DUBAI LOGISTICS CITY: A QUANTUM LEAP IN LOGISTICS TEACHING NOTE

Case Synopsis it was just amazing! They plan to build a tower that will be even higher than the Tokyo Millennium Tower. Peter Winter, assistant to Mr. Schmidt, CEO of Schmidt & Partner Logistics Solutions Inc. headquartered in Munich, nodded friendly and looked at the clock on the wall. His boss had been describing his impressions from his holidays with his wife in Dubai for almost fifteen minutes now. But now the most impressive thing: I heard about a new logistics project called Dubai Logistics City, Mr. Schmidt continued. They say it will be a quantum leap in logistics! He made a dramatic pause. So, you know what your task is for the next week: Find out what this project is all about, and whether it could be beneficial for our company! Peters Challenge Over the past few days, Peter had worked hard and had compiled a great deal of information. His internet research and his phone calls provided a range of facts about the Emirate of Dubai, the Dubai Logistics City and about cultural aspects of the region. The only thing that was left to do was to come to a conclusion whether the idea of the Dubai Logistics City was beneficial for the company or not. Teaching Objectives and Target Audience The case study Dubai Logistics City: A Quantum Leap in Logistics was written for a graduate course in logistics or supply chain management. The case study gives students the chance to develop their analytical and decision-making skills on a logistics management decision. The case study should motivate students to think about new
This teaching note was written by Prof. Dr. Stefan Walter and Lars Eiermann, Supply Management Institute SMI, ebs European Business School in cooperation with Dr. Roland Zibell (Project Director Dubai Logistics City, ADI Consulting), with the support of Roger Moser and under the supervision of Prof. Dr. Christopher Jahns. Copyright 2006 by Supply Management Institute SMI. No use or reproduction without prior written permission by SMI.

aspects and trends in global logistics and supply chain management in relation to the worlds first truly integrated multi-modal logistics platform. Furthermore, students should recognize the possibility to combine aspects, such as tri-modality of transport and valueadded services, such as order fulfillment, merge-in-transit, postponement-in-assembly, kitting and packing, in a free trade zone environment with a single customs-bonded solution. On this basis, students should be able to understand the main reasons for logistics service providers to establish a new branch at the Dubai Logistics City. Teaching Approach and Strategy In general, the Supply Management Institute recommends following a three step approach in case studies: (1) analysis of the relevant issues, (2) development of suggestions and solutions, and (3) definition of detailed next steps in order to implement the proposed solutions. The first step is mainly focused in the first and second question; the second step is underlined in question three. Finally, step three is handled by questions four and five. The answers to question three and four are abutted to a SWOT analysis. With this process, the Supply Management Institute tries to foster the analytical, creative and implementation skills of the students, assuring that the proposed plans are realistic when one takes the implementation restrictions into account. Possible questions: 1. What is the Dubai Logistics City project and what reasons have led to its development? 2. Which factors should be considered when making the decision whether to set up a branch for Schmidt & Partner Logistics Solutions Inc. in Dubai or not? 3. What are the advantages and disadvantages of establishing a branch at Dubai Logistics City? 4. What are possible opportunities and risks that companies settling in Dubai and the Dubai Logistics City itself might have to face in the future? 5. What advice should Peter give to his boss? Should Schmidt & Partner Logistics Solutions Inc. establish a new branch at Dubai Logistics City? 1. What is the Dubai Logistics City project and what reasons have led to this project? The information given in this case study is sufficient to describe the development and concept of the Dubai Logistics City project. However, additional information can be found easily via articles in print media and the internet. The main aspects that should be considered in the first part of the question are: Tri-modality the ease of changing transport modes The geographical location as a hub between Asia, Africa, and Europe The possibility to provide value-added services -2-

