OPERATIONAL REVIEW Operational profile Barloworld Logistics is one of the leading logistics and supply chain management businesses in southern Africa with complementary operations in China, the United Arab Emirates, Iberia, Germany and the United Kingdom. Whilst Barloworld Logistics offers traditional logistics services such as transportation, warehousing and freight forwarding, we create unique value for our clients through a more holistic approach to supply chain management. We combine strategy, planning, management and integration with excellent operational execution. This is achieved by developing and acquiring skills and sharing knowledge spanning the full spectrum of supply chain management, across multiple geographies. Our strategy is to grow a significant international logistics business for Barloworld.

	Areas of operation  – supply chain management:  Africa and Europe  – Freight forwarding:  Africa, Middle East, Asia and Europe  – Warehousing and distribution:  Africa, Middle East and Europe  – consulting and software:  Africa, Middle East, Asia and Europe  – dedicated transport services:  Africa
Isaac Shongwe (47) Chief executive officer: Logistics BA (Hons), MPhil (Oxon) 4 years’ service

Overview
The decline in economic conditions and a dramatic fall in global trade and volumes during most of the financial year severely affected our international operations.

Overall revenue was 27% higher than the previous year, mainly due to the acquisition of Swift, Flynt and SAT in 2008. Operating profit was R77 million, R58 million lower than last year.

In Africa, which still represents the dominant part of our business, the result was satisfactory due to the success of supply chain management contracts not affected by volumes. Losses continued in Europe, but the rate of loss slowed significantly in the last quarter.

An operational efficiency and cost reduction focus resulted in a saving of R127 million throughout the business. All business units generated positive cash flow from working capital reductions and delayed capital expenditure where appropriate. The business model for Dedicated Transport Services was changed to reduce capital expenditure.

All our freight forwarding operations are in the process of being integrated into a cohesive unit focusing on corporate sales to clients with the potential of conversion to supply chain management solutions.

Emphasis was placed on underpinning the growth of the organisation through investment in people, skills and capacity, IT, governance and technology, the latter playing a more important role as management across geographies, and with more partners intensifies.

Although our clients rated us as operationally excellent during a customer satisfaction survey in 2009, a formalised operational excellence programme based on Lean principles has been piloted in Africa and will be implemented in 2010 to ensure sustained improvement. Roll-out to our international operations will take place in 2011.

Africa
The African operations continued to perform relatively well in a declining market. Revenue increased by 15% largely due to new supply chain management contracts, increased FMCG volumes and substantial increases in fuel costs during the first quarter of the financial year. Operating profit was R92 million, R13 million lower than 2008.

Supply chain management contracts based on management fees and performance bonuses were unaffected by the downturn. While our retail and FMCG operations performed to expectation, our business in the construction and automotive markets was negatively affected by the challenging conditions in these sectors.

The dedicated transport business also continued to perform well and a keen focus on reducing asset intensity, together with ongoing focus on evolving the business model to reduce capital expenditure, has assisted in improved returns.

Reduced spending has impacted our consulting and software solutions operation, but demand is expected to improve as companies affected by the economic downturn seek to optimise efficiencies and reduce costs.

A 30% drop in import volumes necessitated the downsizing of operations in our freight forwarding division.

The Zambia Sugar contract for warehousing and distribution management has been successfully implemented and is performing satisfactorily. Our new southern African Nike warehousing and distribution network management venture has been recognised by Nike European headquarters as its most successful new supply chain project in 2009. A major supply chain review and eight year implementation and management contract has been concluded with a major furniture retailer.

A new employee self service HR system was implemented and an employee wellbeing programme successfully launched in 2009. A formal knowledge management programme was also initiated, incorporating a knowledge management portal and communities of practice.

Transformation
Barloworld Logistics Africa have maintained a Level 4 BBBEE status and the target is to attain Level 3 by 2011. The key focus area is black management representation, with particular emphasis on the employment of black women.

Middle East and Asia
Operating profit in the Middle East and Asia was R10 million, a disappointing result despite a net gain in customers.

In addition to the reduction in global trade, freight rates dropped substantially, putting further pressure on margins. While we continued to experience lower volumes in sea-air and air products, initial signs of recovery were evident in the last quarter.

