The Challenges Faced by Logistics Organisations in the UAE - Dissertation Example

?AN ANALYSIS OF THE CHALLENGES FACED BY LOGISTICS ORGANISATIONS IN THE UAE PROJECT JUSTIFICATION REPORT Submitted By Ravil Iskhakov MSC IN SUPPLY CHAIN & LOGISTICS MANAGEMENT 2012 Supervisor: Dr. Robert B. Van Der Meer Table of Contents 1. INTRODUCTION: 3 1.1 Academic Relevance: 4 1.2. Industry Relevance: 4 1.3. Project Aims and Objectives: 5 1.4. Research Questions: 5 2. LITERATURE REVIEW: 7 2.1. UAE Logistics Industry Background: 7 2.2. Supply Chain Management: 11 2.3. Challenges faced by Logistics Organisations: 16 2.4. Future of Logistics Business in UAE: 17 3. RESEARCH METHODOLOGY: 18 3.1. Research Methods: 18 3.2. Data Collection: 18 4.0 DISSERTATION STRUCTURE: 20 5.0 PROGRAMME OF WORK: 22 APPENDIX 23 1. INTRODUCTION: To succeed in the highly competitive digital economy, organizations must manage the integration of business, technology, people, and processes not only within the enterprise but also across extended enterprises. Organisations successfully compete to search for new business paradigms that would lead to competitive advantage. Supply Chain Management (SCM), is one such tool that can help companies to improve production processes, reduce costs and successfully compete in a variety of business environments (Awad & Nassar, 2010). Therefore Supply Chain Management (SCM) becomes critical in the customer fulfilment and satisfaction process. But in a globalised economy Supply Chain Management (SCM) is a highly dynamic process which carries enormous risks. Global events in one market can have an impact on other markets. One moment organisations are preparing for the spread of bird flu from Asia – then a hurricane strikes the Gulf Coast (Bowman, 2012). By the time new SCM strategies are worked out to face those challenges new challenges emerge such as the earthquake, tsunami and nuclear disaster that hit Japan. How can a company secure its supply chain, which is the life blood of its business? It doesn’t get more any more interesting. The recent economic crisis had a huge impact on the global economy and its impact has been visible in the UAE. Transportation being one of the major economic sectors in the UAE it was badly impacted. The transportation industry in UAE is facing tremendous challenges in terms of both operations and profitability. This research study aims to study and analyse the challenges faced by transport organizations in the UAE. The financial crisis created many economic problems for various business sectors in Dubai that includes the supply chain and logistic sector. Therefore this research will discuss the adverse effects of global financial crisis and its implications to transport industry in Dubai as a whole. On a positive a report by Business Monitor International (2011) cites Frost and Sullivan (2010) who consider UAE as a growth market for freight and logistics. Their study found that the Emirates’ logistics market is set to generate record revenues this year, and will continue to grow over the medium term as a result of its concerted effort to place itself at the centre of the global freight forwarding network. But there are challenges galore due to constant threats to supply chains in the region with the talk of war in the region as well as due to overcapacity and a drop in demand continually threatening to push down rates and impinge on profits. The UAE’s primary ports are forecast to grow over the medium term, though at a slower rate than before the economic crisis. The air and logistics sectors in the UAE are continuing to grow at a rapid pace, with more logistics companies relocating their hubs to the country, and national air carriers continuing to expand and post improved results. 1.1 Academic Relevance: It is important to study the topic due to its academic relevance. Supply chain and logistic are key industries in the UAE and act as the life blood of business in the UAE, with little manufacturing base. The major chunk of Dubai’s economy is based on logistic industry and problems arising in this industry may have serious implications on the business community, logistical organizations and the overall economy of the Emirates. Therefore it is important to study and highlight the challenges that transport organizations in Dubai face pertaining to transportation. This study will further add to the body of knowledge on the UAE transportation sector which currently is very limited. 1.2. Industry Relevance: The research will study and analyse the challenges facing the transportation industry and the findings will be useful for organizations in this sector as it will highlight key areas of weaknesses that need to be sorted out. The research will highlight key issues, problems and challenges that transportation organizations face in Dubai and will recommend logical ways in which those issues can be pragmatically be resolved and dealt with. Knowledge of the challenges ahead can be better overcome with sound long term strategic planning. 