for Ramco, DHL
has to opt for technical support from the vendors after acquisition for updates, which
incurs extra cost.

3.4.1 Cost Benefit Analysis

Cost or Benefit Financial Impact Description of Cost or

Benefit

Eliminate 6 hours of OT Annual savings of Direct,

each week at RM30 per
hour Year 0 operational,
6 hours * $30 hourly rate * variable,
26 weeks * 1.5 OT factor =
positive benefit
RM7,020
Year 1 - 5
6 hours * RM30 hourly rate
* 52 weeks * 1.5 OT factor
= RM14,040

Eliminate errors Increases productivity of Tangible cost

the company - reduced
(3 errors per day x 15 mins errors - potential annual Direct cost
to correct each error = 60 savings.
mins = 1 hour) Cost avoidance
YEAR 0: Positive benefit
1 hr saving x $30 per hour
x 26 weeks x 5 hours per
day
=RM3,900 annual savings
YEAR1 to YEAR 5
1 hr saving x $30 per hour
x 52 weeks x 5 hours per
day
=RM7,800 annual savings

Reduce in freight cost Avoidance of annual cost Direct cost

(1 round-trip per day for 50 YEAR 0 Cost avoidance
trucks)
1 * RM8 / round-trip * 50 Positive benefit
trucks * 5 days * 26 weeks
= RM52,000
YEAR 1-5
1 * RM8 / round-trip * 50
trucks * 5 days * 52 weeks
= RM104,000 per year

Reduce in warehousing Avoidance of annual cost Direct cost

cost
YEAR 0 Cost avoidance
(30% space saving for 1
mil sq ft) 30%/2 * RM1.25 / sq ft * Positive benefit
1mil sq ft= RM187,500
YEAR 1-5
30% * RM1.25 / square
foot * 1mil sq ft=
RM375,000

For in-house Completion time= 56 days Direct cost

development:
Data Analyst RM50 / hour for 8 hours Developmental cost

(From research to budget = RM22,400

planning)

For in-house option: Completion time= 35 days Direct cost

Consulting cost for RM80 / hour for 8 hours Developmental cost
designing system = RM22,400

For in-house option: Completion time= 86 days Direct cost

Monitoring Analyst RM40 / hour for 8 hours Developmental cost
(From testing to =RM27,520
implementing)

For in-house option: Year 0 Operational costs

Maintenance, backup and 2 hours * 5 days *26 weeks Direct cost
upgrades * RM25 = RM6,500 / year
Variable cost
(5 hours per week) Year 1 - 5
2 hours * 5 days * 52
weeks * RM25 = RM13,500
/ year

For software package Year 1 - 5 Direct, fixed cost

option:
RM3000 * 12 months
Subscription fees
=RM36,000 per year

For software package RM3000 per annum Direct, operational, fixed

option: cost
Vendor technical support
(After the year of
acquisition)

Consultant's time to install RM60 hourly rate * 8 hours Direct, developmental

and configure software per day * 5 days * 6 weeks cost
package = RM14,400

Training for staff RM35 hourly rate * 10 Indirect, developmental,

hours * 21 days = RM7,350 variable cost

IT Hardware infrastructure RM37,500 Direct, development,

and network installation fixed cost
(For example: Automated
labelling, Industrial mounts
for mobile computers and
other IT accessories, Web-
Based Barcodes-1D/linear
& 2D and EDI: Electronic
Data Interface)

3.4.2 Payback Analysis

As refer to Appendix XX, both acquisition methods are benefit for DHL as the cost
saved out beat the investment cost where both NPV are positive. It is recommended
that DHL builds its own LMS in-house as the benefit of building in-house in larger than
outsourcing. Even though outsourcing payback quickly, it does not consider time value
of money but NPV and ROI do. The NPV and ROI of building in-house is higher and
thus DHL should opt for in-house developing.
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