business plan logistics company

Business Plan For A Logistics Company

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Table of Contents

1. Executive Summary 1Business OpportunityProduct/Service Description

2. Company Background 3

Business DescriptionCompany History

3. Business Plan For A Logistics Company 5

4. Services 6

5. The Industry, Competition, and Market 7

Market DefinitionPrimary CompetitorsCustomer Profile

6. Marketing Plan 10

7. Financial Plan 12Investment PlanBreak-even AnalysisLiquidity PlanEarnings PlanRisk Analysis

8. Conclusion 20

Business Plan For A Logistics Company 1

1. Executive SummaryA worldwide logistics service is one concept that lately showed significant growth potential.For the United States and Canada, the industry expects significant growth rates to persist inthe near future, so that investments in that segment are very profitable. The expectedprofitability is about 15% and the growth rate about 8%, depending on the specific servicesthat will be offered.

The goal of this start-up is the operation of a logistics company that offers a selected range oflogistics, planning and transportation services. Services will be offered worldwide, but with afocus on the United States markets. In addition to this core business, the company provides astorehouse and technical services to increase revenues.

1.1 Business OpportunityThe logistics industry currently shows a strong growth marked by a higher demand, butalso growing costs. The development of new business strategies and solutions seemscritical for new industry players to get market shares and survive in this highlycompetitive industry. The choice of services, as well as the development of applications,can be one strategy in this field of business. Additionally, sound cost management is ofcritical importance for a solid stream of revenues. Big industry players have shown that,even in a competitive market, growth rates of more than 20% can be sustained.

The operation of a logistics company that offers the following services is the core of thisstart-up:

general logistics servicestransportation servicesplanning servicesdistribution planningjust-in-time delivery

A strong focus of this business will be placed on the development of new and innovativestrategies for the customers that deliver a significant value. As an add-on, a broad rangeof customized services will be offered, which will help utilize company and employeecapacity. The range of products is selected to provide solid growth potentials.

The operation of this business requires a good knowledge of the markets, as well as acompetitive logistics service concept, to increase customer satisfaction. However, it iscritical that this service is offered with a strong focus on cost management.

One central goal of the proposed business strategy is the development of a uniquecorporate identity. Such identity will create customer loyalty and help gain a competitiveadvantage. Therefore, it is planned that, in addition to the selection of new and interestingservices, a company design is developed. For this reason, the service around the offeredapplications and the additional businesses is very extensive.


The required investment for the proposed business is moderate compared to othercompanies in the industry. Labor is expected to be the main cost driver, whereas no othersubstantial investment in fixed assets is required. Depending upon the location, theminimum required investment amount ranges between $50,000 and $60,000 in thestart-up phase, based on a 7-10% average revenue margin. This amount is well within thefinancial requirements observed for other comparable companies.

1.2 Product/Service DescriptionThe business will operate in the logistics and transportation industry with severalservices. An additional source of revenues is the development of new services. This canrange from computer planning systems to distribution services. Cross selling is plannedto be one of the prime strategies in this business, since all products are targeted to serve asimilar need and can easily be combined. Synergy in selling product across businesssegments is likely to boost earning further. Net earnings are expected to be at least 3%above traditional trading businesses with only one sales segments.

Figure 1.1 shows the revenue mix across segments in the start-up phase. This projectionis based on the expected strategic direction, investment amount and businessenvironment. As the core business, the logistics segment is expected to generate thelargest share in revenues. The sale of planning and transportation services is expected tobe another important generator of revenues which also helps utilize invested capacity.The sale of consulting services is expected to be intensified.


2. Company BackgroundThe goal of this start-up is the operation of a logistics business with different services andsimilar offers. Additionally, the sale of planning and consulting services is planned to reachan optimal utilization of personnel and company capacity. An initial investment amount of atleast $50,000 to $60,000 is required, which will allow the operation of a small business with4 to 5 employees. Sales revenues are expected to range between $550,000 and $600,000 inthe start-up phase and the operation is expected to generate profits starting in the first orsecond business year.

