ELA/Arthur D. Little

Management Summary

In the jointly conducted European study “Innovation Excellence in Logistics“, the European Logistics Association (ELA) and Arthur D. Little, methodologically supported by Prof. Pfohl (TU Darmstadt), analyzed more than 100 logistics service providers as well as their counterparts - the shippers - in various industries across Europe.

Innovation Excellence Pays Off

An optimized innovation management system can boost company success. Companies with a high Innovation Index (top innovators), meaning companies with an effective and efficient innovation management system, generally have lower logistics costs or higher EBIT margins.

Shippers can increase EBIT margins by 4.4% points if innovation management is optimized. Top innovators amongst the logistics service providers can even increase their EBIT margins by an average of 8.5% points. Average innovators amongst logistics service providers consider the potential to be much lower, although still significant, with a 2.7%-point increase in EBIT margins.

The potential for reducing logistics costs is between 7% and 14% for all shippers and logistics service providers. For performance-related indicators such as turnover, delivery reliability and delivery time, all participants expect a significant improvement potential.

From Cost-oriented to Customer-oriented Innovation

Today the most important objectives for innovation are the modularization of logistic services plus reduction of logistic costs. However, this importance will decline significantly in the future as cost-oriented innovations are replaced by customer-oriented innovations. The generation of new services to cover existing requirements and to stimulate new ones is likely to become the most important innovation objective (figure 1).

Price and reliability are no longer the only buying criteria, but will develop into prerequisites for contracting standard logistics services. In this context, the importance of innovation ability as a deal-clincher will increase significantly. As a result the focus will shift from cost-oriented towards customer-oriented innovation activities.

Personalized and Institutionalized Responsibility Counts

The responsibility for innovation management is more often allocated within top management at logistics service providers than at shippers. Otherwise the responsibility is more institutionalized at shippers compared to service providers.

Top innovators primarily anchor their innovation activities in a dedicated line function or concentrate them in a customer-oriented line function.

Insufficient human and capital resources are the main reason for failure to perform innovation activities.

Customers and Companies Trigger and Drive Innovations

Innovation projects in logistics can be characterized by their degree of novelty and their degree of standardization; only the smallest proportions are truly new developments.

Triggers for innovations at logistics service providers are mostly customer-specific projects, in contrast to mostly customer-independent projects with shippers. While the majority of shippers sees themselves as the source of innovation ideas, from the logistics service providers’ point of view all value chain participants are involved.

Top innovators amongst shippers involve their suppliers when looking for innovation ideas, while average innovators are oriented towards their end-customers. Top innovators amongst logistics service providers are more customer-oriented than average innovators; they are better at picking up on and implementing ideas at their shippers.

The Innovation Approaches are Different but Complementary

The innovation approaches of shippers and service providers are fundamentally different but mutually complementary. The approach of shippers is primarily internally driven, based on strategic planning. Logistics service providers follow an approach that is almost exclusively market-driven, meaning it is triggered by the customers in question (their shippers) and a concrete customer requirement or problem.

Top innovators amongst shippers involve logistics service providers in their innovation process at an early stage; top innovators amongst logistics service providers are involved earlier.

All top innovators are increasingly measuring the success of their innovation projects, opening up higher transparency and controlling options. They are increasingly measuring the value added of their logistics, whereas average innovators focus on costs.

Adaptable and Flexible Logistics Systems and Networks are in Trend

Adaptable and flexible logistics systems and networks have the highest absolute potential for innovation within logistics from the participants' point of view. In particular, cooperation across the value chain is regarded as crucial for the realization of improvement potentials.

Virtual reality (such as for digital plant planning) and automated control (e.g. by agent systems, RFID etc.) are seen as the most important growth areas for innovations. The key barriers for virtual reality, however, include insufficient degree of detail and reusability of models.

Market / Technology Intelligence is Key

Key success factors for top innovators amongst shippers are a structured generation of market / technological know-how, and stringent project management.

Key success factors for top innovators amongst logistics service providers are, again, a structured generation of market / technological know-how, and the early and ongoing involvement of their customers. All others first need to focus on a clear strategy for their logistics activities and the development of strategy and project management competencies.

With respect to the degree of implementation of key success factors, top innovators are far ahead of average innovators. This means that average innovators face an implementation problem.

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