1.3. Project Aims and Objectives: The project aims to study and analyse the challenges and problems that transport organizations faces in Dubai while carrying out logistical tasks and activities. The objective of this research is to provide practical solutions to the underlying problems in the logistics industry. Some of the major challenges that transport organization in Dubai faces are with due to overcapacity, weaker demand and transactional volumes, cut throat pricing strategy, fluctuating and rising fuel prices, intra GCC challenges, change in air, road and sea regulations and slow rate of global economic recovery. In order to achieve the aim of this study, the following research objectives are set: 1. To study and analyse the development and growth of the UAE transportation sector; 2. To explore and analyse the challenges faced by the Transportation companies in the region; and 3. To recommend suitable strategies to maintain and sustain competitive advantage and to overcome the challenges faced by the transportation sector in the UAE 1.4. Research Questions: The research questions which will be explored and investigated in this research study are as follow: 1. What are the challenges being faced by the Transportation companies in United Arab Emirates? 2. What is the relationship of the supply chain management strategies with the overall performance of the transportation companies? 3. What strategies should be adopted by the transportation companies in United Arab Emirates (UAE) in order to overcome the challenges and maintain competitive advantage? 2. LITERATURE REVIEW: 2.1. UAE Logistics Industry Background: UAE is collectively known worldwide as a regional hub that serves numerous multinational organizations by facilitating and providing much needed economic, social and technological infrastructure. Similarly, on the other hand, Dubai as a city is known globally as a financial hub of the Middle East. In the last two decades or so, Dubai has transformed itself significantly to construct state of the art infrastructure in almost every field and discipline. Under the leadership of His Highness Sheikh Mohammed bin Rashid Al Maktoum who is the current ruler of Dubai and also the Prime Minister of UAE, Dubai has focused on bringing reforms in education, health, hospitality, real estate, transport, logistics and in the overall economy. Unlike Abu Dhabi that is dependent on oil and gas resources for revenue generation, Dubai’s economy is based on different clusters which include trading, shipping, logistics, banking, real estate, construction and most importantly tourism. Since the research is based on highlighting issues related to supply chain; trading, shipping, transportation and logistics activities will be discussed primarily. Dubai which is the business hub of Middle East is strategically placed to serve China and other industrial nations with regards to importing goods. Dubai as a city is one of the biggest importers of Asian goods in Middle East and therefore is also classed as a re-exporting hub of Middle East and North Africa. The goods are usually imported by China and other Asian countries and then re-exported to African, European and CIS countries in small quantities. Apart from being in the best geographical location, Dubai facilitates businesses by being linking and connecting Asia with Europe and Africa on social and. economical grounds. Dubai has substantially grown over the years in real estate, finance and logistic sectors. To facilitate global business activities, Dubai is focusing to construct state of the art logistic centre to strengthen its already existing infrastructure. A major milestone that Dubai achieved with regards to logistical infrastructure is the construction of Al Maktoum International Airport which completed in June 2010. Al Maktoum International Airport is the largest airport in the world considering its capacity to accommodate both passenger and cargo. The new airport in Dubai is constructed to support and facilitate supply chain activities in the city and the country as a whole. Dubai government has taken serious initiatives to create economic zones all over the Emirates to cater the increasing demands of the business community. Furthermore they have also initiated free zones concept that allows diverse business activities to prosper without local interventions. They have taken all possible steps to ensure that business policies are friendly and at the same time the infrastructure is readily available to organizations at all given time. Moreover last ten years have been extremely substantial for Dubai as they have now become the first choice destination for both business and leisure travellers. Dubai now emphasizes on promoting both free trade culture and tourism culture to boost economic activity in the region. By opening up free hold property in designated areas of Dubai, the Emirates enjoyed magnificent growth in real estate and other sectors of the economy inviting many large profile organizations and individuals to the city. However, Dubai was caught off guard when the financial crisis started with the collapse of two major banks in USA bringing adverse effect to the economy. The collapse of two major banks in USA created global unrest and panic due to which stock exchange and other financial market crashed one after the other. The financial crisis created many economic problems for the Dubai that included supply chain and logistic sector. Therefore this research will discuss the adverse effects of global financial crisis and its implications to transport industry in Dubai as a whole. The recent economic crisis had a huge impact on the global economy and its impact has been visible in the UAE. Transportation being one of the major economic sectors in the UAE it was badly impacted. The transportation industry in UAE is facing tremendous challenges in terms of both operations and profitability and the financial crisis created many economic problems for businesses in the region. On a positive a report by Business Monitor International (2011) cites Frost and Sullivan (2010) who consider UAE as a growth market for freight and logistics. Their study found that the Emirates’ logistics market is set to generate record revenues this year, and will continue to grow over the medium term as a result of its concerted effort to place itself at the centre of the global freight forwarding network. But there are challenges galore due to constant threats to supply chains in the region with the talk of war in the region as well as due to overcapacity and a drop in demand continually threatening to push down rates and impinge on profits. The UAE’s primary ports are forecast to grow over the medium term, though at a slower rate than before the economic crisis. The air and logistics sectors in the UAE is continuing to grow at a rapid pace, with more logistics companies relocating their hubs to the country, and national air carriers continuing to expand and post improved results. Capitalising on its ideal strategic location, the UAE has successfully managed to become a world-class logistics hub, with billions of dollars being invested in the fast-track development of warehousing facilities and transportation infrastructure. According to recent report by Frost & Sullivan, the UAE has first-mover advantages over other emerging regional logistics hubs which would be difficult to replicate in the short-term. The revenues from the UAE’s logistics market are expected to reach US$9.40 billion in 2014, an impressive jump from last year’s figure of $7.03 billion. “Being located in close proximity to the high-growth economies of India and China, the UAE imports around 60% of its products from these countries, mostly transiting through the Dubai borders,” explains Srinath Manda, transportation and logistics programme manager at Frost & Sullivan. Frost & Sullivan’s estimate the that the bulk of logistics revenue was collected by the freight forwarding segment at around 63.1%, supported by heavy demand from customers in the oil and gas, engineering, and food and beverage sectors. Transportation was second highest contributor at 18.6%, with road transportation holding a dominant share in the segment. Other transportation modes were found to have a nominal share, apart from rail cargo transport, a significant mode in most global logistics markets that is non-existent in the UAE. “However, the government has launched its large-scale Union Railway project to address this issue, which will connect the entire country and later get integrated into the proposed GCC-wide railway network” (Haq, 2011). The final two contributors to logistics revenue are warehousing at 14.2% and value-added logistics services (VALS), such as packaging and labelling, at 4.1%. “Transportation practices in the UAE are likely to change with a string of upcoming infrastructure developments, including the upcoming GCC-wide railway network with dedicated freight lines.” The road networks across the emirates are also expected to be transformed into freight lines. Both these forms are expected to be operational after 2012-2013, and are most likely to drive down the transportation times and costs to a commendable extent. Warehousing and VALS practices are also expected to improve with better logistics infrastructure.” “Owing to massive international trade activity routed through the country, the UAE is considered a land of significant opportunity for logistics services providers, especially those involved in freight forwarding and shipping services. This is because most of the typical manufacturing industries have only trading operations in this country, resulting in a logistics sector that is skewed towards freight forwarding” (Haq, 2011). 2.2. Supply Chain Management: A firm’s strategies, innovations, and well-planned activities will lead to sustainable competitive advantage and hence improve its brand and business performance. As firms strive for ways to achieve competitive advantage, they are looking for new ideas and solutions. One of the first researchers to propose a theoretical framework for understanding a firm’s performance is Michael Porter (1980). He takes a strategic and analytical approach to understanding competitive strategy, and argues that, “Every firm competing in an industry has a competitive strategy, whether explicit or implicit.” Porter (1980) argues that with the right approach it is possible to achieve superior performance. Porter’s (1980) ideas and proposals on achieving competitive advantage have influenced many other researchers to propose complementary theories on achieving competitive advantage. A theory that has gained momentum in the last few years is the concept of supply chain management. In recent years, there have been numerous advances and developments in supply chain techniques and management. One of the reasons is that as trade barriers drop and markets open, competition has become more intense – hence companies need to be more competitive and cost effective. An initiative to help achieve this is a supply chain management program. Supply chain management is the management of upstream and downstream activities, resources, and relationships with suppliers and customers, which is required to deliver products or services. In theory, if this is done well it will lead to competitive advantage through differentiation and lower costs as suggested by Porter (1980). Moreover, some researchers claim that effective supply chain management can reduce costs by several percentage points of revenue (Boyson, et. al, 1999). In today’s highly dynamic and