Logistics and Supply Chain in Indonesia-Libre

Emerging Practices
Togar M. Simatupang
School of Business and Management
Bandung Institute of Technology
Indonesia

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Copyright 2013 by Togar M. Simatupang.
All rights reserved. No part of this work may be reproduced, stored or distributed in any form or by
any means, electronic or mechanical, including photocopying, without written permission from the
author.Product or company names used in this set are for identification purposes only. Inclusion of the
names of the products or companies does not indicate a claim of ownership by the author.

Logistics and Supply Chain in Indonesia: Emerging Practices / Togar M. Simatupang.
Summary:
This manuscript of the book provides the latest development of logistics and supply chain in
Indonesia as a developing country, highlighting themes from macro logistics, horticultural supply
chain, heavy equipment supply chain, strategic outsourcing at a Telco-company, and business model
of logistics enterprise. - All work contributed to this manuscript is new, previously-unpublished
material.

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Table of Contents

Preface ..................................................................................................................................................iv
About the author ..................................................................................................................................v

Chapter 1
Trends of Macro Logistics in Indonesia ................................................................................................1
Togar M. Simatupang, Bandung Institute of Technology
Chapter 2
A New Collaborative Approach for Horticultural Supply Chain .........................................................27
Yuanita Handayati, Bandung Institute of Technology
Tomy Perdana, Universitas Padjadjaran
Chapter 3
Heavy Equipment Supply Chain in Indonesia.......................................................................................44
Chapter 4
The Formulation of Sourcing Strategy Model at Telkom Indonesia ....................................................70
Ega Nugraha Putra, Bandung Institute of Technology
Chapter 5
The Alignment of Strategy, Business Model, and Operating System in Logistics Enterprises ............93
Rizky Yoga Pratama, Bandung Institute of Technology

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Preface
The aim of this manuscript entitled Logistics and Supply Chain in Indonesia: Emerging Practices is to
provide latest issues on logistics and supply chain in Indonesia as a developing country. In the advent
of new economic era of free trade agreements between countries across regions, logistics and supply
chain has a key role in enhancing the free flows of goods and services. The complexity of logistics
and supply chain not only grows in a dramatic and dynamic way but also changes the way business to
business interact with their customers around the world. Understanding logistics and supply chain
thus becomes important to deal with emerging markets. Practitioners need to be equipped with real
cases of logistics and supply chain in Indonesia.
In this manuscript, logistics is defined as a set of activities to acquire and provide goods and services
for customers needs. A larger picture of logistics in network is called a supply chain. A supply chain
is a complex and dynamic supply and demand network that includes all of the logistics management
activities between companies.
This manuscript provides a deep understanding of macro logistics issues in Indonesia and emerging
practices in horticultural supply chain, heavy equipment supply chain, and specific applications in
outsourcing strategy at a national Telco-company and business model of logistics enterprise. The
potential audiences of this manuscript are well distributed among academics and practitioners
especially for masters students interested in and related to logistics and supply chain in Indonesia.

Acknowledgements
I would like to thank the contributors who show enthusiasm in completing this work, including
Yuanina Handayati, Tomy Perdana, Ega Nugraha Putra, and Rizky Yoga Pratama. I like to thank
Akbar Adhi Utama and Jann Hidajat Tjakraatmadja for introducing me to the collaboration between
the School of Business Management of ITB and the Kyoto University Graduate School of
Management. I am grateful to our colleagues at the Kyoto University Graduate School of
Management who provide constant support in preparing this manuscript. Specifically, I thank Kiyoshi
Kobayashi and Hayeong Jeong. Finally, I would like to thank Sudarso Kaderi Wiryono and Mursyid
Hasan Basri for encouraging me to realize the collaborative work with Kyoto University.
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About the Author
Togar M. Simatupang is a Professor of Operations and Supply Chain Management at Bandung
Institute of Technology, Indonesia. He holds a PhD degree from Massey University in New Zealand.
At the School of Business and Management ITB, he teaches Technology and Operations
Management, Supply Chain Management, Operations Management, and the Creative Economy. He is
associated with the Indonesia Community of Logistics and Supply Chain, Bandung Creative City
Forum, and the British Council in developing creative community. His research interests include
supply chain collaboration, inventory models, operations management, service science, and creative
economy.
His other research focuses on the development and management of collaborative relationships such as
how to design and manage supply chain collaboration, how to equalize their risks and rewards, and
how to share the benefits of collaboration. The results of his research have been published in a variety
of journals, including the International Journal of Logistics Management, Total Quality Management,
Management Decision, Business Process Management Journal, Supply Chain Management: An
International Journal, Benchmarking: An International Journal, the International Journal of Physical
Distribution & Logistics Management, International Journal of Value Chain Management, and
International Journal of Logistics Systems and Management. In addition, he has presented his work at
national and international conferences.
He was a recipient of the Emerald Literati Network Award 2006 for the highly commended paper
published in the International Journal of Logistics Management. He was also rewarded Endeavour
Award from the Government of Australia for a postdoctoral study at the University of Newcastle in
2008. He received the Faculty Award for Achievement in 2012 in the category of Research and
Scholarly Activities, awarded by the Rector of Bandung Institute of Technology.

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Chapter 1
Trends of Macro Logistics in Indonesia

Togar M. Simatupang
Indonesia

Abstract
Logistics becomes a new weapon of competitiveness not only at company levels but also at country levels.
Macro logistics describes logistics activities accompanying trade and business with spatial complexity.
The purpose of this paper is to report on the latest trends of a macro view of logistics in Indonesia. The
study applies literature reviews and content analyses to develop a set of macro-logistics dimensions that
determine the current status of logistics development in Indonesia. The coverage includes the current
situation of macro logistics in Indonesia, Master plan for Acceleration and Expansion of Indonesia
Economic Development, national logistics plan, and ASEAN logistics network. As an archipelago
country, Indonesia has neglected the importance of coastal logistics and railway transportation. The
paper would conclude with macro logistics challenges in Indonesia.
Keywords: macro logistics, logistics infrastructure, Indonesia

Introduction
Logistics phenomenon is a day-to-day affair experienced by every person in meeting the needs of food,
shelter, and clothing. For example, each household arranges when and how much to buy, store, process,
and consume foods. The business world cannot be separated from the logistics activities such as
purchasing raw materials to be processed and to be sold or purchase merchandise to be resold at a higher
price. A mining company makes estimation on its mining deposit and determines the best way to mine in
order to maximize the recovery of valuable minerals.
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Logistics is also an important part in the agricultural sector. Farmers often perform logistics activities
such as the determination of a commodity to be planted; procurement of raw materials for production,
such as the selection of fertilizers and pesticides; how to harvest; how to process; and the delivery of the
crop to the hands of consumers. In addition, logistics activities are also related to election activities, such
as determining the location of polling, providing ballot boxes and ink, temporarily saving evidences, and
announcing the results of the vote count. Also, logistics is a critical success in humanitarian operations
when natural disasters occur. The smooth logistics determine the effectiveness of rescue and
rehabilitation.
Logistics has become a routine activity that is often underestimated. Many regard that logistics can be
done without requiring certain skills. For them, as long as there is a demand, and an instruction is given,
logistics will ioccur bty itself. Affairs related to demand creation and demand fulfillment are two different
things. Indeed, both of them require coordination although each requires its own expertise. Logistics
expertise consists of competence in and knowledge of handling the needs of goods, goods procurement,
contract negotiations on goods, goods transportation, goods storage, use of goods, and goods disposal.
Attention to logistics will be so much when food crises, shortages of items in the store, the scarcity of fuel
oil (BBM), or unavailability of raw materials in the country happen. Wastage will be a direct result of
mismanagement of logistics. For example, fuel shortages make the user have to queue for hours and
businesses lost their production. Food logistics crisis certainly will cause worse situation in which it can
lead to mass starvation and death.
Entering the era of globalization, logistics can no longer be responded reactively. For example, when a
logistics problem arises, the logistics solution is spontaneously sought. The new paradigm is to anticipate
the future prospects and challenges so that logistics can be realized as an important element in decision
making at both the policy and operational level of businessmen and community members. In other words,
the logistics become an important element in boosting competitiveness.
Logistics sector macro determines the competitiveness of a country. If competitiveness is defined as the
ratio of productivity and costs, then the competitiveness can be measured by the percentage of logistics
costs to a country's gross national income. The lower the cost, the better logistics competitiveness of the
country is. Developed countries like the U.S. and Japan issued its logistical cost between 9 and 12 percent
of its gross national income (GDP). The Economist estimates that in 2006 China's logistics cost reaches
by 21% of its GDP, Thailand 18%, Singapore 7%, India 13%, the European Communities 11%, Japan
11%, and the United States by 9%. Malaysian logistics cost is estimated between 12 and13% of itsGDP,
and Vietnam amounts its logistic cost between 19 and 20%. When compared with other ASEAN
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countries, Indonesia's logistics cost is estimated between 22 and 27% of its GDP. This is a value that is
not small, so it requires special attention.
The fact that Indonesia's logistics cost is the highest in Southeast Asia is a reflection of the condition of
facilities, technology, human resources competencies, and logistics policies that have not yet been
developed optimally (Herliana and Parsons, 2011). This high logistics cost has contributed to the high
economic cost for the low competitiveness of Indonesias products. This condition requires an attention of
all stakeholders in the field of logistics. Logistics improvement is urgent, especially when it is associated
with the opening of free trade with ASEAN, China, and India in the near future.
Taking into account the importance of the role of logistics in improving a competitiveness, the present
portrait of Indonesis contemporary logistics and its relationship with ASEAN regional logistics should be
understood in order to identify the opportunities and barriers that exist. The question is whether Indonesia
can leverage its logistics to increase its competitiveness. This paper aims to analyze both the weaknesses
and challenges of Indonesias logistics so that the improvement of Indonesias macro logistics
performance can be made. The approach is based on the framework of macro logistics that views logistics
as a driver of cross-regional trade. The data Sources are based on the documents and the results of the
discussions of various media.