The long-term planning horizon The degree of innovation Concerning the second part of the task, the following factors should be taken into account: The overall diversification of business in Dubai other than oil The likely capacity overload of the existing logistics infrastructure of the airport lack of space for warehouses and value-added services Long-term orientation of the Sheikhs The will to do a quantum leap in logistics The wish of the Sheiks for innovation and growth 2. Which factors should be considered when making the decision whether to set up a branch for Schmidt & Partner Logistics Solutions Inc. in Dubai or not? The decision to build up a branch at Dubai Logistics City would have an influence on both the company and their customers. For this reason, both of these sides should be considered. From a company perspective, the companys overall orientation and processes must be designed in a way that they can benefit from the opportunities that the Dubai Logistics City has to offer. If the company is not engaged in multi-modal transports, the trimodality of the logistics platform might not be of significant value. In fact, companies have to fulfil certain requirements, such as being involved in extended logistics operations, in order to be allowed to settle at the Dubai Logistics City. In the same way, the possible integration of value-added services in the processes must be kept in mind. If a firm is specialized in goods that do not require further handling, this aspect of the Dubai Logistics City can possibly be disregarded. Another point is the fact that the property in the logistics area cannot be purchased by foreign companies but is available for rent only. Furthermore, it is important to pay attention to the areas which the firm currently ships to. Only transports which use Dubai as a hub can benefit effectively from the logistics platform. This leads to the customer-oriented factors that should be considered when making a decision to set up a new branch. It is of utmost importance to pay attention to the needs of the clients. Do the clients benefit from value-added services? Do the clients need multimodal transports? Is the region of relevance to clients operations?

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3. What are the advantages and disadvantages of establishing a branch at Dubai Logistics City? Advantages Clearly, Dubai has proven to be a growing economy that has gained a remarkable brand image within the last 10 years. Attributes like innovative, modern, growing, and booming are associated with the Emirate; a fact that makes the location attractive for companies of all sectors around the world if they want to be a part of this development. In fact, companies might benefit directly from the image of Dubai as part of an image transfer. The sustainable positive economic development of the country, together with its geographic location close to future growth markets such as the Asian countries, India and to a certain parts of Africa guarantee the long-term attractiveness of Dubai for foreign companies and investors. The political system of the Emirate is relatively stabile and neutral to foreigners. Both aspects reduce the political risks for foreign companies settling in the region and enable them to develop long-term plans. In addition, governmental offices and private companies offer advice and support to foreign firms in order to help establish a branch in Dubai. The overall business climate is liberal and fosters a positive and open attitude towards foreign investors. Concerning the advantages for company logistics, the geographical location of Dubai should be emphasized. Located directly between Europe, Asia and Africa, the country has become an important hub for passenger and cargo air traffic that enables fast handling of goods for transports around the world. Especially the tri-modality of the Dubai Logistics City concept offers the possibility to easily switch between road, sea and air transport within a free trade zone. Schmidt & Partner Logistics Solutions Inc. might reduce the time duration of transports to the effect that its customers can react more flexibly to demand changes, are able to lower their stock levels and improve their overall resource allocation. In the same way, the concentration of different logistics service providers in one area creates synergy effects by jointly using facility management services, such as security, cleaning and doorman services or specialized logistics services (i.e. port handling). Another crucial advantage is the possibility for logistics service providers to offer value-added services to their customers: The Dubai Logistics City provides enough space to establish services for the conditioning and processing of goods that are forwarded from one means of transport to another. For instance, ironing or packaging services can be offered. Thus, settled logistics service providers can achieve customer-lock-in making effects and generate more profits through these additional services. In fact, many international companies have already established an office in Dubai so that a logistics service provider could keep close contact to many customers if it sets up a branch in Dubai.