competitive business environment, many organisations are venturing far beyond their traditional markets through expansion, mergers, contracting, or otherwise redesigning their supply chains. Figure 1.1 The Value Chain and Theoretical Framework to Achieve Competitive Advantage. Source: Porter (1985). This has been facilitated by the rapid advancements in information and communication technologies and transportation. Therefore to fulfill a customer request, who may be geographically spread anywhere in the world organisations need to be develop and better integrate their supply chain network to increase the value delivered to the customer. Supply chain integration is important because it may include manufacturers, suppliers, transporters, warehouses, retailers, third-party logistics providers, and the customer. Since so many parties are involved in a supply chain, challenges arising at any end of the supply chain process can pose serious challenges to an organisation in fulfilling customer requests. To succeed in a highly competitive and dynamic global economy, organizations must manage the integration of business, technology, people, and processes not only within the enterprise but also across extended enterprises. Organisations to successfully compete need new business paradigms that would offer them a competitive advantage. Supply Chain Management (SCM), is one such tool that can help companies to improve production processes, reduce costs and successfully compete in a variety of business environments (Awad & Nassar, 2010). Therefore Supply Chain Management (SCM) becomes critical in the customer fulfillment and satisfaction process. But in a globalised economy Supply Chain Management (SCM) is a highly dynamic process which carries enormous risks. Global events in one market can have an impact on other markets. The objective of supply chain management is to maximize the overall value generated in a particular supply chain. It is ideal to look at some of the definitions of what exactly is meant by supply chain management. According to the Supply Chain Council (2001) "Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers". Another good definition of Supply Chain Management is that it is a network of relationships, with the goal to deliver superior value, i.e., “The management of upstream and downstream relationships with suppliers and customers to deliver superior value (in manufacturing products and services) at less cost to the supply chain as a whole” (Christopher, 1998). Supply Chain as a Strategic Asset When companies view supply chain as a strategic asset, supply chain strategy is part of the overall business strategy, designed around a well-defined basis of competition (innovation, low cost, service, quality). It is integrated with marketing strategy and with customers’ needs, product strategy as well as power position. On the other hand, supply chain strategy must adapt as market conditions and competitive advantages change. In that way, supply chain strategy designs a unique supply chain configuration that drives strategic objectives forward. A supply chain strategy consists of five building blocks (Cohen, 2004, p. 10): 1. Manufacturing strategy. 2. Outsourcing strategy. 3. Channel strategy. 4. Customer service strategy. 5. Asset network. Drivers of Supply Chain Management In today's global economy, organisations face increasing pressure to reduce costs while maintaining production and quality levels to deliver results. In order to achieve these goals, companies must successfully overcome a number of challenges. As Meakem (2003, p. 1) points out, free market economies and new technologies are creating new supply-and-demand markets around the world. Many organizations, for instance, are looking for supply from China. But a good number of these organizations lack the information and knowledge necessary to drive more supply and production offshore. The rules of free market global competition dictate that only the strong survive. As a result, industries around the world are consolidating at a rapid rate. Mergers and acquisitions are a primary means of achieving consolidation. But unless synergies between combining entities can be realized, consolidation rarely works. Global competition and improved technology are shortening time-to- market and order-to-delivery times. This, in turn, requires organizations to select the best suppliers and pull them into core enterprise activities. Organizations across geographies and industries are scrutinizing make-versus-buy options. And many are finding increased value in outsourcing production of goods and services. Handfield (2002, p. 11) summarizes drivers into: Ever-increasing customer demand in terms of product and service cost, quality, delivery, technology, and cycle time brought about by global competition; The emergence and greater acceptance of higher-order cooperative inter-organizational relationships; and the information revolution. Key Activities in the Supply Chain Management System As the definition above suggests supply chain management involves managing a host of activities and each activity in the supply chain process can offer the organisation a competitive advantage provided it is better at managing that activity or it has some unique advantages. Supply chain management encompasses end-to-end management of a product or service, and includes the following key activities which are shown in figure 1.2 below, which together form the supply chain management system. Logistics Logistics plays a critical role in