Macro and Micro Logistics
The question that is often asked is what logistics is. History has recorded that the military its movement
depends on logistics in winning a battle. Just in recent decades, logistics has become the concern of many
governments and business world. The term logistics comes from the Latin word logisticus, which means
numeracy. Oxford Dictionary defines it as detail organization and an execution of a complex operation.
The military defines it as a science of movement, supply, and maintenance of military personnels in a
military operation. The business world sees it as the management of material flow, from raw materials to
finished goods.
In general it can be said that the logistic is the flow of goods or services from source to destination in
support of a program or activity. Logistics has a function of getting things needed to fulfill a requirement.
A more detailed understanding of logistics is that it is a process of planning, implementing, and
controlling the flow of goods or services (including its related information) effectively and efficiently
from a point of origin to a point of use to meet specific needs. The basic concept of logistics concerns the
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flow and stock that connect the source and destination by providing goods in the right quantity, right time,
right location, and the right cost. There are 14 areas of logistics activities, namely: customer service, order
processing, distribution liaison, inventory control, demand forecasts, traffic and transportation,
warehouses and storage, plant and warehouse layout of selected land, material handling, material
procurement, spare parts and maintenance service support, industrial packaging, returns processing , and
waste disposal.
Why is logistics important in the economy? Transactions in the economy offer five main values, namely:
location, time, quantity, form, and ownership. The first three are related to the logistics function. The
value of form relates to the production function, and the value of ownershp relates to the marketing
function. Logistics allows the production process to happen through making the necessary raw materials
available. Logistics also allows the purchase process to happen through the product delivery into the
hands of users.
Logistics plays an important role in determining the competitiveness of an organization. Competitiveness
can be seen from the two dimensions: value and cost superiority. The first relates to the fact that
customers do not purchase the products, but purchase the value, while the second relates to the fact that
every action requires cost. Simply put, if each dimension has a high and low scale, the "normal" status
applies to an organization that has a low superiority scale in both its value and cost, whereas the
"cheaper" status applies to an organization that has a cost superiority. An organization will be called
"better" when it has a superiority that can satisfy its customers. An organization is called "superior" when
it has superiority in both its value and cost.
The role of logistics in achieving a "cheaper" status is through a logistics engineering process of reducing
costs, among others: through the capacity setting, economy scaling, logistics streamlining, and inventory
reduction. The "better" strategy can be implemented by using accurate reliability and responsiveness to
ensure a perfect order fulfillment. Sub strategy is "faster" to be realized by managing the time planning,
among others: by using forecasting with better data, queue optimization, on-time production and
distribution, and transportation mode selection.
Logistics approach is different from trade approach, which emphasizes on the balance between demand
and supply. trade Mechanism mostly relies on setting prices so that the supply can match the demand.
When the supply is excessive, the price drops, and when the demand is excessive, the price goes up.
Logistics sees that excessive demand means loss of revenue, and excessive supply means a waste of
resources. Tools that are used not only price adjustment but also time and capacity of logistics system .
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Price adjustment is a symptom of a problem, not a solution. Logistics help use resources efficiently,
optimize the tradeoffs against conflicting objectives, and redesign a logistics system.
Logistics is not just happening in the organization but also between organizations called a supply chain
(Christopher, 2010). A supply chain is a related logistics network and is maintained by several companies
from a point source to a point of use. The application of a logistics network or a supply chain requires the
related organizations to coordinate the customer priorities, production control, product delivery to suit
customer needs, and the development of an integrated information system. Coordination among actors
along a supply chain can reduce inventory and transportation costs while improving service performances.
Why is it so difficult to implement logistics network management although the potential benefits are real?
There are at least three reasons why logistics network management becomes difficult. The first is the
divergence of interests between the actors involved. The largest conflict of interest is the income for a
player is the expense of the other. Not to mention there is a clash in an operation, such as delivering goods
in large or small volume. The second reason is the uncertainty that occurs along the supply chain, ranging
from the uncertainty of demand, of raw material availability, and of machine reliability to natural
disturbances. The third reason is the complexity of logistics system has increased not only the variety and
quantity of goods, the number of business partners, but also the amount of regulatory production and
technological development.
Solving logistical problems requires an interdisciplinary approach. Management can contribute to the
planning, control, and improvement of logistics systems. Engineering is required for computing and
optimization. While economics is required for the allocation of scarce resources and an efficient trading
system, political logistics is required for determining policy. Therefore, a dialogue and communication
between logistics actors are required to realize exchanges of ideas and commitments to the improvement
of the overall logistics. A political instrument relates to a logistics policy. Policy Logistics is the process
of planning, facilitation, implementation, monitoring, and controlling the flow and storage of goods
within and between logistics systems used by corporates, agencies, governments, or organizations with
the goal of improving their competitive advantages, efficiency, and fairness.
Logistic activities occur not only within a company and between companies but also involves a course of
aggregated activities of flowing goods and providing services from one point to another. The concrete
logistics activities -- resulting from the engagement amongst consumers, producers, and enterprises that
take place in a small geographical space of specific logistics activities -- are defined as micro logistics.
Micro issues are concerned with the logistics flow of activities between companies and the circulation of
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products and services operated by transportation companies. One characteristic of micro logistics is to
focus on strategy, which includes the interests of a company, the goal of maximizing companys profit,
the level of corporate supply chain (inbound logistics and outbound logistics), the element of price and
availability, and criteria regarding the effective and efficient company.
The logistics that occurs as a result of trade and spending in the logistics sector is called macro logistics.
In other words, from the perspective of the socio-economic logistics, logistics activities belong to the
macro logistics. However, from the perspective of business logistics, logistics activities belong to micro-
logistics. Macro logistics relates to the cross-border value chain with geographically dispersed logistics
activities such as warehousing, transportation, sourcing, and inventory management. One characteristic of
logistics is to focus on macro policy, which involves the interest of many parties, the purpose of benefits
for all stakeholders, the level of an industry chain (collection of similar companies), the tariff and non-
tariff elements, and the success criteria, including effective, efficient, and fair for many parties.

The Logistics portrait in Indonesia
Indonesia's logistics performance in international ranking is not something to be proud of. One clear
assessment indicator that can be used to conduct perfomace measuremnet against logistics performance of
a country is by looking at the value of Logistics Perfomance Index (LPI) issued by the World Bank. In
assessing the performance of logistics sector of countries in the world, the World Bank based its
assessment on the perceptions of behavior, consisting of 7 (seven) measurement components, namely:
customs, infrastructure, ease of arranging international shipments, logistics competence of actors and
local service providers, tracking and tracing, domestic logistics costs and delivery timelines.
Data reported by the World Bank showed that Indonesia's Logistics Performance Index in 2010 was
ranked 75 of 155 countries surveyed. Compared to neighboring countries Indonesia is far behind.
Singapore ranked second to the world, Vietnam was ranked 53, Philippines was on the order of 44,
Thailand ranked 35, and Malaysia was on 29 ratings.
The Logistics Performance Index (LPI) issued by the World Bank in 2012 showed Indonesia was ranked
59th out of 155 countries surveyed, declining from its 46th position in 2011. If you look at the level of
ASEAN, Indonesia's logistics performance is still far away from Singapore (world number 1), Malaysia
(29), Thailand (38), Philippines (52), and Vietnam (53). Infrastructure is the biggest obstacle for getting
the worst ratings among other assessment components for Indonesia.
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According to the Ministry of Trade, Indonesia's logistics cost in 2011 reached 24.64 percent of
Indonesia's GDP, or Rp 1,800 trillion. Table 1 shows Indonesia's logistics cost as a ratio to gross domestic
product (GDP). The largest cost component of national logistics is for ground transport, accounting for
66.8 percent roomates. It is followed by inventory handling cost, which is at 27.56 percent. And the rest is
administration cost. This condition is much higher than some other countries such as the United States,
Japan and South Korea. The U.S. logistics cost only 9.9 percent, Japan was 10.6 percent, and South Korea
was 16.3 percent. According to the Institute of Economic and Social Research (LPEM) at the University
of Indonesia, Indonesia is one of the countries with the highest logistics cost, accounting for 14.08 percent
of sales revenue. In contrast, Japans logistics cost is 4.88 percent. When compared with the neighboring
country of Malaysia, Indonesia is still far behind (Asworo, 2013). As an illustration, the logistics cost
from Cikarang to Tanjung Priok with a distance of 55.4km is US$ 750. In contrast, in Malaysia, from
Pasir Gudang to Tanjung Lepas, Johor Baru, with a distance of 56.4km costs US$ 450.
One of the causes of the high logistics cost is that the logistics infrastructure in Indonesia is still very
limited in the eastern region of Indonesia, thus creating an imbalanced economic growth between the
Western Region and Eastern Region (Herliana and Parsons, 2011). In addition, the backhaul without
paying load has resulted in freight to the eastern region is higher compared to the western part of
Indonesia. The disparity between the western and eastern regions has resulted in a lack of investors to
invest their capital in the eastern region, thus slowing down the economic growth in this region.
Table 1. Indonesias Logistics Cost 2004 2011
National logistics cost (Rp trillion) Ratio of logistics cost to GDP (%)
2004 633.8 27.6
2005 762.9 27.5
2006 961.2 28.8
2007 1,016.60 25.7
2008 1,238.40 25
2009 1,397.30 24.9
2010 1,543.80 24
2011 1,829.70 24.6
Source: Bappenas, Sislognas Expert Team in Meeting on Measurement of Sislognas Performance,
presented in Bappenas Office, 11 March, 2013.