2.1 Business DescriptionManagement is expected to have a solid knowledge of the markets and the offeredservices to influence the customers. The goal is to create an innovative business in whichthe customer experiences competent service. A well chosen and targeted selection ofofferings will complement this strategy. Both aspects are core requirements to buildcustomer loyalty. Repeat customers are expected to generate revenues of 40% and more.Although this strategy is likely to require additional investments, it is expected thatrevenues per customer will increase significantly and range above industry average.Furthermore, this strategy will provide a clear entrance barrier for prospectivecompetitors.

The development and promotion of a corporate identity is another central task formanagement. Given the homogeneity of businesses in this industry, the development of acorporate identity will markedly increase sales revenues and build a customer base.Furthermore, a corporate identity will support expanding the business to a largerinternational target market.

2.2 Company HistoryIn the start-up phase, the business is operated as a one-person-business. This set upcarries a certain risk potential because of the high equity stake the manager bears and thepersonal and statutory liability assumed. However, this set-up preserves a high degree offlexibility in managerial decision making.

The number of personnel to be employed depends on the structural complexity of theoperations and the desired size. Figure 2.1 shows a break up of costs in the industry. It isexpected that the target employee earns a monthly salary of $4,500 to $6,000 based on 42hours per week. The sales and service area requires 1 to 2 employees on average workingin 2 shifts. Due to illness and vacation times, in the long run an average of 4 permanentemployees will be required after the start-up phase. With increasing sales and betterutilization of employee work time, revenue margins will increase and thus, costs peremployee will decrease on average. With revenues ranging around $500,000, capacityutilization is expected to be around 85%.

During the start-up phase, a single person will attend to all necessary management task,coordinate employees and provide strategic direction to the developing business.Accounting, administrative and machine maintenance will be outsourced to an external


partner, since those tasks can typically be provided at better rates externally. Sourcingand marketing will require one employee.

Finding the optimal location for a business is one of the success factors in the short andlong run. This is also important for international businesses because taxes, employees andadditional costs are crucial for all businesses. The following analysis is based on 10businesses in the logistics industry. Since a small company is recruiting its customerstypically from the home country and later from a worldwide area, a national location isconsidered as the core market.

For the location with a core market in the selected region, the following factors arerelevant:

The taxes and other administration costs are low.Administrative costs are expected to be comparably small given the expected revenues.The possibility to recruit additional personnel is favorable.Public institutions are expected to provide additional sponsoring. It is easy to find appropriate employees.

Because of the favorable growth perspectives in the chosen market and growinginvestment activities, we expect to realize yearly growth rates in revenues of 15-20%given a 4% economic growth rate.


3. Business Plan For A Logistics CompanyOne of the key elements of a successful business in the logistics industry is the selection ofservices that are as profitable as possible. One key element of a profit maximization strategyis to minimize the costs and to increase the sales volume. The following services show thehighest demand and the best profitability, depending on input costs on the one hand and salesrevenues on the other hand: general logistics servicesinternational transportationjust-in-time deliverydistributioncost optimization

The specific selection of services and applications offered will be monitored constantly andvary according to business needs. This strategy provides a competitive edge against othercompanies in the environment and is expected to generate an additional demand and thepossibility for a price mark-up.

The development of warehouse and a storage system are two key elements of a successfullogistics and transportation business. The following services will be offered in this segment:

storage capacitytransportation servicesinternational distribution

All services will be monitored to find out an optimal combination of services.


4. ServicesAdditional service offerings related to the core business provide other fields of business. Theavailable competence will be used for further business activities that will generate additionalrevenues. While this is not a core business segment, this concept has growth potentialbecause the demand for planning and consulting services is rising. Initially, the investment ininventory, technical equipment and personnel capacity of this segment is limited. Especially,the supply of complex logistics planning with a higher priced range will require extensiveservice. This strategy will help utilize the capacity in personnel, since it allows for an optimalcoordination of employees. All employees will be trained to cover all aspects of individualservices for the customer.