the supply chain system. Since parts or products within the supply chain, have to be delivered to factories, distributors, and customers, the mode of the transport - sea, land or air, affects all other activities in the supply chain management process, such as planning, production, packaging, warehousing, location (of suppliers, manufacturing, and customers), inventory control, and information management (Coyle et al, 1998). Logistics factors such as transit time, reliability, accessibility, security, impact on inventory, product degradation or obsolescence, trace-ability, and so on play a critical role. The effectiveness of the logistics function can offer a cost advantage to organisations and offer it a competitive advantage (Council Of Logistics Management, 2001; Coyle et al, 1998). Furthermore not only inbound and outbound logistics that play a critical role but also reverse logistics has become an important activity. Reverse Logistics is the management of the reverse flow of products. This includes customer dissatisfaction with the product or at the end of the product life cycle, when the product is returned for recycling. This concept of reverse logistics has become an important strategic advantage for companies, and is driven by losses from customer dissatisfaction returns, or the cost and challenges of recycling (Tibben-Lembke, 2002). Both the activities if managed well can result in increased customer satisfaction. 2.3. Challenges faced by Logistics Organisations: Logistics organisations all over the world are facing different challenges and issues in order to compete in the global logistics industry. The organisations are looking for different methods and strategies to overcome these issues and come up with effective and efficient techniques to create competitive edge over other competitive organisations. These challenges and issues have also forced the organisations to move to different geographical locations in order to create differentiation and competitive advantage. The logistics industry is one of the most rapidly growing industries all over the world at the moment and in turn it is resulting in increasing competition. Some of the challenges faced by the logistics organisations are: Increasing fuel and transportation costs Overcapacity Different hurdles and issues in supply chain management Increasing security issues and concerns Communication issues and challenges 2.4. Future of Logistics Business in UAE: Overall logistics industry in UAE is growing with rapid pace and it is being predicted that the same trend will be followed in the future. This is because of the increasing globalization and different business opportunities being created because of the UAE and Dubai becoming the international business hub. Despite of the strategic position and location of UAE and increasing foreign investment in the logistics industry of the country, the future of the logistics industry in the country is gloomy because of different issues and challenges. One of the challenges in this regard is the growth of the logistics industry of other Arab countries including Saudi Arabia, Oman, and Bahrain. Apart from this it is also important for the logistics organisations operating in UAE to understand the overall business culture and environment of the region in order to make sure that they are able to accomplish their business goals and objectives. Some of the challenges being faced by the 3. RESEARCH METHODOLOGY: At the very outset research needs to have a design framework within which research can be conducted (Gimblett, 2006). This is important to ensure that the data being collected is relevant to the research questions. Research is a systematic process of gathering, analysing and interpreting information to find answers to questions. Research design involves the following aspects that need to be addressed: 1. Research Questions / Objectives 2. Research Approaches – Quantitative or Qualitative 3. Data Sources and Data Collection Instruments 4. Data Analysis Approaches 3.1. Research Methods: For this study a questionnaire survey will be designed and administered among the stakeholders of the UAE transportation industry. The quantitative data gathered will then be analysed qualitatively to give meaning to the data gathered. Qualitative research approach enables a researcher to find out “why” of a given topic instead of “how”. For this research, it was felt that qualitative research approach will suit the best for the purpose. Through surveys, feedback forms, individual and group interviews and emails lot of meaningful information will be obtained that will be used for providing possible solutions to the challenges that are faced by the transport industry. The questionnaire survey is presented in the appendix. The researcher will focus on secondary research strategy in order to come up with better insights and more detailed responses from the target respondents. This in turn will allow the researcher to accomplish the aim and objectives of the research study in more effective and efficient manner. 