Some other problems include the existence of illegal charges and transaction costs that lead to high-cost
economy. In addition, there are other problems such as the high export-import service time and the
operational constraints in port services as well as the limited capacity and network service of national
logistics providers. Other issues also arise, such as shortages in the stock of basic commodity and the
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fluctuations in price of basic commodities of the consumers, especially in the national holiday and
religious celebration days. In fact, a wider disparity occurs in the border, remote and outer areas.
The high logistics cost has lowered the competitiveness of Indonesias products compared with the same
products produced by competing countries. The low competitiveness happens not only in the domestic
market but also in the international markets. The low performance of Indonesias logistics has impacted
on Indonesias high economic cost and poor quality of logistics services. Indonesia still has to work hard
to overcome its weakness in this sectors. Therefore, it has to make serious improvements in customs
affairs, infrastructure, international shipments, logistics competence, tracking and tracing, and time
accuracy.
Logistics problems faced by Indonesia is the low competitiveness of Indonesian products and the slow
delivery time. The competitiveness of Indonesian products is very low compared to other countries
products if seen from the price of the product. This is one of the drivers of high logistics costs.
Competitive price of a product cannot be separated from the logistics cost that is borne by the company
that produces the product. In the report of the World Economic Forum (WEF) from 2009 to 2011 showed
a number of indicators that are directly related to logistics cost, among others: non-reguler/bribery cost
incurred and the costs incurred from the applicable customs and trade tariffs.
The slow delivery time that occurs is due to the conventional Indonesia's logistics infrastructure, such as
road structures, port systems, intermodal relations, and so forth. In addition to these conditions, the slow
delivery time is also caused by the disintegrated inter-connectivity between one location with another
location that connects the centers of production with the centers of consumption so domestic container
shipment is more expensive than overseas container shipment. In the report of the World Economic
Forum (WEF) from 2009 to 2012, the quality of Indonesia's infrastructure was ranked 82 of 134
countries. Compared to other Asian countries, Indonesia's position can be said to be bad. For example,
Malaysia was ranked 23.
Logistics activities of governments are often spotlighted by the mass media due to their irregularities in
expending the fund of the state budget for the procurement of goods and services. The types of
irregularities that occur include a wrong procedure, fictitious data, bribery, and the price rise.
Perocurement of goods and services is vulnerable to corruption, collusion, and nepotism. Corruption
Eradication Commission (KPK) noted that about 80 percent of cases that are handled relating to the
procurement of government goods and services. According to the report of Agency for the Procurement
Policy of Government Goods/Services (LKPP), the annual inefficiency can reach at least 20-30 per cent
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of the total state budget allocated for procurement of government goods and services. The inefficiency
value has reached Rp 70 trillion. This figure does not include the inefficiency that occurs in the local
regions.
The importance of logistics as an economic driver is reflected in the Master Plan of Acceleration and
Expansion of Economic Development (MP3EI) issued by Presidential Decree No. 32 of 2011. Under this
Master plan, the acceleration and expansion of economic development shall be done through the
economic corridor approach. It is expected that this approach shall increase the flow of goods and people
in a region that occur simultaneously with the development of telecommunications, energy, tourism,
health, education, agriculture, infrastructure, and regulation. It is also expected that this approach will
encourage the development of the private sector. In other words, MP3EI seeks to reduce barriers to
business and attract investment in infrastructure development.
Will the infrastructure development create commercial knots, borders, market gates, and exchanges? The
key to the success of economic corridor is the logistics policy. Logistics is the process of policy planning,
facilitation, implementation, monitoring, and controlling the flow and storage of goods within and
between logistics system with the goal of improving business competitiveness and regional competitive
advantage. Logistics policy has not become a concern of MP3EI yet. Economic corridor is the last stage
of logistics development, and it is not just about connectivity and logistics. The logistics development
consists of four stages (Banomyong, 2010): Stage 1 concerns the transport corridor: physically connected;
stage 2 concerns the intermodal transport corridors: support of various transport modes; stage 3 concerns
logistics corridor: institutional facilitation, information technology, and finance; and stage 4 concerns
economic corridor: business and investment transactions between locations. Thus, the development of
economic corridor needs to be done in the above-mentioned stages.
Cooperation between the public and logistics professionals as well as supported by a law is absolutely
necessary in the implementation of MP3EI. Otherwise, the ideas proposed in MP3EI may not be realized
because of the lack of coordination and monitoring, high sectoral ego and low participation of local
governments. Cooperation is needed not only in resolving the problems faced but also in logistics policy
development and logistics competence improvement of human resources.

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Logistics Industry in Indonesia
Humans are increasingly recognizing the importance of the role of the logistics industry because it can
support cross-regional trade flows. Logistics industry plays an important role in planning, control, and
regulation of the movement and supply of goods, services and information across borders between
countries and even cities. Logistics business concerns services to move, store, search for resources,
provide information, and handle shipping documentation. Business logistics starts from raw material
suppliers to the consumers, including the arrangement of return items and containers.
There are various different types of logistics business, depending on goods ownership and the degree of
services, namely: 1PL, 2PL, 3PL, and 4PL. A first party logistics provider is a company or an individual
that needs to transport cargos, freights, goods, produces or merchandises from point A to point B. The
term first-party logistics provider represents both as the cargo sender and the cargo receiver. A 1PL can
be a manufacturer, trader, importer/exporter, wholesaler, retailer or distributor in the international
commerce field. A second party logistics provider, an asset-based carrier, specializes in one particular
area of a supply chain which actually owns the means of transportation to transport goods from one point
to another. Typical 2PLs would be shipping lines which own or lease their ships, airlines companies
which owns or lease their planes, or truck companies, such as DHL and UPS, which own or lease their
trucks.
A third party logistics (3PL), according to the Council of Supply Chain Management Professionals
glossary, is defined as a firm [that] provides multiple logistics services for use by customers. Preferably,
these services are integrated by a provider. Among the services that 3PLs provide are transportation,
warehousing, cross docking, inventory management, packaging, couriers, freight cargo, air cargo, and
freight forwarding. 3PL companies usually hold and transport goods without actually owning them. For
example, company A outsources part or all of its logistics to a company B (3PL), which handles the
whole process.
A fourth-party logistics provider assemblies the resources, capabilities, and technology while at the same
time giving advice and solutions to other companies regarding their comprehensive supply chain
solutions. A supply chain integrator that assembles and manages the resources, capabilities, and
technologies of its own organization with those of complementary service providers to deliver this service
might use 2PL and 3PL providers to build and run the most successful supply chain solutions. For
example, company A (4PL) advises company B to use company C for their supply chain and logistics
needs. Deloitte and Accenture are the examples of 4PL.
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Recently, the logistics business potential in Indonesia is very large which is characterized by the
increasing trade flows between islands and between countries. The magnitude of this potential gives both
local and foreign logistics service providers the opportunity to compete competitively. The local and
foreign logistics players that gain market share in Indonesia, among others: Maersk Line, APL, Samudera
Indonesia, Yusen, Hanjin, Evergreen, Meratus (freight forwarding and shipping line), UPS, DHL, FedEX,
JNE, Tiko, and Pos (couriers and express delivery), Linfox, Exell, Kamadjaya, Pantos, CKB, JNE
Logistics, Dunex (logistics value added), and Pandu Logistics. The Indonesias state owned companies
that participate in logistics services, among others, are BGR, KA Logistics, AP Logistics, KBN, and Pos
Logistics.
Logistics cost is an important factor that is used in the selection of 3PL. Logistics activities include
warehousing, logistics information systems, inbound and outbound transportation, customs, inventory
management, product packaging, and product return services. Since the use of logistics services has
reduced the cost of logistics enterprises, many companies use logistics services. An efficient logistics
partner can help improve operational efficiencies for any business by cutting cost and delivery time. This
ultimately translates into market share and profits for the business.
The parameters in measuring customer satisfaction relate to market share (national and international),
warehousing facilities, experience of the company, payment flexibility, customized service, the use of
Enterprise Resource Planning software (ERP), Global Positioning System (GPS), and the use of Radio
Frequency Identification (RFID) in vehicle tracking. The use of RFID is still rarely used due to the high
cost of investment. According to a survey conducted by Frost and Sullivan, (2007), the Third Party
Logistics (3PL) Indonesia awarded best performance in the ASEAN logistics awards for Best Automotive
is PT NYK Puninar Logistics, for Best IT/Electronics is PT NYK New Wave Logistics, for Best Fast
Moving Consumer Goods is APL Logistics, for Best Pharmaceutical is Agility Logistics, for Best Retail
is Maersk Logistics, and for Best Domestic is Samudera Indonesia Group (Frost & Sullivan, 2007).
Frost & Sullivan predicts that Indonesia's logistics industry will grow by 14.5 percent and reach USD
1,634 billion in 2013 from last year's estimate of Rp 1,427 trillion. This initiative has been driven by the
development of the logistics industry, government, and strong economic growth. Gopal, Vice President
Global Transportation & Logistics Practice of Frost & Sullivan in the Indonesia Logistic Industry
Outlook 2013, revealed that relocation and strong capital flows are expected to boost manufacturing
activity and increased demand for logistics in Indonesia.
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Foreign trade to Indonesia is expected to rise moderately by 16.7 percent to reach 446 billion U.S. dollars
in 2013. Business activities in Indonesia related to forwarding, shipping and transportation of goods by air
both exports and imports would gain from foreign trade activity growing continuously.
The growth of foreign direct investment (FDI) is expected to continue in 2013, with an estimated
investment of 42.7 billion U.S. dollars. Party for Foreign Direct Investment realization in transport and
storage sector reached 2.8 billion U.S. dollars in 2012. It is the second largest investment of the whole
Foreign Direct Investment after the mining sector, which is worth about 4.3 billion U.S. dollars. The
massive flow of Foreign Direct Investment to the mining industry will continue to drive growth in the
industry and offer business opportunities for transportation and logistics industry.
The prediction of Frost & Sullivan stated that the transportation and logistics market in Indonesia will
grow 14.8 percent CAGR for the period of 2013-2017. However, the inadequate infrastructure will slow
the growth if such barriers continue to happen in the coming years. The poor connectivity, which tend to
be a long process and long-winded, and the infrastructure, which is still weak have caused problems and
high cost in transportation sector in Indonesia. The next obstacle relates to existing trade facilities, which
are mostly still on hand writing system or 'paper-based systems', which not only reduces the efficiency but
also adds to the cost of logistics. Other obstacles in the transport and logistics industry in Indonesia are
the frequent occurrence of late delivery of for export goods and delays of local delivery.
In addition, Indonesia's logistics market is highly fragmented due to many players in the logistics market.
The players consist of small, medium-sized, and big companies. The big companies even have to face
stiff competition from the other two company types. This fragmented market logistics service has
encouraged the small logistics providers to apply a smaller economical pricing strategies rather than
focusing their services on the quality and diversity of services.
The total volume of cargo moving through the Indonesian seas are expected to rise by 6.1 percent to reach
1 billion tonnes in 2013 from the year 2012 that reached 943.1 million tons. The port controls 90 percent
of the total cargo traffic of non-road in Indonesia. Indonesian shipping industry is likely to be affected by
the impact of slowing global growth, especially by the European crisis and by the falling demand from
China. Despite that, the industry is expected to maintain its steady growth because of the strong domestic
demand and the availability of new ships, especially for the oil and coal industries.
The volume of good shipments by rail is expected to increase by 8 percent to reach approximately 25.5
million tonnes in 2013 from the year 2012 that reached 23.6 million tons. The government plans to
accelerate the development of Jakarta-Surabaya double track will increase the amount of freight transport
13

capacity as much as three times because it will reduce the burden of road and cut both logistics costs and
time.
The air freight volumes are expected to increase by 19.6 percent to 1.16 million tons from 970,000 tons in
2012. There will be a significant potential for the air freight industry, which are from the seasonal goods,
the components, and high-value equipment. Soekarno Hatta contributed as much as 36.7 percent of the
total air freight in Indonesia.
Logistics industries are also affected by the presence of a strong inclination to outsource a variety of
value-added services in the Indonesian market. Therefore, the logistics service providers have to focus its
business on an effort to provide value-added services while strengthening the service they have. The end
users of logistics services have also started to switch to a network of suppliers that have been integrated
with professional service providers.
The competition among logistics business players is getting tougher. Logistics service providers in
Indonesia have started offering specialized logistics service solutions for specific industries, such as:
Fast-moving consumer goods (FMCG), construction, service parts, and mine. They should not be stuck to
the existing basis of logistics services that give common value-added services. Logistics networks for
industrial centers should be built on the outskirts of Jakarta to facilitate access to the port of Tanjung
Priok because of the high levels of congestion in Jakarta has an impact on the length of time of ordering,
delivery delays, and inefficiency in the supply chain.