5. The Industry, Competition, and MarketA careful analysis of the market and competitive forces in this industry is a key element inassessing the business potential of our project. This analysis will provide marketing and salesdata that are indispensable to develop the business potential optimally. The main competitorsare comparably-sized medium and large logistics companies in the international environmentwith a similar selection of products and services. Since the planned project is of internationalscope with a single headquarter, the competitive analysis will have to focus on theinternational and local market. The market and competition analysis will be based on theentire market.

5.1 Market DefinitionFigure 5.1 shows average growth figures in revenues of typical logistics companiesduring the past 10 years. A lot of companies in this industry have experienced constantgrowth rates of more than 15% to 20% since 1999. For 2005, a growth of 17% isexpected with a strong development in the third and last quarter.

Despite slowing economic growth and decreasing customer demand, the internationallogistics industry underwent a relatively favorable development. New and innovativebusiness concepts in the sector still show high growth potentials, while growth rates oftraditional businesses in that industry were below average. The significant growth of newbusiness concepts is primarily due to sharp cost control and more efficient businessstrategies that accounted for higher revenue and earning figures. According to industryestimates, 30% of such innovative businesses gained from cross-selling activitiesbetween their business segments. Sinking prices of input products and service costs haveallowed the industry to partially compensate for slowing demand. Savings in input costswere also due to decreased labor costs. However, starting in 2006, this trend is expectedto reverse and growth rates will pick up markedly, despite the uncertainty in thedevelopment of input prices and worldwide economic developments.

5.2 Primary CompetitorsThe competitive environment is primarily determined by the choice of item groups, butalso the regional location. But, regardless of the selection of items, high mark-ups are not


feasible in the long run, since this will attract competitors who compete away any rents.With a high density of businesses in one location, businesses with the highest marginalcost will be driven out of the market. Such locations will yield a return of 12-14% onaverage. This is the expected equilibrium return in a saturated market. To further analyzethe competitive environment, it is necessary to define the players in that environment. Afirm that generates $300,000 to $1,000,000 in revenues and employs 5 to 10 peopleshould regard a firm with revenues and personnel 3 times this figures as a viablecompetitor. On the product and service side, businesses with a comparable selection ofoffers are regarded as competing in the same market segment. Figure 5.4 shows the sizeof businesses in this market segment, which also includes different products and servicesthat will be sold worldwide. The numbers are based on average revenues of companiesthat run their business more than five years.

5.3 Customer ProfileThe specialized way of distribution and offerings are primarily targeting largeinternational companies. A possible segmentation to identify different customer groups isby segmentation of different lines of business. Figure 5.2 shows the demand for logisticsservices from different lines of business. Numbers are based on averages per company ofa particular group multiplied by the number of companies in the respective group. Thisgives total demand share per group. As can be seen, companies in the industry segment,like car manufacturers, have a high demand for logistics services like just-in-timedelivery and international distribution. Also, other industries, like telecommunication andinformation technology, have a growing demand, especially in the field of transportation.Figure 5.3 shows revenues by yearly revenues of potential customers. The figure showsrevenues generated per profit group. Numbers are based on the average profit percustomer and the number of customers per profit group. As can be seen, customers in themiddle income bracket generate the highest revenue streams. High frequented lowincome groups, such as small and medium companies, generate relatively low revenuestreams.