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For goods that leave the free trade zone, an electronic system for customs handling will be installed at the Dubai Logistics City from the very beginning in order to facilitate and accelerate all shipping processes. Regarding human resources aspects, Dubai Logistics City has some additional advantages to offer: Since establishing a new branch in a foreign country is often connected with the relocation of personnel, employee accommodation and social life should be considered. For this reason, the Dubai Logistics City offers a number of residential and leisure areas that can be purchased by incoming companies. Disadvantages Since Dubai is a Muslim country, the risk of terrorist attacks exists due to its relative close relationship towards Western states and companies. Similarly, the rulers of the Emirate try to distance themselves from the United States of America, which might have an impact on companies from the U.S. which intend to do business in Arab countries. Another aspect that must be considered is the problem of corruption and existing insider relationships which are difficult for foreigners to detect. A great deal of business works on the basis of personal relationships which are difficult to establish. Even if a foreigner is respected and trusted, a business partner from Dubai will hardly ever invite him to informal or recreational occasions. Similarly, the Arabian business partners tend to dominate negotiations and do not make decisions in an open discussion with their foreign partners. Companies that are interested in setting up a branch in Dubai must be aware that the country does not offer high cost savings. Especially costs for management personnel reach the levels of Western economies. Companies must also be aware that other locations, such as Shanghai or Hong Kong, could develop similar logistics platforms. There is a risk that Dubai Logistics City could lose its attractiveness if it were no longer to be unique. Consequently, if a main customer of a logistics service provider moved to one of these new sites, it would also have to relocate in order to keep the customer. But most of the companies in global logistics need several strategic platforms or hubs distributed all over the world, such as Asia, the Middle East, Europe and America. Therefore, it might be not a question of uniqueness but rather a question of positioning in a global network. Foreign companies can only purchase residential space at the Dubai Logistics City. Since they cannot acquire the logistics space that they need, there is always the risk that the lease contract might be terminated. Moreover, foreign companies cannot profit from a positive development of lease prices and the resulting increase in real estate value. Finally, the extreme temperatures in Dubai (high humidity and up to 50 Celsius) might have a negative effect on food, pharmaceuticals, flowers and other temperature-sensitive goods. Consequently, these conditions require special attention and might increase average logistics costs.

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4. What are possible opportunities and risks that companies settling in Dubai and the Dubai Logistics City itself might have to face in the future? Future Opportunities In general, Dubai Logistics City possesses the technical capabilities and expansion opportunities to stay competitive for up to 40 years, if no new inventions revolutionize the field of transport. A growing volume of passengers and cargo, as well as the tendency towards air cargo form the basis for a sustainable success of the project. Moreover, time pressure cannot be expected to decrease over the next years. Instead, companies will have to deliver goods faster than before at a lower price. As a result, integrated logistics platforms that foster the switch between different transport modes and integrate valueadded services will likely become more and more important. Concerning space availability, future steps to expand the Dubai Logistics City are almost unlimited: the desert offers huge areas which could be used for future developments. In this respect, the financial feasibility is always assured by the modular expansion concept of the Dubai Logistics City: In the beginning, only 20% of the entire complex will be built, followed by additional modules according to the existing demand for space. Interesting opportunities may arise as well from the implementation of innovative technologies and software systems (for example RFID) which might differentiate Dubai Logistics City even further from its competitors and add to the users benefit. Future Risks Although there are hardly any restrictions concerning the surface area of the Dubai Logistics City project, the space in close proximity that is vital to many logistics providers is limited. As a rule of thumb, the attractiveness of a location within Dubai Logistics City decreases with its distance to the airport. Therefore, only companies whose business is located directly to the logistics sector are allowed to settle in the area. As a consequence, a future change in their production business processes could terminate the lease contracts. For many companies, the tri-modality of the Dubai Logistics City is not a core benefit. In fact, the shipment from one transport mode (ship) to another (airplane) is still unusual. The majority of the transports are only carried out through one or two modes until the goods have arrived at their final destination. Without additional incentives, this state might not change quickly enough. There is constant pressure on the facility management to keep leasing rates low, since warehousing decisions are highly price sensitive. Uncompetitive leasing rates would easily drive away logistics companies. Finally, it is of prime importance to continuously develop and update the Dubai Logistics City in order to meet future requirements and face emerging competitors.