Macro logistics context in the Master Plan for Acceleration and Expansion on
Indonesian's Economic Development
In line with the national development vision, as stated in Law No.17 of 2007 about National Long Term
Development Plan of 2005-2025, the vision for the Acceleration and Expansion of Indonesian Economic
Development is "Creating an Independent Community Indonesia, Forward, Just and Prosperous". The
Master Plan for Acceleration and Expansion on Indonesian's Economic Development lays out Indonesia's
ambitious plans to Accelerate and expand economic growth. Through the MP3EIs step, acceleration and
expansion of economic development will place Indonesia as an advanced nation in 2025 with per capita
incomes ranging between USD 14,250 and USD 15,500 with the total GDP ranges between USD 4.0 and
USD 4.5 trillion. To realize this, the real economic growth of between 6.4 and 7.5 per cent in the period
of 2011-2014 and of between 8.0 and 9.0 per cent in the period 2015-2025 are required.
14

The 2025 vision shall be realized through three (3) missions that emphasize on the following things:
1. Adding value and expanding the value chain of production processes and distribution of asset
management and potentials of natural resources, geographic region, and human resources through
the creation of an integrated economic activity and synergy within and between regional centers
of economic growth;
2. Encouraging the realization of improved production and marketing efficiency as well as the
integration of domestic markets in order to strengthen the competitiveness and durability of the
national economy; and
3. Strengthening the national innovation system in the production, processing, and marketing to
achieve the sustainable global competitiveness and innovation-driven economy.
The development strategy consists of 3 (three) main pillars based on the vision and mission that have
been set. One is the strategy of increasing the potential of the region through the development of growth
centers in the economic corridors. Two is the strategy to strengthen the national connectivity. Three is the
strategy to increase the capacity of Human Resources and Science and Technology. Government
functions as the motor for the creation of inter-regional connectivity, which is realized in the form of:
Realizing a system that integrates the national logistics, national transportation system, regional
development, and communication and information systems;
Identifying the transportation hubs and distribution centers to facilitate the logistics need for both
the main and supporting commodities;
Strengthening both intra and inter- corridor connectivity and global connectivity; and
Improving communication networks and information technology to facilitate all economic
activities, government activities, and national education sector.
The development of economic corridors can also be interpreted as a regional development to create and
empower an integrated, competitive, and sustainable economic base. The Master Plan identify six growth
centers, or economic corridors, to boost the economic development. The centers are Sumatra (center for
the production and processing of natural resources and as nationa's evergy reserves), Java (driver for
national industry and service provision), Kalimantan (center for production and processing of national
mining and energy reserves), Sulawesi (center for national production and processing of agricultural,
plantation, fishery, oil and gas), Bali-Nusa Tenggara (gateway for tourism and national food support), and
Papua-Maluku Islands (center for development of food, fisheris, energy, and national mining). Indonesia
needs almost Rp 2,000 trillion (U.S. $ 220 billion) in investment between 2010 and 2014 for its
15

infrastructure development, with most of those funds expected to come from private investment (the
Jakarta Post, 2010).
The total length of the Indonesian coastline is 54,716 kilometers. It stretches along the Indian Ocean, the
Strait of Malacca, the South China Sea, Java Sea, Celebes Sea, Molucca Sea, Pacific Ocean, Arafura Sea,
Timor Sea, and in other small areas. In the Indonesian islands, there are several strategic sea lanes both
economically and global military wise. These lanes are Malacca Strait (SLoC), Sunda Strait (ALKI 1),
Lombok and Makassar Straits (ALKI 2), and Ombai Wetar straits (ALKI 3). Most of the world's major
cruise use these lanes as their seafaring lines. MP3EI prioritize the utilization SLoC and ALKI
(Indonesian archipelagic sea lanes) above. Indonesia can gain many benefits from this maritime
modalities to accelerate growth in the various regions in Indonesia (especially the eastern Indonesia), can
build its maritime competitiveness, and can enhance its national security as well as its economic
sovereignty. For the benefit of the national strategic position, the efforts stated in MP3EI need to take
advantage of the presence of SLoC and ALKI as waterways for international shipping.
To achieve the purpose of strengthening the national connectivity, the connectivity components that are
interconnected need to be integrated into an integrated planning. Some components function to form a
national connectivity posture are: (a) National Logistics System; (b) National Transportation System; (c)
Regional Development (RPJMN and RTRWN); and (d) Information and Communication Technology
(ICT / ICT).

National Logistics System
In order to develop the National Logistics System as one of the infrastructure in building national
competitiveness and to support the implementation of the Master Plan for the Acceleration and Expansion
of Indonesian Economic Development 2011 - 2025, PERPRES No. 26 Year 2012 on the Blueprint of
National Logistics System Development has been set. The blueprint is intended to be a guide and
guidelines for relevant stakeholders. Its role (Sislognas) is to ensure the smooth flow of goods, reducing
transaction costs, building national competitiveness, preserving the environment, and promoting the
public welfare.
The vision and mission of the National Logistics System are formulated based on the current national
logistics practices and national and global environment development. The vision of the national logistics
system of 2025 is "locally Integrated, Globally Connected for National Competitiveness and Social
16

Welfare". There are two missions of national logistics system. First is to facilitate the flow of goods
effectively and efficiently to ensure the fulfillment of the basic needs of the people as well as improving
the competitiveness of national products in the domestic, regional, and global market. Second is to build
national logistics knots and their connectivity, such as rural areas, urban areas, inter-region areas, inter-
island areas, and International Hub Ports through collaboration among stakeholders.
The purpose of national logistics system is to accelerate the flow of goods effectively and efficiently by
way of: (i) reducing logistics costs, facilitating the flow of goods, and improving logistics services that
improve the competitiveness of national products in both the global and domestic market; (ii) ensuring the
availability of basic and strategic commodities throughout Indonesia at an affordable price so as to
encourage the achievement of a just and prosperous society as well as to strengthen the sovereignty and
integrity of the Republic of Indonesia; and (iii) preparing to achieve the targets of ASEAN logistics
integration in 2013, the integration of the ASEAN market in 2015, and the integration of global market in
2020.
Given the primary activities of logistics is to move goods (commodities), the paradigm used is "ship
follows the trade". However, with the vast of Indonesia's geographical location and the constraints for
reaching certain areas, then the paradigm "ship promotes the trade. should also be used. The national
logistics system will create a network of trade distribution that can ensure the smooth flow of goods and
the availability of basic goods as well as strategic goods needed by the people at an affordable price.
The policy development of the national logistics system is based on six factors. They are as follows:
1. Determination of a key commodity in an order of logistics and supply chain networks,
management, and effective and efficient administration;
2. Integration of logistics infrastructure, both the logistics nodes and logistics links, which serves to
flow the goods from point of origin to point of destination. Logistics node includes logistics
players and consumers, while the logistics links include distribution networks, transportation
networks, information networks, and financial networks, which connect the communities of rural
areas, urban areas, centers of economic growth, inter-islands and cross-nations. The integration of
these logistics nodes and logistics links has become the main cornerstone in realizing local,
national, and global connectivity to achieve national economic authority and security as well as
the establishment of Indonesia as a State Maritime;
3. Development and implementation of information and communication systems that are reliable
and secured;
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4. Development of players and provider of world-class logistics services;
5. Development of professional human resource in logistics field; and
6. Reorganization and harmonization of rules and regulations in the field of logistics to ensure legal
and business certainty as well as synchronization between logistics players and providers both at
central and local levels to support efficient logistics activities and create a conducive business
climate. The reorganization includes the implementation of effective institutional management of
national logistics system.
National Logistics System is developed towards an effective and efficient integrated logistics system by
using the concept of Supply Chain Management (SCM) which is based on synchronization, integration,
and collaboration of the involved stakeholders by utilizing information technology contained in a reliable
institution and effective organizational system. National Logistics System is expected to be
operationalized by professional and ethical logistics service actors and providers and be supported by the
availability of adequate and reliable logistics infrastructure.