6. Marketing PlanIn the start-up phase, it is a central task of the marketing concept to establish namerecognition and a unique trade mark. Later on, the strategy will primarily be targeted to gainnew customers and create customer loyalty of repeat customers. Several marketing and salespromotion strategies are available in the logistics industry. Figure 6.1 shows differentmarketing elements and their use in marketing strategies, as well as their estimated potentialsuccess factor. The figure can serve as a direction for the planning of a marketing and salespromotion strategy. The numbers are based on typical businesses in the logistics andtransportation industry. As can be seen, printed advertisements target a large potentialcustomer group, but at a relatively high cost. Printed advertisements in internationalnewspapers and magazines are regarded as very beneficial in the start-up phase to attract alarge group of potential customers and draw attention to the range of articles offered. 49% ofbusinesses in the trade industry use printed advertisements and about 60% of this groupregard this as the most beneficial form of marketing. Sales promotion strategies havetemporary effects only. They are used at business openings primarily and offer specialdiscounts. 49% of businesses use sales promotion strategies frequently and 81% of the usersresponded that this instrument is successful. Marketing alliances with other tradingbusinesses to generate cost savings and increase efficiency are used rarely. Such strategiesinclude mutual use of marketing and web promotion events and joint promotionarrangements. Only 45% of businesses have used these elements and 55% of these regardthis instrument as beneficial. Web and e-mail marketing is used frequently in the industry,although this would be a relatively inexpensive additional effort. Direct mailings are a veryefficient strategy that sends mailings to selected customers or business groups. Sincespreading costs of such mailings are very low, this marketing element provides a useful toolfor special offer promotions.

The use of marketing and sales promotions proceeds as follows: as a broad base to attractnew customers, the strategy will include a combination of printed advertisements and specialoffers with opening discounts. Furthermore, a group of customers will be selected for directmailings. This strategy is expected to continue for 3-4 months, after which the effort will turntowards creating customer loyalty for regular customers. This strategy is supplemented by aregular marketing strategy and direct mailings to regular customers. A marketing allianceand online advertisements will also come to use.


7. Financial PlanA sound financial plan is the key factor for the success of a business start-up. Investors andbanks will base their funding decision on the information given in this plan. Besides a plan ofthe financial needs, this plan must insure that the business is always liquid and ultimatelyprofitable. Since the sales and earnings projections in the business plan are based onexpectations, the financial plan has to be revised and refined on a constant basis so thatdiscrepancies can be uncovered and solved instantly. The inputs for this financial plan arebased on 22 businesses of different size and market segments in the national andinternational logistics industry, which serve as a group of comparable firms, as well as ownestimates based on the planned business environment. Revenue estimates are conservativeand expense projections include a cushion for unforeseen contingencies.

The initial capital requirement is estimated to be $50,000 to $60,000. The sales margin isexpected to be 7-10%, whereby each business segment contributes differently to sales andearnings. The classical logistics segment, of all segments, will have an average contributionto sales in relative terms (6.5%), but given the high sales volume, the largest in absoluteterms. Revenues from transportation services can be differentiated into those from low pricedsingle services to comprehensive and long-term transportation. The sale of services isexpected to generate a 12% to 15% sales margin, while the margin from sales of services isexpected to be closer to about 10%. Figure 7.1 shows the source of revenues by segmentduring the start-up phase.

Depending on the initial investment sum, cost and revenue estimates vary. Figure 7.2 showsthe expected relationship of cost and revenues. As can be seen, the relationship is not lineareverywhere, but costs decrease relative to sales at an initial investment of $50,000. Thiseffect is due to the better utilization of capacities in personnel at rising revenues at constantcost. If capacity is fully utilized, additional personnel must be recruited. At an investmentsum of $100,000, administrative costs are expected to return to a linear relationship of sales.At sales levels between $1,000,000 to $2,000,000, costs increase by the factor 1.85. The costrevenue relationship is important, not only during the start-up phase, but also for plannedfurther expansion. Often such expansion strategies are based on this relationship. Otherindustries are able to generate cost savings of 30-50% during expansion periods, while forthe logistics industry, this factor is close to 15%. At a specific size, this relationship reversesbecause administrative costs rise sharply. This affects small businesses between 10 and 20employees most severely.

The details of the financial plan are laid out in more detail as follows:

Section 7.1 gives an investments schedule. This includes all investments necessary during thestart-up phase.

Section 7.2 gives a break-even analysis that shows revenues at the break-even point. Everyadditional sales revenue adds to profit and vice versa.

Section 7.3 gives a liquidity plan. This plan is based on current cost and revenue estimates


from Section 7.2. Liquidity must always be positive.

Section 7.4 contains a long-term profit projection for the first 4 years of business. Theprojection shows the critical amount of revenues at which the business is profitable and howprofit develops over time.