Our focus has been on optimising the current business through rationalisation and cost-cutting to drive recovery, while also finalising the integration of our 2008 acquisitions of Swift Freight and Flynt.

The freight forwarding division is changing its focus from trader business into Africa from the Middle East and Asia to corporate clients linking the Middle East, Asia, Europe and Africa. A new specialist sales team has been employed to drive this focus.

With GDP growth predicted across the region, we are gearing up to meet the associated growth in supply chain management. The implementation of our first supply chain management contract is expected for 2012.

Europe
Our European businesses were all affected by the global downturn, but a keen focus on cost reduction resulted in many of these operations being rightsized during the year.

While the Spanish operation was hit most severely, this business is operationally efficient and, with a reorganised sales team, is poised to take advantage of a move to outsourcing as more companies focus on core capabilities to cut costs and drive efficiencies.

The launch of the supply chain management initiative in Europe is on track and the amalgamation of our Spanish and UK business under one European management structure is enhancing synergies, providing cross pollination of knowledge and leveraging regional opportunities. Strategically, the business will begin its move towards more supply chain management contracts over the next year.

The UK supply chain management offering is being built on the back of a transport management services contract concluded with Barloworld Handling which includes elements of warehousing and inventory optimisation. Coupled with the leveraging of relationships and skills built up by the software company and other networks, this ensures a healthy pipeline of opportunities for 2010 and beyond.

The software business headquartered in the UK has been placed under a single international management team and we have upgraded our software products as enablers to our total offering.

The CINO (Combined Inventory and Network Optimisation) product has been in beta testing with major clients and feedback generated will be incorporated into the product, which is due to be launched in 2010.

People
A leadership development training initiative has been launched, coupled with specific training interventions across the organisation. Resources from emerging economies such as India are being utilised to assist in systems programming and a pilot project to outsource certain back office functions is in progress.

Outlook
Emerging markets such as China and India are expected to have more influence on world trade flows going forward and high growth rates are projected for our supply chain management offering, driven by outsourcing trends. Organic growth is also anticipated in the supply chain management market in Africa.

We are preparing to capitalise on the outsourcing trend predicted in these regions and expect the new focused sales force in India, Africa and the Middle and Far East to start deriving value from our targeted customer base in the second quarter.

Developed markets, especially in Europe, will remain key consumers of merchandise sourced from emerging markets. Many international head offices making supply chain decisions are based in Europe and we will also target these for delivery of our solutions.

The divisional strategic plan is to leverage the link between the emerging and developed markets and to transition to a higher level supply chain management offering, characterised by customised solutions based on contractual annuity income (three to five years plus) with management fees and performance bonuses.

Another strategic priority is the integration of Swift, Flynt and Sea Air Transport acquisitions into a single Barloworld branded international freight forwarding unit that will focus on corporate solutions with the potential of conversion to supply chain management offerings. Our longer term strategy is to increase our international footprint through organic growth and attract bigger multi-national customers.

This process will require some investment in technology over the next year. However the rebranding of our acquisitions in the first quarter, followed by a major marketing initiative, will enable us to extract additional value from the Barloworld brand.





In addition to growing our freight forwarding footprint globally and leveraging off our existing network to extract additional value and services for our clients, we will investigate the viability of extending our SCM philosophy to the regions to take advantage of annuity based income and gain-share benefits associated with this business model.

Africa
Business volumes will remain subdued in the year ahead, most notably in the construction and automotive sectors.

The African business unit will focus on organic growth in South Africa, together with exciting new business development opportunities. At the same time further expansion into Africa will be explored, both leveraging off the existing Barloworld relationships in several countries and following existing clients as they expand into Africa.

The year ahead will also focus on successful implementation of key new contracts and enhancing our operational processes.

Middle East and Asia
Whilst we do not envisage volumes returning to 2008 levels, increased levels of trade are expected in the coming year. Our Far East and sea-air operations are already showing increased volumes and air and ocean freight rates have started to stabilise. This will enable us to once again grow our margins.

Europe
The European market will remain relatively flat in the short term, with growth in total logistics activity leading GDP growth slightly. However we believe our customised management solution combining planning, management and execution will show positive growth as clients outsource more non-core activities.