ASEAN logistics system
The AEC, popularly known as the ASEAN single market, was created to integrate the economies of the
region. ASEAN Economic Community (AEC), which will soon be enacted in 2015, has a strategic value
in encouraging economic growth in Asia. Currently, the average rate of economic growth in ASEAN is
5.5% and has a population of 608 million people, which is a potential market and a large labor force. For
its summit in 2015, AEC has prepared a blueprint that focuses on the establishment of a single market and
production base, a highly competitive economic region, a region with equitable development, and a
region that is fully integrated with the global economy. This integration should be aimed at facilitating all
ASEAN members to achieve positive and continuous growth. From Indonesia's point of view, as the
largest economy in the region, the ASEAN integration is considered to be necessary milestones for further
opportunities. Yet, challenges still remain to achieve this goal.
The national connectivity enhancement needs to be integrated with the growth of cooperation
development at the ASEAN level that has the following purposes:
Facilitating the formation of agglomeration economies and the integration of production
networks;
Strengthening regional trade among ASEAN countries;
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Strengthening the attractiveness of investment and the reduction of the development gap among
ASEAN members and between ASEAN and the countries in the world.
The above efforts were made through strengthening the network infrastructure, communications, and
movement of commodities (goods, services, and information) effectively and efficiently. This is part of
the international connectivity. The main elements of strengthening ASEAN connectivity consists of:
1. Physical connectivity, such as: transportation, technology, information and communication,
energy;
2. Institutional connectivity, such as: facilitation and trade liberalization, trade facilitation and
liberalization of investment and services, mutual cooperation, regional transport cooperation,
cross-border procedures, capacity empowerment program.
3. Social-cultural connectivity (people-to-people connectivity), such as education, culture, and
tourism.
Within the framework of the ASEAN Framework Agreement on Services (AFAS) on December 15, 1995
in Bangkok, Thailand, there are 8 sectors agreed to do trade liberalization, namely: Air and Sea Freight
sector, Business Services sector, construction service sector, telecommunication services sector, tourism
services sector, the financial services sector, Health Services sector, and logistics Service sector. As for
the liberalization of the services sector, it is be targeted to comprehensively commence in 2015.
If AEC is enacted in 2015, ASEAN will be open to the free flow of goods, free flow of services, free flow
of investment, free flow of capital, and free flow of skilled labor. The question is to what extent Indonesia
is ready to face AEC in 2015 when seen from its economic potential and challenges. Is Indonesia ready
to enter the ASEAN free market in the remaining two years? With the open market conditions, it is not
impossible Indonesia will also suffer the same fate as when Indonesia accepted the free trade area
agreement between ASEAN and China (ASEAN-China Free Trade Area), where Indonesia were flooded
with the imported products from China, resulting in Indonesia being deficit in its balance of trade.
In terms of economic potential, Indonesia is a country that is now emerging to be one of ASEAN's
economic strength with GDP of US$ 1 trillion, the highest economic growth compared with Brunei,
Malaysia, the Philippines, Singapore, and Thailand. The average growth rate of Indonesia is 6.4%, which
is estimated to be higher than the average growth of the other 10 ASEAN countries, which is at 5.5% per
year from 2013 to 2017. Also, Indonesia is the most populous nation, with 247 million people. In
addition, its potential is also supported by such factors as natural resources, growth in private
consumption, and the potential for a growing investment climate.
19

In addition to the huge potential, the main challenge faced by Indonesia is its low competitiveness
compared to other ASEAN countries. According to the Global Competitiveness Index issued by the
World Economic Forum of 2012-2013, Indonesias competitiveness ranks at 50th position out of 144
countries, down from its 46th position in 2011. For the ASEAN region, Indonesia ranks at the 5
th
, just
below Singapore at the 2
nd
, Malaysia at the 25
th
, Brunei at the 28
th
, and Thailand at 38
th
.
Of course, in driving national competitiveness, Indonesias regional preparedness should be encouraged
in facing AEC 2015. Indonesias local regions should be the center of attention because they will
determine the readiness of Indonesia to compete in the free market of ASEAN. If the local regions are not
empowered, then the Indonesias horticultural products may be replaced by foreign horticultural products
at an affordable price. For example, Pontianaks oranges may be replaced by Chinas oranges; Indonesias
durians may be replaced by Bangkoks durians. In other words, local regions in Indonesia could become a
victim of the implementation of the ASEAN free trads if they are not empowered according to their
potentials. Moreover, in this era of globalization, the concept of competition has shifted from mere
competition between countries to competition between individuals, companies, provinces, and
municipalities. Through the AEC, each city in ASEAN regions will grow into power with its comparative
advantages. For example, Singapore will grow as a financial center, Johor as a manufacturing hub,
Bangkok as a terminal agribusiness industry, and Phuket as a tourist center.
The only advantage Indonesia has is just in the procurement of raw materials based on natural resources,
both mineral and agro raw materials. There are nine national industrial commodities that are prioritized to
enter the ASEAN market, which are currently categorized as having relatively higher competitiveness
than the other ASEAN countries industrial commodities. The nine commodities are agro-based products,
such as palm oil, cocoa, rubber; fish and dairy products; textiles and textile products; footwear; leather
and leather goods; furniture; food and beverages; fertilizers and petrochemicals; machinery and
equipment; and basic metals, such as iron and steel. However, later with the loss of the barriers in the
ASEAN countries, we can be sure that Indonesia will increasingly lose the added value of its natural
resources during the implementation of the ASEAN Single Market by 2015.
From peoples perception, a study conducted by Benny and Abdullah (2011) shows that Indonesian
people generally have high awareness of the ASEANs existence, functions, and objectives. They also
have a good understanding of Indonesias roles in the ASEAN as well as the importance of closer mutual
agreements between Indonesia and other ASEAN members. Although they know much about the
ASEAN, Indonesian people appear to have only little knowledge about the idea of the AEC. Most of the
respondents (around 80%) have never even heard or read about the AEC and its founding document.
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There are several reasons to explain their lack of knowledge about the AEC. This could be due to the
governments failure to socialize and explain the concept of the AEC to the public. The idea of the AEC
might be elitist and state-centric and designed without involving public participation. The public might
also see little relevance between the potential benefits that the AEC could provide and their day-to-day
lives. Nevertheless, despite their lack of knowledge about the AEC, most of the Indonesian respondents
still agree with the concept of the AEC.
It is predicted that even when the target of ASEAN logistics integration has to be met by 2013, the
performance of the logistics industry in Indonesia is still considered to be under the countries in Southeast
Asia, although the World Bank noted Logistics Performance Index (LPI) Indonesia increased from
position 75 in 2010 to position 59 in 2012. This increase has been mainly experienced by private logistics
and transportation companies. The World Banks data have confirmed the seriousness of pursuit of the
private logistics companies in creating more efficient competitiveness of Indonesia's logistics.
Indonesia is now faced with the reality in which the logistics sector have to fight against foreign parties
and foreign transportation and logistics corporate conglomeration. These two realities can threaten the
existence of private logistics company in Indonesia. To overcome these problems, the government had to
intervene by not letting the private logistics players go bankrupt. In addition, the acceleration of
infrastructure projects should be encouraged and the high tariff rate of inter-port should be lowered.
Indonesia currently only occupies the 6th position in the ranking of readiness among ASEAN countries in
dealing with the implementation of the ASEAN Single Market 2015 (Bustami, 2010). According to the
assessment matrix that was released by ASEAN Secretariat, Indonesias score only reached 81.3 percent,
far behind other competing countries such as Thailand, Malaysia, Laos, Singapore, and Cambodia. In the
third phase of assessment (2012-2013), Thailand would be the most ready country to face the
implementation of the ASEAN Single Market by 2015, with 84.6 percent readiness rate, followed by
Malaysia and Laos that have accumulated points of 84.3 percent. The next position is occupied Singapore
with 84 percent and Cambodia with 82 percent.
Based on the results of a study conducted by the Ministry of Industry, there are four factors that have
reduced Indonesia's competitiveness compared with the competitiveness level of other countries in the
ASEAN region. These four factors include the performance of logistics, tax rates, interest rates, and labor
productivity. The unpreparedness of Indonesia has been worsened by the high cost of logistics and the
lack of infrastructure development in the country. In Indonesia, the logistics cost today is 16 percent on
the average of its total production costs. Normally, the maximum logistics cost is between 9 and10
21

percent. Currently, logistics is facing such problems as the weak oversight of imported products, the slow
imposition of anti-dumping procedures in case of unfair trade practices, the safety issues which disrupt
the investment climate, the poor quality of infrastructure conditions, and the high terminal handling
charges.
In addition to weak performance in terms of logistics, fiscal policy in Indonesia is still burdensome for
domestic industries. For the ASEAN region, the imposition of corporate income tax in Indonesia is still
higher than that of Singapore, Cambodia, and Brunei Darussalam. Meanwhile, of the 130 countries
recorded by KPMG, the rate of corporate tax in Indonesia is ranked the 59th.
Other issues that could also be a stumbling block for Indonesia is the bank interest rate in Indonesia,
which ranks the 3rd highest in the ASEAN region, after Myanmar and Vietnam. With an interest rate of
5.75 percent, the position of Indonesia is far below Singapore banks interest rate, which is only 0.03
percent, Cambodia (1.19 percent), Thailand (2.75 percent), Malaysia (3 percent), the Philippines ( 3.50
percent), Laos (5 percent), and Brunei (5.5 percent). In addition to this, the issue of Indonesian labor
productivity has also been in the spotlight, because among 23 countries in Asia, Indonesia ranks only
15th.

Nusantara Pendulum
Indonesia as an archipelagic country has to build an archipelagic logistics system and a good
infrastructure system so that the economic cost can be reduced, productivity can be increased, and the
quality of goods can be maintained. However, according to Deputy Minister of Commerce, 98 percent of
the distribution of goods in Indonesia is through land, consisting of 87 percent distribution by road and 11
percent by train. Only two percent of the distribution of goods in Indonesia is carried through air and sea
transport. Currently, the government is busy building land infrastructure, while Indonesia is a maritime
region, where between its region is connected by sea. Indonesia requires small ports in the islands so that
cargo ships could use them.
Sea transport is an important component for achieving the national development objectives of the present
and future. The fundamental problem of Indonesias marine transportation logistics system is that there is
inequality between its frastructure and its transportation service demand. The provision, ownership,
operation, and maintenance of infrastructure and facilities are still dominated by government and state-
owned enterprises. Consequently, the service tariff rates tend to be under priced.
22