Section 7.5 provides a risk analysis. The risk analysis contains critical factors that mayimpact the financial numbers presented in this plan.

7.1 Investment PlanThe investment plan comprises primary capital needs for the foundation and operation ofan international logistics company with different products and services for sale. The planalso includes initial marketing and sales promotion expenses.

The figures are based on a business with 3-5 employees and expected revenues of


$950,000 in year 2-3.

7.2 Break-even AnalysisThe break-even analysis shows how earnings rise as a function of sales. The break-evenpoint is the point at which revenues from sales cover total costs (fix costs and costs risingwith sales). This analysis is important for the development of the liquidity plan. If thebreak-even point is not achieved, in the long run the business loses liquidity and maybecome insolvent. This requires that a critical amount of revenues must be generated.

At a sale revenue of $600,000 and given fixed costs, the business will generate a profit.Fixed costs are estimated at $120,000 to $130,000 and variable costs at $480,000.

At a realizable revenue of $1,000,000, after 2-3 years profits will rise to $70,000 pre-tax.This represents an earnings margin of 10% pre-tax and 7% after-tax. These estimates arerealistic in this market segment. Increasing sales volume will increase pre-tax earnings


margins, but this development reverses when administrative costs begin to rise sharply.Up to a sales volume of $3,000,000, earnings margins rise to 12.5%, after which themargin decreases to constant 11.5%.

Figure 7.3 shows at which critical sales volume the business generates a profit. Thisserves as a base for a pricing strategy. Additionally, the graph shows the amount of salesat which a marketing campaign can be run profitably.

7.3 Liquidity PlanThe liquidity plan shows the amount of finances necessary to assure permanent liquidityof the business. The plan is based on 4 representative months of a typical business with 3to 5 employees, annual sales of $1,300,000 and net profits of about $300,000. Revenueestimates are drawn from a standard normal distribution.


7.4 Earnings PlanThe earnings plan shows the results from ordinary operations. The plan is based on thefirst 4 years of business. Revenue estimates are drawn from a normal distribution with anestimated growth rate of 20 to 30%. Figure 7.4 shows profit over time.


7.5 Risk AnalysisThe risk analysis considers critical factors that may lead to a failure of the businessconcept. Such factors can involve failures during the implementation phase, as well asduring operations. Such potential factors are ordered according to the probability atwhich they can arise. Shown is the key factor that led to the failure only. Data are drawnfrom questionnaires of 10 logistics businesses with comparable product offerings andrevenue- and cost structures that went bankrupt during the last 3 years, as well asanalyses of different research institutes.

1. Insufficient demand: This is the most frequent reason that leads to business failure. Thisincludes permanently low demand, as well as a temporary collapse in demand. Oftendemand estimates were too optimistic at the outset. Such failures might also come fromexternal shocks instead of operating deficiencies. 19% of businesses with insufficientdemand go bankrupt. 50% of these businesses report that, once demand slacked, they didnot react accordingly, because they believed that this phenomenon was only temporary.Since the expected frequency of customers during the start-up phase is still low, a criticalsuccess factor is to focus promotional effort so as to generate customer loyalty early on,


which will help minimize the effects of demand fluctuations. This is also important forthe future development of the business.

2. Behavior of Competition: Due to low entry barriers, additional businesses can enter themarket at low cost. Approximately 16% of insolvent businesses were driven out of themarket by that competition. A better service concept, innovative ideas and concentrationon core businesses are easy means for an entrant to gain a competitive edge.

3. Personnel and capacity utilization: Often personnel capacity cannot be adjusted easilywhen demand slows down. Currently, business services have a capacity utilization rate ofpersonnel of 70%, i.e. 70% of employee working hours can be directly credited to sales.At small businesses this value is often lower, which means that 30% of working hoursarise without generating any further revenue. 13% of such businesses go bankrupt for thisreason.

