The Intermodal Mode of Transport in AP-Moller Maersk - Case Study Example

Abstract This paper uses AP-Moller Maersk Group to show how through good strategic management planning can move a company from small size to a multinational company. AP-Moller Maersk Group is a company that started as family business using one ship and today has been able to place itself at the top of the world’s leading shipping company today carrying out various forms of intermodal transportation. The paper goes on to stress how important intermodal transportation can be beneficial not only to the company, but to the whole economy of the country and at an international level. Introduction Even though considered as the world carrier of goods around the world, with an estimated 90% of goods being transported by sea, the shipping industry is still widely perceived as one of the most complex industries with ever changing conditions governing the industry. Its services are the most homogeneous making it a perfectly competitive market. The industry has also over the years witnessed some technical changes all due to the ever increasing level of world trade since the 1960’s, with an estimated 12,056btm of cargo being transported by sea in the 1990’s as compared to 31btm of cargo transported by air and some 3,853btm by rail in same year (Martin, 2005, p. 8). The peak of the problem arose when it became abundantly clear to the industry observers that the traditional “break bulk” shipping will not be able to carry around the world the increasing cargo while performing their duties of safe delivery of the cargo. This therefore led to the palletization and containerization as a means to resolve the problems. At the same time, a revolution took place whereby, there was the increasing need for the use of bigger ships as it was realised that this could lead to a great reduction of shipping costs since industries increasingly preferred using ships than to the old rail and road methods. From 1945 to 1995, oil tankers increased by size of almost twenty times while dry bulk vessels became almost some fifteen times bigger. With this increase in ship sizes, the industry benefited from a great advantage due to reduction in cost to carry around their raw materials (e.g. this led to the cost of transporting coal by sea from Virginia to Jacksonville, Florida almost three times cheaper than by rail) (Chrzanowski, 1985). This paper will use AP-Moller Maersk as case study to show how the company applies the intermodal mode of transport. AP- Møller Maersk Company The A.P. Møller - Maersk Group is a worldwide conglomerate operating in some 130 countries with a workforce of some 115,000 employees. The A.P. Moller - Maersk Group is one of the world’s largest shipping companies, and also involved in a wide range of activities in the energy, logistics, retail and manufacturing industries. The company started in April 1904 when A. P. Møller together with his father, Captain Peter Mærsk Møller, established A/S Dampskibsselskabet Svendborg (the Steamship Company Svendborg) and bought a second-hand vessel, which was renamed SVENDBORG. The company had its first office in A.P. Møller’s childhood home “Villa Anna” in Svendborg. In 1912, due to disagreements with other board members in The Steamship Company Svendborg, A.P. Møller decided to form a new company, Aktieselskab (the Steamship Company of 1912), in which he would have the final say and thus moved the company from their childhood home at Villa Anna to Copenhagen.   From 1918 A.P. Møller took a long lease of roughly 15 acres and also bought an adjoining piece of land by the Odense Canal from the Odence City Council where he established by own means a newbuilding shipyard with two building berths. The first six newbuildings from the Yard were all steamships, of which the first was delivered on 26 May 1920, but already in 1921 the first motor vessel was delivered. The business was doing well, and a third building berth was added in 1924-1926. In 1927 the Yard delivered its first tanker. At the beginning of the 1920s A.P. Møller considered the possibilities of going into the liner business, which of course required careful consideration and thorough preparation – and a favourable agreement. AP Moller then entered in such an agreement with the Ford Motor Company, and on 14 July 1928 the m.s. LEISE MÆRSK left Baltimore on its first voyage between the American east coast via the Panama Canal to the Far East and back. The cargo on this maiden voyage consisted of Ford car parts and other general cargo.     In 1928 as the industrial society became increasingly dependent on stable oil supplies and the need for tankers increased, A.P. Møller’s interest in this new business area increased as the company saw the possibility of not only increasing but also stabilising earnings. A.P. Møller company concluded a number of time charter deals that would last for several years to deliver Shipping Companies’ with tankers were contracted. Two of the five tankers were built at the Copenhagen Floating Dock and Shipyard (completed by Burmeister & Wain in Copenhagen) and the last three at Odense Steel Shipyard. Today, A.P. Møller is involved in container and shipping related services, tankers and offshore related services, terminal activities, gas and oil activities, technology, and retail and other activities.1 This paper will look into how AP-Moller Maersk group has been able to use strategic planning to put themselves today as one of the leading shipping companies involved with intermodal system of transport. According to Glaister K.W and Falshaw J.R (1999), they are three reasons why companies need strategic planning: Firstly, through strategic planning, the company is able to improve her performance. Prescriptive strategic management theory stresses the planning of a mission for any company that involves the setting of objectives (including performance objectives) should be accompanied by thorough implementation of the strategies and control systems put in place so as to ensure the objectives are achieved. Secondly, through strategic planning, the company should be able to know what areas that need much attention and use them to indirect improvements in performance by improving the effectiveness of management. Thirdly, according to the authors, the benefits of having a strategic planning put in place by any company include process advantages, such as the ability to identify and exploit future marketing opportunities, personnel advantages such as the encouragement of a favourable attitude to change, and the