This happens because policy rates are made based on political considerations rather than on financial
considerations. As a result, the performance and services of transportation in Indonesia in general is still
very bad. It was compounded by the inability of government to fund the maintenance and rehabilitation of
the assets that have been built, the inability of attracting new investment to meet the increase in demand
for services, and low participation level of private investors. The implication is the occurrence of excess
demand which is characterized by overcrowded transportation and transportation bottlenecks.
The low private investment in maritime transport sector is mainly due to the uncertainty in the
determination of the initial tariff rate, which may be caused by the inflation adjustment and the taxes of
ship and spare parts purchasing. The current tariff rates in most sub-sectors of transport do not reflect
their real costs. In addition, the cross-subsidy policy cannot resolve the problem. The policy even adds
another problem. This happens because the implementation is not transparent and accountable. The
condition tends to lead to moral hazard.
The tariff rates that have been distorted by subsidies have given a wrong signal to private investors and
consumers. In fact, the tariff rate or price is a major signal for producers (investors) and consumers in
making investment decisions. Due to the prevailing irrelevant tariff rate, they are not interested in
investing. Another implication of the fundamental problems is the decline in the quality of transport
infrastructure services. The growth in the construction of transport infrastructure networks has also
stagnated, which is indicated by such things as the limited ability in maintaining transportation
infrastructure and facilities, either regularly or periodically. These conditions have resulted in faster
transport infrastructure damage when compared to the estimated economic life of the infrastructure and
facilities.
Logistics costs will remain high if there is no improvement of road and port infrastructure as a whole,
particularly in relation with the development of the port, such as pool depth of ports, shipping lanes, the
length of the pier, and highways. So far, large ships carrying containers above 10,000 TEUs have
difficulty to get into a number of ports in Indonesia. This is caused by, among others: the shipping lanes
and shallow pool.
Based on a review of the Ministry of Transport (MoT), in general the existing shipping channels and
docks are under maintenance. They should routinely be dredged because silting in the harbors is quite
high. Therefore, only small ships of 5,000 TEU class can enter the harbors. In fact, Pendulum Nusantara
program that was launched to drive the success of the economy and to encourage the peoples purchasing
23

power is difficult to implement when there is no infrastructure improvements. The prices of goods in
eastern Indonesia are more expensive than the western part of Indonesia because the freight is expensive.
The problems faced by the transport sector are quite diverse. Not only do the problems happen in the sea
and the port but also on the highway. The entrepreneurs in the field of transportation and distribution will
be ready to compete with foreign companies in 2013 if there is a support from the government. The
government can support them, for example in issuing regulations on the abolition of import duty fleet
(container trucks) and components/spare parts. This import duty fleet has burdened the domestic container
trucking entrepreneurs their competition with the foreign companies that run the same business.
Indonesia's logistics industry has both a challenge and a tremendous opportunity in the archipelagic
logistics system. Indonesia's large growth and abundant natural resources should be a high bargaining
power for Indonesian logistics industry. So far, foreign importers use the services of foreign logistics
companies to export goods from Indonesia. In addition, when Indonesian importers buy goods from
overseas, they also use foreign ships. To overcome this unfairness, Ministry of Commerce plans to
implement the cost system of insurance freight (CIF). With CIF, the foreign importers are required to use
Indonesias logistics companies when buying goods from Indonesia. This is in contrast with the previous
system or freight on board (FOB) system was applied, where the foreign companies provide their own
transport when importing from Indonesia. To implement the CIF, the government has to have courage and
the domestic logistics company have to be ready. Logistics companies have to ensure that when they send
goods abroad, they also have to be able to bring imported goods to Indonesian. Thus, both the departure
and return cost can be covered.
Logistics service providers and authorities in Indonesia are required to build a proactive nationwide
logistics network for islands to cut freight interference effects. Central and local governments need to
encourage the alliance or cooperation as a safety net for the distribution of essential goods nationwide
when a logistics disruption occurs. One prominent cooperation has been initiated by Pendulum Nusantara
Indonesia Port Corporation (IPC) and the World Bank.
The IPC II collaboration with the World Bank will establish the implementation plan of the Pendulum
Nusantara (Pendulum of the Archipelago) concept and make efforts to reduce logistics costs (Investor
Daily, 2013). This is a contribution in support of the full IPCs ideals in accelerating the national logistics
costs reduction. The memorandum of understanding for the cooperation was officially signed on May 16,
2013 in Jakarta. The cooperation aims to study the potentials of implementing Pendulum Nusantara
programs into the government's effort to improve the logistics system in Indonesia (Lino, 2012). Under
the umbrella of this cooperation, IPC will fund the studies that will be conducted by the World Bank. The
24

studies that will be prioritized are about feeder ports, which is included in the Pendulum Nusantara
concept and about national logistics cost reduction.
Pendulum Nusantara is a corporate act of IPC and IPC I, III, and IV as part of the National Logistics
System (Sislognas) in support of the Master Plan for the Acceleration and Expansion of Indonesian
Economic Development (MP3EI). This act is also intended to reduce the current national logistics costs,
which are still relatively high compared to other countries or reaching 24 percent of the total of gross
domestic product (Asworo, 2013).
There are two main things that will be the subject of study by the World Bank. The first is the study to
determine the potential ports that need to be developed to support the implementation of the Pendulum
Nusantara and implementation of National Logistics System. This archipelago Pendulum plan will
involve six major ports of Indonesia, namely: Belawan, Batam, Tanjung Priok, Tanjung Perak, Makassar
and Sorong. The six ports will become the main gates. A master ship would travel regularly through the
main seaports, serving as a hub. It will move like a pendulum, from one port to another, and the schedule
for smaller vessels will be built around the master ship. Nusantara pendulum is expected to increase the
pace of domestic container services and lower transport costs so that the shifting from land transport using
fright to ocean transport using fright is expected to occur.
The second is the study to identify efforts to reduce logistics costs in Indonesia. This study will be
focused on the inventory of the entire infrastructure, both in terms of hard infrastructure and soft
infrastructure, which is owned by the port, shipping line, customs clearance, inland transportation
services, logistics, and other sectors. Thus, the contribution of each sector to reduce logistics costs to
below 15 percent, or even reach 8 percent of the total GDP as it has be achieved by the United States
today can be mapped.

Conclusion
Indonesia has made a commitment to be an important player in the international market and trade. The
Indonesian government is focusing its attention to ensure the availability of strategic commodities,
promote low cost economic activities, and strengthen the nations competitiveness. The Indonesian
government also should integrate transport centers, such as ports, airports, terminals, and distribution
centers, into a transport network. Also, the government should build the infrastructure for the logistics
industry in order to create an efficient distribution process. An efficient and effective integrated logistics
system can improve the competitiveness of national products in the global and regional markets as well as
25

improve the welfare of the community. This can be done by lowering logistics costs and ensuring the
availability of basic and strategic commodities up to the village level.
ASEAN Economic Community (AEC) in 2015 will strengthen the value of exports for countries in the
ASEAN region, including Indonesia. In addition to expanding the market, Indonesian logistics companies
should also strengthen its human resource capabilities with professionals and experienced employees in
the field of logistics. Having 40 percent of economic resources of the region (the Greater ASEAN),
Indonesia must improve the competitive edge of its products and services, improve its human resources,
and prepare its regulations. The government needs to pay attention to infrastructure development in
Indonesia evenly. This is because about 70 percent of its logistics infrastructure is still concentrated in the
big cities in Java. The policy makers must fix the infrastructure inequality for connectivity challenges in
2015.
As a maritime country, Indonesia should develop a more serious archipelagic logistics that provides
greater opportunities for private sectors to participate in the development. Logistics business players in
Indonesia need to work together to create a cluster service that aims to reduce logistics cost with an
economical business scale and to reduce inefficiency. One of the efforts that should be encouraged is to
apply the Pendulum Nusantara programs in order to realize a more competitive logistics cost.
Referring to the low competitiveness it has, it is time for Indonesia to improve its regulation, for example
enacting a regulation that is pro-investment, emphasizing on clean governance, promoting a just and equal
economy, promoting political stability, security and social order, and encouraging technological
innovation. In addition, the key to face the AEC is that each local region should be empowered according
to its comparative advantage. In developing the leading sector of each region, both central and local
governments should focus on the core business that will be developed whether it is in agriculture,
fisheries, tourism, investments, or services.

References
Asworo, H.T. (2013), "Pendulum Nusantara: logistics competitiveness at crossroad", Bisnis Indonesia, 2
May, p. 7.
Banomyong, R. (2010), "Benchmarking economic corridors logistics performance: a GMS border
crossing observation", World Customs Journal, Vol. 4, No. 1, pp. 29-38.
26

Benny, G. and Abdullah, K. (2011), Indonesian perceptions and attitudes toward the ASEAN
Community, Journal of Current Southeast Asian Affairs, Vol. 30, No. 1, pp. 39-67.
Bustami, G. (2010), Indonesia Readiness Towards ASEAN Economic Community 2012, Ministry of
Trade Republic of Indonesia, Jakarta.
Christopher, M. (2010), Logistics and Supply Chain Management, 4
th
Edition, London, Prentice Hall.
Herliana, L. and Parsons, D. (2011), "Logistics in Indonesia", in The Impacts and Benefits of Structural
Reforms in the Transport, Energy and Telecommunications Sectors in APEC Economies, APEC
Policy Support Unit, Singapore, pp. 446-461.
Lino, R.J. (2012), "Indonesia Maritime Infrastructure", World Export Development Forum 2012, 15
October.
Investor Daily (2013), "Adopting Pendulum Nusantara concept: capacity of six ports should be
increased", 15 February, p. 6.
The Jakarta Post (2010), "RI, Japan eye economic corridor development", January 12.

27

Chapter 2
A New Collaborative Approach for Horticultural
Supply Chain

Togar M. Simatupang and Yuanita Handayati
Indonesia

Tomy Perdana
Department of Agribusiness
Faculty of Agriculture
Universitas Padjadjaran

Abstract
This paper attempts to study whether the lack of value chain are the causes of the inefficient, prodigal,
and underdeveloped agricultural logistics. A diagnosis has been made to identify issues and root causes
of underdeveloped agricultural logistics in Indonesia. Several opportunities have also been identified,
especially a collaborative model of fruit and vegetable export supply chain. This study is of benefit to the
agri-fresh produce industry and those who are interested in developing the collaborative horticultural
supply chain model further.
Keywords: agricultural logistics, Indonesia, vegetable, supply chain management, collaborative model

Introduction
The markets of agricultural products in the world have changed in the last ten years both in terms of
demand and supply (Shukla and Jharkharia, 2013). The demand for agricultural products is increasing,
and it is increasingly diverse, such as food, feed, fertilizer, fiber, fuel, and pharmacy. The increased needs
of agricultural products usually encounter obstacles on the supply side, for example uncertainty,
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discontinuity, and finite volume. The production of agricultural products is influenced by weather
uncertainty, plant diseases, and pesticides. In addition, because of the seasonal harvest cycle and market
of agricultural products, the quality and quantity of supply do not often meet the consumers demand. The
supply constraints are also caused by the reduction of agricultural land for human settlements.
In addition to depending on environmental conditions, the quality and quantity of agricultural products to
consumers also depend on the logistics activities of the products, for example how the products are stored,
processed, and delivered. Logistics is an important part of the activities of the agricultural supply chain
that connects the centers of production and consumption locations (Ahumada and Villalobos, 2009). The
weaknesses in logistics systems are often the sources of risks in the agricultural supply chain that could
affect the availability, delivery time, traceability, and quality of products.
The logistics activities of agricultural products have specific characteristics that are different from the
logistics activities of other products (Chen and Feng, 2007). The characteristics are associated with high
uncertainty and product durability. Agricultural products have the uncertainties in terms of their quantity
and quality. Agricultural products depend on the growth season and the surrounding environment
(weather, crop pests, and others) while the durability of agricultural products is relatively short. The
durability depends on the type of commodity, post-harvest handling, and storage technology that is used.
The special characteristics of logistics activities of agricultural products have made them more complex
and difficult to manage than the logistic activities of product manufacturing. The collaboration of the
parties involved in agricultural logistics activities is required in order to meet the market demand at the
right time and in cost-effective way. The pattern of collaboration for agricultural supply chain also
requires a special approach in which a management should look at downstream and upstream aspects
simultaneously.
This study aims to see why collaboration is required in the application of agricultural logistics activities
and to see to what extent collaboration can benefit from changing a market structure, that is, from an
unstructured to a more structured market, in which the volume, quality, and delivery of agricultural
products can be maintained. Case studies of exporting fresh product supply chain are used to illustrate the
applications of collaboration that emphasizes both on the quality and fairness.
The paper is structured as follows. It starts with the introduction which explains the needs for research in
agricultural logistics, and it is continued with the discussion on the concept of agricultural logistics and
supply chain as a new collaborative model. The presentation of the research approach is to explain the
process of this research. Finally, the findings and conclusion are presented at the end of this paper.
29