4. Liquidity constraints: Another frequent reasons for bankruptcy is insufficient liquidity. Inthat case, it is possible that all liquid funds are used to cover losses or that liquidity needswere planned too tight. To be able to flexibly react to changing liquidity needs, it isimportant that sufficient funds be planned, even during the start-up phase. Thus, 5-10%of the investment sum should be held as liquidity reserve permanently. 13% of insolventbusinesses reported liquidity as the reason for bankruptcy.

5. Over-indebtedness: Many business are run on a small equity base. The majority ofinvestments are funded by debt. If the business becomes unprofitable, debt obligationscannot be covered. Little more over 10% of insolvent firms reported over-indebtedness asthe reason for going bankrupt. It is therefore important that a share of earnings is retainedfor debt service.

6. Macroeconomic Conditions: In a cyclical downturn, revenue expectations may not comein according to expectation. Although this factor does not affect the business in itself, itdoes have an impact on profitability, liquidity and leverage. Costs remain constant duringsuch periods, but revenues typically decrease which affects overall profitability. 10% ofall insolvent businesses report that they went bankrupt due to macroeconomic conditions,although the relevant indicators of the business looked healthy.

7. Location and market: The market of the business and the selection of the right potentialcustomers is an important success factor and one of the fundamental decisions that has animpact on the future prosperity of the firm. Therefore, a careful analysis is necessary.More than 10% of insolvent businesses reported that they went bankrupt because of thewrong market selection. Often start-ups did not consider that, even when the choice ofmarket may not be wrong at the outset, it may later become so when economic conditionsworsen. This may be due to structural changes or different interest of customers.

8. Wrong Business Decisions: Often wrong business decisions and difficult situations gounnoticed for some period, which can lead to a failure of the business. A critical andindependent reflection of a decision are critical factors to determine the value of amanagement decision and evaluate the business' profitability. Studies have shown that


many businesses fail in their start-up phase because of management’s inability to makesound business decisions, while once a business is settled, such mistakes are very rare. Acritical management instrument is the ability to detect potential failures and problems.Certain key figures can help measure this ability and objectively determine a decision'schance for success. Small businesses should use such indicator ratios to assess theirbusiness outlooks.

Figure 7.5 shows the relative importance of each factor for businesses that went bankrupt.The numbers are based on the most relevant reason that triggered bankruptcy, but not thereason responsible for bankruptcy. External factors that changed the competitiveenvironment and changing macroeconomic conditions were the most important reasonsrelative to internal factors.


8. ConclusionThe international logistics segment is one of the most profitable within the business serviceindustry, while almost any other segment, especially in the local markets currently livesthrough a difficult time. This situation is mostly driven by the competition of largerinternational companies. A business that successfully survives the current temporary slowdown can be certain of increased profitability once the situation rebounds.

The relatively modest investment requirements and running costs (compared to industrybusinesses) provide a favorable argument, since external funds from banks becomes moredifficult given that the risk aversion to finance such ventures has risen. A company withspecific knowledge and innovative ideas has good chances to move into profitable marketniches and run a successful business. Market conditions change constantly, as do customerdemands. This is the chance for businesses with innovative ideas and new offerings to securea dependable customer basis. Service is a critical factor that can earn a competitive edge.This is also true for new trends in the industry to better control costs and increase efficiency.

For a successful operation of an international logistics company, five factors are critical andcentral for the business strategy:

- In the international logistics industry, it is important that the customer experiences acomprehensive and competent logistics service. This will secure customer loyalty in amarket that is very fast and competitive.

- The utilization of personnel capacity is critical for the long-term profitability because ofchanging margins and the constraints to flexibly reduce personnel. Therefore, the additionalselling of transportation services is a further segment of the business that is integrated in thesale of the whole business process.

- A carefully selected assortment of services, as well as the selected choice of newtechnologies, has the potential to gain a competitive edge against competitors. Furthermore,a service that aims to give the customer an added value through new services can justifyprice mark-ups.

- A critical factor in the logistics industry is quality management. Better quality at lower costincreases customer satisfaction. Deficiencies in service quality can lower demand, whilegood service quality can help create customer loyalty.

- Cost management is a critical success factor for businesses in industries where margins arelow. Computer aided planning is an integral part of cost management.

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