3.2. Data Collection: The research study is mixture of quantitative and qualitative research, and for this purpose the researcher will gather the data through questionnaire survey and interviews. The interviews will provide the more detailed analysis and insights about the issue being investigated. Apart from this the research study is based on both primary and secondary data. Primary data will be gathered through a questionnaire and interviews that will be administered to stakeholders of the UAE Transportation industry. The questionnaire will consist of carefully selected questions to gather relevant data to answer the research questions. Those stakeholders will primarily consist of transport entrepreneurs, managers, supervisors, drivers, economic and logistic analysts and Road and Transport Authority (RTA) officials. The secondary source of collecting data will be primarily based on books, journals, online journals, articles, newspapers, magazines, online articles and blogs etc. The valuable information and data will be used in literature review primarily. The data will also help in identifying core challenges that transport organizations in Dubai face at present. 4.0 DISSERTATION STRUCTURE: Besides this introductory chapter, this dissertation consists of four chapters as shown in the Figure 1.1 below. Chapter 2 reviews the relevant literature, addresses the disciplines under investigation, and provides an overview of supply chain and logistics management and how is can lead to competitive advantage. Chapter 3 presents the research methodology used for this study and it includes: the justification of the research methods used, a discussion on preparation of the questionnaire and the data collection process and the process used for data analysis are discussed. Chapter 4 summarizes the data collected from the sample respondents and aims to interpret the data in relation to the research objective. The research issues are analyzed, interpreted, and the detailed findings are presented. The chapter concludes with a summary of the research findings. Chapter 5 provides a summary of the findings and conclusions of the research objective and issues, discusses the contribution of the research findings to the literature and theory, reviews the implications of the findings, discusses the limitations of the research, and concludes with suggested direction for future research. 5.0 PROGRAMME OF WORK: Project Timetable: GANTT Chart Activity March April May June Literature Review Proposal Writing Secondary Data Collection Primary Data Collection / Interviews / Survey Primary Data analysis Writing Revision and fine- tuning Paper submission APPENDIX Questionnaire 1. What is your age group? a. Below 21 years b. 21- 25 years c. 26-32 years d. 32-40 years e. 40-50 years f. 50+ years 2. What is your gender a. male b. female 3. What is your position level in the organization? a. Lower level b. Middle management c. Top management 4. Do you have experience of working in any other country than UAE? a. Yes b. No 5. Which of the following function is the most important one for firms operating in the logistics industry of UAE? a. Freight forwarding b. Transportation c. Warehousing d. VALS 6. Which of the following factors do you believe influence the overall logistics industry of UAE and its growth? (1 being the least important and 5 being the most important). 1 2 3 4 5 Cultural differences Laws of UAE Religious differences Language differences Differences in management style Differences in organizational culture Gender differences 7. Do you believe that people of UAE have a different view and perception regarding things than people from West and it influences the business as well? a. Yes b. No c. To a certain extent 8. Arabs are known to have a different style and a different working pattern; do such factors influence the logistics industry? a. Yes b. No c. To a certain extent 9. What challenges do you believe would influence the logistics industry of UAE in the next few years? a. Fluctuations in the oil prices b. Efficiency of supply chain management c. Strategies and policies implemented by the company in managing their logistics business d. Laws and regulations of the country e. Differences in culture, language, religion and other related factors. 10. What opportunities you believe are present for logistics industry of UAE to capitalize? a. Expand their services to other parts of Middle East countries as they are also growing b. Train their employees to understand the differences in culture, language, religion and other such factors to improve the productivity c. Growth of Ecommerce and online purchasing in UAE d. Advancement of technology 11. How do you think the logistics companies in UAE are trying to reduce the challenges being faced from differences in culture, language, religion and working patterns? a. Training employees about differences in culture, language, religion and working pattern etc b. Forming teams so that everyone can work with each other and understand others c. Making the project duration smaller so that these differences do not really impact the project d. Having a strong project manager that could reduce these differences 12. Do you agree that improvements in supply chain management have influenced the logistics industry to grow in UAE? a. Strongly agree b. Agree c. Somewhat agree d. Disagree e. Strongly disagree 13. Do you agree that further improvements in supply chain can enhance the logistics industry and make it more competitive? a. Strongly agree b. Agree c. Somewhat agree d. Disagree e. Strongly disagree 14. What strategies and tactics should be adapted by organizations in UAE to overcome the challenges being faced? (1 being the least important and 5 being the most important). 1 2 3 4 5 Improvements in Supply chain Understand the legal restrictions of operating in UAE Understand differences in language, culture, religion etc. Understand differences in management style Use hedging strategies to overcome fluctuations in oil prices Read More