view that strategic planning keeps the company synchronized with the external environment so that changes can be adapted to accordingly and fast enough. Barney (1991) argues that strategic planning is one tool to manage environmental turbulence especially as it involves that act of planning which is of real value for any company. Therefore, strategic planning should therefore be looked as an effective process of management, regardless of the performance achieved. AP-Moller Maersk group has been able to place themselves as one of the world’s leading shipping company all due to strategic planning and foresight on the part of the owner and management. From the breakup from the parent company whom the owner owned with his father to forming his own company all due to the fact AP-Moller wanted a situation whereby he was to have the last word all alone, meant that the owner at that time have foresight and had effective put in place a strategic planning method. The group has been able through good planning to exploit all exist avenues that came up, from shipyard and ship building to today a company involved in container and shipping related services, tankers and offshore related services, terminal activities, gas and oil activities, technology, and retail and other activities. One of the means that has helped the company well established today is by using intermodal transport system. Definition Intermodal freight or intermodal connectors can be defined as the shipment of goods involving two or more modes of transportation (sea, air, rail, road) from origin to destination under a single contract of carriage (bill of lading).2 Due to the increase production processes around the world and the need to effectively move the goods around the world, logistics cannot be complete without a good communication method from the manufacturers to the consumers. In this case therefore, logistic systems must be able to rapidly adjust to changing and increasing levels of demand and inventory at each stage of production and distribution around the globe to the final consumer with minimal defects. This can only be achieved with good intermodal connectors. Intermodal connectors that consist of roads, railways, inland waterways, shipping lines and air freight services mainly fall into three categories (inter-regional transport, short sea, and inland transport). There has been persistent traffic bottlenecks and inadequate access to freight transfer facilities such as ports due to poor conditions of access roads and most importantly, most of the roads have deficient geometrics (limited turning radii at intersections, low clearances, inadequate shoulder width, etc.) for the heavy truck traffic that serve between the ports and final consumers and have therefore reduced service reliability and predictability. Role of intermodal connectors in Transportation Efficiency Intermodalism is believed to have a great significance on our production and transportation systems as it can improve the overall efficiency of our transportation system by using the best combination of modes, allowing each mode to be used for the portion of the trip for which it is best suited. These connectors which are generally believed to be of segments of road or rail distances of less than two miles tie the intermodal transport system together and facilitates transferability among modes, especially as intermodal cargo is typically shipped in standard sized containers. Therefore, if the intermodal system is in a poor state, it will generally the service reliability and predictability (two most important aspects of the shipping industry). In a nations transport system, if the intermodal connectors are poorly maintained, this may lead to increase in shipping costs, thereby limiting the productivity and competitiveness of the country’s business abroad. At the same time, poor intermodal connectors can also result in long lines of idling trucks, reducing air quality and increasing energy consumption. With the “just-in-time” delivery required by most businesses, logistics demand higher levels of service from intermodal carriers especially as they increasingly use these carriers as rolling warehouses. Retailers and manufacturers have been trying to substitute more frequent shipments for large and costly inventories and outsourcing production to overseas plants that can provide cheaper labour for the processes. A truck may deliver parts from overseas within hours or even minutes before they are used in a manufacturer’s assembly line. Therefore with poor intermodal connectors, this will be hardly achieved. In the case of AP-Moller Maersk group, the company has been able to put in place a strategy based on a system of profitability, by increasing investments in areas that they found to be more profitable for the company. Schendel and Hofer (1979) define strategy as the process that deals with the entrepreneurial work of the organisation, with the organisational renewal and growth and more importantly with developing and utilising the strategy which is to guide the organisation. AP-Moller Maersk group has been able to adopt this principle to grow to the size of today. Today, the company has always adopted a system of innovations and thinking out of the box. At the core of this innovation is the leadership strategy put in place. Strategy as a dynamic tool According to Cynthia A. Montgomery, the strategy put in place by the CEO must be a dynamic tool for guiding the development of the company over time rather than a short run issue. To be able to achieve this development goal, the CEO first of all should be able to trace out the overall landscape the company will be operating in, such as the target customer, competitors, may be issues such as differentiation by race, gender etc and from there should determine where the company will be going from there and what the company intends to achieve. It is therefore at the this point that the CEO should look; At the business objectives, the best way that can be used to achieve the objectives and What resources that may be needed to break the barriers that may be existent. But as Montgomery puts it, these issues are not often properly followed by CEO’s, but they rather sort to the search of effective ways to come out with good strategies especially as CEO have taken the issue of good strategy as an analytical problem that needs solutions. All of these have led to the MBA legends and strategy consultants into the field with strategy frameworks and techniques to better solve the issue for the managers. This surge in