Agricultural Logistics and Supply Chain
In general, agriculture is the cultivation of animals, plants, fungi, and other life forms, such as food, fiber,
biofuel, drugs and other products that are used to sustain and enhance human life. One of the branches of
agriculture is horticulture. According to US Department of Agriculture (USDA), horticulture is defined
as the branch of agriculture concerned with intensively cultivated plants that are used by people for food,
for medicinal purposes, and for aesthetic gratification.
Agriculture business is a business which deals with the agricultural products, including the trading of raw
materials used in agro processing industries and the activities of agro-processing industries that transform
products originating from agriculture (Higgins et al., 2010). These agricultural business activities relate to
logistics in order to meet the consumer needs. To be able to make a profit and also meet the consumer
needs, an agricultural business activity requires an effective and efficient logistics.
A council of Logistics Management defines business logistics as planning, implementing and controlling
the efficient and effective flow and storage of raw materials, process goods, finished goods from point of
origin to point of consumption for the purpose of meeting customer demand. As for agricultural logistics,
it is defined as all logistics activities that are mentioned above, and it is related to costumer fulfillment of
agricultural products.
Based on the above definition, a study that relates to the agricultural logistics may include transportation,
warehousing, design and organization of value chains and supply chains that generate buyer values for the
customer and strategic values for the firm(s), a coordination among value adding activities, a flow of
information needed to coordinate most effectively and efficiently, a network modeling to address spatial
and temporal demands, and a global logistics. In addition, the study of supply chain management needs to
be highlighted, because the activity is closely related to logistics and supply chain management (Shukla
and Jharkharia, 2013)
Oliver and Webber (1982) describes supply chain as a coordinated system of organizing people, activities,
information, and resources that are involved in moving a product or service in a physical or virtual
manner from the supplier to the customer. Agriculture supply chain involves parties that deal with the
transfer of agricultural products from agricultural land to the customer. As for value chain, it is regarded
as a value adding activity of an organization. In agriculture, a value adding activity is linked to the
activity of drying, selection, transfer, processing, packaging, and marketing of agricultural products. The
value adding activity will affect the selling price of a product.
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Based on the relationships among the components of supply chain, the supply chain can be divided into:
1. Vertical supply chain
Vertical supply chain is the term used to describe the consecutive stages in a marketing chain
when they come under one ownership and control (Ahumada and Villalobos, (2009). This vertical
supply chain has several advantages and disadvantages. The advantages of vertical supply chain
are lower transaction costs, synchronization of supply and demand along the chain of products,
lower uncertainty, and having the ability to monopolize the markets in the chain. On the other
hand, the disadvantages of the vertical supply chain are higher monetary and organizational costs
when switching to other suppliers or buyers and unable to monopolize the markets along the
chain.
2. Horizontal supply chain
In horizontal supply chain, an alliance allows its allies to be independent companies. There are
three types of alliance mechanism that can be applied in horizontal supply chain, namely cross-
ownership of shares, cost-plus arrangements, and strategic alliances. The advantages of the
horizontal supply chain, if it is implemented, are that it may create a balance between flexibility
and loss of control, and it can generate benefits through information sharing. However, the
disadvantage of the horizontal supply chain is that it has a tendency to tempt the allies to bolt for
exists.
3. Network supply chain
The network supply chains provide linkages between horizontal networks of suppliers and
vertical supply chains. Several interdependencies can occur when implementing the network
supply chains, such as reciprocal cooperation based on mutual exchange between suppliers;
sequential delivery systems based on planning along the supply chain; and pooled
interdependencies at business level to guarantee standardization and harmonization of processes.
Supply chain management is required to deliver the right products and services to the right place, at the
right time, at the right price, and in the right condition, while at the same time making the greatest
contribution to the firm.

Limitation of local horticulture supply chain
Effective agricultural logistics system has such principles as maintaining the quality of an agricultural
product from the farm to the consumer, delivering and storing an agricultural product in an appropriate
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manner, while maintaining its quality and quantity, to meet the rules of safe food at an efficient cost level,
and maintaining the quality of an agricultural product started from the selection of seed and the
cultivation. Developing countries often have glaring weaknesses in agricultural logistics system due to
their inability to apply the principles to their agricultural logistics system.
The performance of agricultural logistics system depends on the agricultural logistics infrastructure,
logistics services, logistics actors, and institutional framework. In relation with the West Java, its
performance of agricultural logistics system is not satisfactory. It is caused by the weaknesses in the
above-mentioned sectors. Therefore, these sectors have to be improved. The first weakness of its
agricultural logistic system is in its infrastructure sector. It is indicated by the inadequacy of its
agricultural irrigation systems, where more than 60% of its irrigated rice fields are in damaged condition.
Another weakness is that its irrigation system is designed only for rice fields, not for horticulture,
plantation, and others. Also, most of its rural farm roads are in poor condition. The last is that it lacks in
cold chain system for fresh produce in the areas of horticultural production centers. Its service sector also
has some drawbacks, such as: the unavailability of agricultural logistics services in rural areas, the lack of
services of information system on agricultural products, the urban areas (and not the rural areas) as the
location of agricultural logistics services, and the inconformity between the agricultural logistics services
and the needs of agricultural logistics in rural areas.
Some other weaknesses are also experienced by the actors of logistics services, where they have not
evolved as expected, for example they have limited understanding on the logistics management in
agricultural farm, starting from the production up to the market. For example in the production stage, the
improper handling of agricultural products takes place in the farm, product storage, and product
distribution. This improper handling has caused in a high level of damage (above 25%). The improper
handling of agriculture product also takes place at the retail distribution center, resulting in more than
a10% level of damage. The not well-run agriculture logistics system also occurs at the level of collective
rural producers. The last weakness can be seen from the institutional framework side, in which not only is
there are a specific policy for agricultural logistics system -- as a derivative or operationalization of the
"Blueprint for the National Logistics System" , but also there is no authority that coordinates the
agricultural logistics systems in West Java.
A poor agricultural logistics system directly results in high cost of logistics and in constricting the
production continuity. The indicator of the high cost of logistics in West Java can be seen from the inter-
island transportation and export of horticultural commodities, which accounts for 25%-30% of the sale,
transportation between cities about 10%, and shrinkage of the product during transport about 10%-30%.
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In addition, the instability of an agricultural product supply will cause a high and fluctuative price of the
agricultural product.
At the operational level, farmers usually try to maximize his personal profits by adjusting their cropping
system to gain a better income. But in reality the cropping system cannot guarantee the income of the
farmers. It is because the predicted sale price of a crop made at the time it is planted may be different with
the sale price of the crop at the time it is harvested. Most sale prices of crops at the time of harvest are
lower than their predicted sale prices. In addition, sale prices of crops are determined unilaterally by
middlemen. In this case, the middlemen are the ones who reap the biggest margin of this system.
Horticultural agribusiness chain has unique trends. The first trend relates to biological production process
and complex biological types that have effects on the durability of a product in various ways. Another
trend is that small, medium, large businesses have a complex network in both their main and supporting
activities. Also, random climate changes that cannot be predicted by any decision of supply chain
components have caused the inconsistent production quality and quantity. The last trend relates to the
environmental protection and sustainable development. They are the determining factors in horticultural
agribusiness chain. Therefore, they deserve to get an attention of agribusiness stakeholders.
The logistics supply chain in global horticulture has different characteristics. Food safety and "traceability
system" have become the determining factors in the international agribusiness trade. The guarantee of
volume consistency, high-quality, punctuality, and right price of a product has become a business driving
force in the supply chain of both domestic and international agribusiness. The uniqueness of a product,
season, and trend of consumers has become the key factor in both domestic and international agribusiness
product. In addition to the above-mentioned factors, the "justice" factor has become an important issue in
developing an efficient, innovative, responsive and sustainable agribusiness supply chain.
Thus, the main issue in a supply chain is that an efficient supply chain requires not only a good
information flow but also a good communication throughout the supply chain. Overall logistic activities
are driven by demand, and not by production. Therefore, cooperation among actors is absolutely
necessary to change the system that depends on the production into the system that is driven by demand.
Without the collaboration among the actors along an agricultural supply chain may lead an actor to
behave for his own short-term profit. Relying on a traditional market with highly fluctuative prices will
make farmers unable to cope with the risk of low selling price that causes the loss. The mediocre profit-
making has given no incentive to the actors to develop a technology. The absence of both seed and
cultivation engineering coupled with the uncertain weather has caused a low production, thus adding
33

losses to the actors. Therefore, cyclical logistics activity of horticulture needs a new approach that is
based on fair collaboration.

A New Collaborative Model
This time the competition that happens in the agricultural business is no longer between companies, but it
is between supply chains. Therefore, in order to maintain business continuity, a coordination or
collaboration between members of a supply chain is required in order to be able to shift from the
unstructured to the structured market.
One thing that has become a focal point in building collaboration among the members of a supply chain
relates to information sharing. Each member of the supply chain is expected to share its information with
other members of the supply chain, due to a great number of needs of consumers, products, and sale
prices. To be able to share information, a mutual trust between members of the supply chain has to be
built. This confidence can be built by recognizing the role of each member of the supply chain and by
nurturing good communication among the members. Figure 1 shows the design elements of agricultural
supply chain development (Perdana and Kusnandar, 2012).