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5. Should Schmidt & Partner Logistics Solutions Inc. set up a branch at Dubai Logistics City? This question should be openly discussed on the basis of the facts provided and the information found by the students individually. Even if the description of Schmidt & Partner Logistics Solutions Inc. and its customers implies that the advantages outweigh the disadvantages of an engagement in Dubai Logistics City, it is possible to argue against setting up a branch. Pros and cons for a settling in Dubai are summarized in the following table:

PRO
Geographical location of the Dubai Logistics City as a hub between Europe, Asia, and Africa Possibility to respond quickly to transport lags (e.g. resulting from delayed ships) Possibilities of tri-modality the ease of changing transport modes Synergy effects based on cost savings and complementary services Excellent fiscal situation Possibility to offer value-added services to customers Package bundling can be offered to customers Completely new construction; modern technical facilities Slightly lower labour costs than in Western countries Excellent image of Dubai as boomtown and city of innovation

CONTRA
Not all customers benefit from the possibilities of tri-modality and the location The extreme temperatures might affect certain products (pharmaceuticals, fruits) Cultural difficulties; the need to adapt Success of the Dubai Logistics City is still not completely certain; international competitors Dubai-hype could turn out to be a bubble Property cannot be acquired but must be rented Politics depend on the ruling clan only Many competitors in the logistics sector in the direct environment Danger of terrorist attacks Only few specialists in the local logistics sector / lack of specialised education in logistics

Moreover, in order to answer the question whether Schmidt & Partner Logistics Solutions Inc. should set up a branch at Dubai Logistics City, the three mentioned clients and Schmidt & Partner Logistics Solutions Inc.s own operations should be considered. Only if Schmidt & Partner Logistics Solutions Inc. can proactively design and specify new business solutions for its clients including non-logistics considerations, they could

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convince their clients to go with them to Dubai. This would enable all of them to take part in the growth of the region. I. International clothing company: it is necessary in the fashion industry to include the purchasing department of the client because they make the decisions and do not focus on transport costs but on lost product sales due to late delivery. Fruit supplier from India: for perishables this would require intensive work with the customer to re-design the supply chain, including shippers, wholesalers, etc. (taking perishables through the desert hub). Medical equipment manufacturer: the pharmaceutical industry and the production of medical equipment are very complex. Therefore, it is indispensable to have a specific understanding of the clients market in order to decide whether a hub in Dubai could be interesting for the client.

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Thus, Schmidt & Partner Logistics Solutions Inc. can be just another player working in Dubai as a transport provider, riding the wave of growth in the international logistics market, or they can develop into an integrated logistics service provider locking-in their customers. Usually, the latter is very difficult for companies like Schmidt & Partner Logistics Solutions Inc. as key account management and business development takes more time and resources than forwarders management is often willing to invest. Therefore, this issue becomes a risk factor for Schmidt & Partner Logistics Solutions Inc.: if they do it well, they can roll up the market with existing clients quickly and focus on building a platform for expansion. If not, they risk becoming just another player who needs two years to build up a network with clients, suffering from decreasing margins in the transportation sector (as there are many transport companies in Dubai and competition is high when it comes to pure transports). Optional Additional Reading: http://www.dubailogisticscity.com Feedback The case study works well with students who have basic knowledge about logistics and supply chain management and who are able to understand the importance of new holistic and integrated approaches for transport, logistics and value added services. Based on our experience, it is best to start with a short introduction with the entire group, presenting some pictures of Dubai to give a first impression. Afterwards, the case study can be discussed in small groups as the perspectives on logistics and supply chain management can differ enormously. These discussions have proved to be very useful for students understanding of new trends in global logistics and supply chain management. Back in the large group, answers to the five questions can be presented and the different groups approaches can be compared. Depending on the number of students, the case study should be discussed and presented in a time frame of 90-120 minutes.

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