different methods to get a better business strategy has all resulted to the fact that the unique role that managers have been known for in companies (arbiters and steward of strategy) has been grossly exaggerated by the fact of company CEO’s do only seek for a competitive advantage for their company. It can be realised from here that company managers who are locked in the fight for a competitive advantage for company divert away from the role of putting in place strategies that should be followed by subordinates that will serve the company in the long run. For such managers often do not seriously take time to think what should be the ultimate goals for the company, what they think they are trying to work out as to see it happen, and what the company should aspire for in the future. It is for these reasons that after 50 years, schools came up with strategy as part of their curriculum and the scholars through class teachings and practical means have realised that strategy is unfailingly the most important duty of the CEO. This important role takes both formulation and implementation (thinking and doing) into play. During the period, managers believed in and mostly used but SWOT analysis technique to analyse its external environment. The problem was, the technique had considerable breadth and not rigor to make sure that the strategy put in place is accomplished. According to Montgomery, all of these problems have not only refined the strategy industry, but has also brought into play new advanced areas and players such as the development of the corporate planning departments, that have introduced formal systems and standards for strategy analysis. “Consulting firms have also joined bringing along them their own framework such as Boston consulting group’s influential growth-share matrix and the McKinsey’s 7-S framework and academics unleashing the power of economic analysis on problems of strategy and competition.” It can be realized at this point that, for strategy to be well stated, purpose should be at the heart of the strategy, should draw all parts of the firm together and define what part of work to be done. Purpose here can be said to be ability to draw together and align all the functional pieces and the company into a logical consistent whole, as it can both serve as constrain and guide to behaviour. This means, purpose if taken into consideration when coming up with a strategy, the strategy itself will not only say what a company can do, but implicitly what the company cannot do. With this taken into account, we can talk of a better implementation procedure as to achieve the company objectives. International trade Improvement of the intermodal connections is vital for the increase of the productivity of any country. If port terminals are made to handle the increase cargo by improving the sea, road and rail segments, the country will obviously witness an increase in their GDP. According to a report by the office of freight management in the USA, merchandised trade accounted for over 25% of US GDP as compared to only 11% in 1970. This was as a result of improved intermodal connections at some major ports.3 According to report published by the Port Import/Export Reporting Service (PIERS), a maritime economic research firm in-charge of tracking the U.S. container trade, it forecasted a 4.6% average annual growth rate in import containers and a 5% average annual growth rate in export containers through 2010. In a separate report concerning freight study conducted by DRI-WEFA (now known as Global Insight) for the Federal Highway Administration (FHWA), the volume of international trade is forecast to double by 2020 (John, 2003). This will therefore need improved intermodal connections especially for trucks that are believed to be at the start and end of any transportation system. Role of peaking behaviour at ports Most ports are located in urban areas that see truck and commuter traffic intermingled. The problem here arises as most shippers are now using big container ships to carry their shipments. This therefore causes rush hours at the port terminals especially as most inbound goods are received by most warehouses in the morning and outbound goods in the afternoon. At the same time, trucks bound for harbours try to reach the ports first in the morning hours. Therefore, for the freight flows to function properly, the peaking behaviour is an occurrence at port terminals and needs good network of intermodal connectors. Good intermodal connectors will reduce the cost for ships that have to stand at ports for long either to load or offload their shipments. It should be noted here that container shipments follow retail markets. Retail markets are obviously known to follow some major seasons such as August which is mostly for shipments for back to school and October being a period for shipments for holiday shipments. Other gains for good intermodal connectors Good intermodal connections can be of great benefit to the national security of a nation. Be it during peace or wartime, most nations will rely on intermodal connections to carry the military equipment. In the late 1990’s the Department of Defence (DOD) of the US relies on commercial carriers for 90% of its peacetime movements and 85% of its wartime movements. Commercial carriers carry these equipment under the Voluntary Intermodal Sealift Agreement (VISA), whereby ships can volunteer some capacity for the military in a time-phase activation and at the same time provide the full road and rail services. Conclusion Good intermodal connections here can be seen to have a full range of effects on a country, both on business, economy, individuals and military. Therefore, it is of great importance that a nation puts much attention on the intermodal connections should that country wish to keep her economy moving in the right direction. This is because, delays can consequently delays for supplies that are needed by the population and that are needed to keep the economy moving. 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An empirical test of the Resource based theory. Strategic regulation in the Dutch audit industry. Strategic Management Journal 17: pp 549 – 569, 1996. Retrieved at http://www.utcc.ac.th/public_content/files/001/P166_1.pdf Schendel, D.E and Hofer, C.W. “Strategic planning: A new view of Business Policy and Planning”, Little, Brown, Boston MA, 1979 U.S. DOT, Office of Freight Management, “National Freight Movements”, July 24, 2001. Websites consulted http://www.maersk.com/AboutMaersk/Pages/BusinessAreas.aspx Read More