Figure 1 Design of Agriculture Supply Chain Development
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From the above design, an agriculture supply chain can be divided into several sections. Each section
contains the parties involved and their activities. The sections are as follows:
1. Quality Engineering, which is related to the quality of agricultural products that are produced to meet
consumer needs. The parties that are involved in determining the quality is the supplier of seeds,
fertilizers, and many others; the farmer groups; and the sub-terminal agribusiness. The activities
related to the determination of a quality start from production-base development (production of seed,
fertilizer, etc.), selective harvest, post harvest management (sortation and grading), cold chain system
(pre-cooling and cooling), packing, and storage.
2. Hybrid production system, which is about how to match supply with demand. Based on the available
supply, planning is made on the basis of forecasted number of orders. The number of orders is made
based on the number of orders placed by the suppliers. Between supply and orders, there is a
decoupling point which is used as the safety stock to anticipate the uncertain supply and demand. This
decoupling point can be placed at production area at the exporters distribution center.
3. Balanced performance measurement, which is related to performance monitoring in each member of a
supply chain, includes financial monitoring, customer service level, internal business process,
innovation and learning, and value-added. Financial monitoring is related to cash cycle and profit that
is gained by a supply chain as a whole and by each member of a supply chain. Customer service level
is related to customers perspectives on an order fulfillment ratio. Internal business processes is
associated with productivity and the number of production outputs that is rejected or cannot be sold
because the quality does not match consumer demand. Innovation and learning is associated with
cooperation and flow of information that occur among members of a supply chain. Distribution of
value-added is associated with the addition of a value created by each member of a supply chain.
4. Institutional innovation, which is related to the relationship among members of a supply chain, such
as farmers and suppliers, could be related to a process either with a transaction or without a
transaction; a relationship between farmers and a farming group that goes without transaction; a
relationship between farmers and agribusiness sub-terminal (STA) members that occurs without a
transaction; a relationship among suppliers, farmers , STA members, and exporters through a strategic
partnership; a relationship between consolidators and partnership assistants; a relationship among
suppliers, farmers, or STA members, consolidators, and partnership assistants; a relationship between
exporters and consolidators through a strategic partnership.
5. Supply chain management consolidator, which is related with its role in a production process as a
mentor for farmers, suppliers, farmers group, and STA members. This mentoring may be about
production techniques that relate to planning, bookkeeping, SOP GAP implementation and
35

demonstration plots (demplot), harvest and post harvest techniques; managerial matters that relate to
bookkeeping and financial management, production cost determination, farmer development, and
organizational development; and bridging between producers and exporter needs.
In order that a supply chain restructurisation can be done smoothly, the contribution of each party
involved is required, for example a party must consistently perform its role, so as to create a more
structured market that can provide benefits and advantages for the other parties.

Research Approach
This research employed a case study approach, where the data were obtained from workshops, interviews
with stakeholders, and field visits. This study refers to one agribusiness actor that has implemented best
practice in production supply chain management and has gained the benefits by implementing this
production supply chain management.
To obtain a preliminary picture of both global and Indonesian scale of agricultural business, a workshop
on agriculture supply chain management was attended. In the workshop, the topics that were discussed
were the background of the importance of the application of supply chain management in the agricultural
business, the existing condition of the supply chain in agriculture, the proposed models of collaboration in
agriculture supply chain, and the barriers and challenges in implementing the supply chain collaboration.
After studying the overview of supply chain management in agriculture, the next step is to conduct
interviews with the relevant parties and to conduct field trips to see the real condition of the agricultural
businesses in the field. Alamanda Sejati Utama was chosen to be the subject of this research. The reasons
are that not only is this company categorized as one of the biggest exporters of agricultural products in
Indonesia, but also it has implemented supply chain management in its agricultural business. The
interviews with the company's s staff members, the companys business partners, farmers were
conducted. The objectives of the interviews were to discover the information about the companys profile,
history of applying supply chain management in its business, barriers and obstacles in implementing the
supply chain management, and future plans. Concerning the interviews with the farmers, the objectives
were to discover the obstacles and constraints encountered as well as the advantages gained from the
collaboration undertaken by both the farmers and the company.
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Both the field trip to the companys premise and the companys farm were also done. The objectives of
the trips were to see firsthand the conditions and business processes in the field. The visit to the
companys premise was to observe the processing of post-harvest products, ranging from product sorting,
washing, packaging, refrigeration storage, and delivery. As for the visit to the companys farm was to
study the planting scheduling and harvest scheduling applied by the farmers to meet the daily demand of
the company.
Based on the workshops, interviews, and field trips, the constraints and bottlenecks encountered by the
company in implementing the supply chain collaboration can be analyzed. Also, in this study, some
inputs to overcome the obstacles and barriers are suggested so that the future collaboration could work
better, and all members of the supply chain could gain more benefits from the collaboration.

Findings
Horticultural business in Indonesia is growing. Because of the increasing market demand for horticultural
commodities for both domestic consumption and export, horticultural business has to be developed.
Horticultural business in Indonesia is also supported by the potential of its natural and human resources.
Province of West Java is one of the regions in Indonesia which has a lot of good commodities, such as
fruits, vegetables, and various plants. Although these commodities are highly competitive, they are the
advantage of this province.
Based on its geographical location, West Java Province has a strategic location to supply horticultural
crops to its surrounding areas. West Java province in its western part borders with Banten province, in its
northern part borders with the North Sea Java and DKI Jakarta Province, in its eastern part borders with
Central Java province, and in its southern part borders with the Indonesian Ocean.
The challenge for the horticultural industry in Indonesia, especially in West Java province is the
increasing demand for domestic and overseas markets. Therefore, its horticultural industry must pay
attention to several factors that can determine the sustainability of its business. The factors that need
attention are the quality of the products that are produced and the consistency of business people in
providing quality products according to the standards that consumers require. In addition, the number of
available products and the supply continuity has to be ensured in order to maintain the service level to the
customers and to maintain the stable prices. Another important factor is to offer the consumers a
competitive price. The competitive price can be achieved by applying an efficient production. Supply
37

chain management is therefore necessary to ensure that horticulture products can be distributed to the
consumers on time, at the right place, in the right condition, and at a desirable price. .
Supply chain management for horticultural products has specific characteristics that are different from the
others. The characteristics include high uncertainty and durability of agricultural products. Agricultural
products have the uncertainties in terms of their quantity and quality. Harvested crops or agricultural
products depend on their growth season and the surrounding environment, such as the weather, crop pests,
and others. The durability of agricultural product is relatively short. The durability depends on the type of
commodity, post-harvest handling, and storage technologies that are used. The characteristics of
horticultural products have made their supply chain management more complex and harder to maintain
compared with other product supply chain management.
According to its functions, horticulture supply chain management can be divided into three:
1. Supply chain management of export commodity
2. Supply chain management of modern retail commodity
3. Supply chain management of food industry commodity
These three supply chains have several characteristics, among others: collected transactions, transparency
in information flow, and contract-based product sales done by farmers. Collected transactions are
associated with the cooperation among farmers in gathering their crops to meet the quota demand.
Normally, farmers join a group of farmers and farming activities in which the transactions and their profit
sharing is done by consensus in the group. Transparency in the flow of information is needed, not only
among the farmers but also between the farmers and the other members of the supply chain, to ensure
well developed long-term cooperation. The system of horticultural product sales consists of several sub-
systems, namely: bonded system, ordinary system, and contract system.
The sale practice that is commonly found is the bonded system. This system is a system of agricultural
product purchasing s from farmers where agricultural products are bought before they are harvested. The
buyers only estimate the likely total harvest to be obtained and pay the farmers as much as the estimation.
Such system causes loss to the farmers, because the farmers get a lower price than when they sell them at
the harvest time. The buyers will also suffer losses if the crops harvested are not in accordance with the
initial estimation. The second system is the ordinary system where the farmers sell their crops to the
buyers. The farmers who sell all of their crops to the buyers with the price that is in accordance with the
effective price in the market. By applying the system, the farmers will not have a definite profit, because
the price received by the farmers is likely to fluctuate every day. In fact, the farmers may suffer losses due
38

to the price received is too low. The last system is the contract system, where farmers have a contract
before cooperation with a buyer is made. Thus, the farmers sell their products in a certain amount for a
certain period as stated in a contract. This system ensures a profit for the farmers, because the price they
receive is not fluctuative. Among the three supply chain managements, supply chain management for
export commodity has the greatest challenge. For example, because of the far distance between countries,
the product handling, packaging, and storage system are required to provide the best quality products with
a high level of freshness. For more details of supply chain of exports commodity can be seen in Figure 2.

Figure 2. Supply Chain Management of Export Commodity
There are more than 14 companies in the province of West Java, which are engaged in the export of
horticultural product industry. One of them is PT Alamanda Sejati Utama, which is located in
Pangalengan, Bandung, and West Java. This company is the biggest fruit and vegetable exporter in West
Java. The vision of this company is to become a vegetable, fruit, and flower exporter that puts customer
satisfaction as a priority. Its missions are to work with all farmers to promote the Indonesias export
activities of horticultural products to the rest of the world. This company focuses its business on
providing the best services while maintaining the quality standards in the selection of materials to be
used, post-harvest handling, and delivery.
Input Supplier
Farmers
group
Supplier
STA
Exporter
Foreign
Buyer
Customer
Farmers
Product flow
Agro-input flow
Money flow
Information flow
39

The company has implemented supply chain management on its business operations. The company not
only implements supply chain management in its own company, but it also implement it across its entire
supply chain, including farmers. By implementing supply chain management, the company hopes that it
will ensure the consistent quality, quantity, continuity, and price, the cooperation commitment among
supply chain members, and the knowledge transfer to the farmers to apply the standard operating
procedure (SOP) to be GLOBAL GAP certification. This certification requires that the recipients have the
ability to demonstrate good agricultural practices, such as using production techniques that can reduce the
impact of agricultural activities on the environment, can reduce chemical use, can use natural resources
efficiently and ensure the welfare of their farm workers. With this certification, both the consumers and
retailers acquire the safety and quality assurance of agricultural products.
The company has been successfully exporting horticultural products to Asia and the Middle East. The
countries for its export horticultural products are Singapore, Thailand, Brunei Darussalam, Malaysia,
Hongkong, Taiwan, Pakistan, Bangladesh, Abu Dhabi, Jeddah, and Dubai.
The following are the horticultural products that are produced by the company:
under the category of vegetables, it includes baby fine bean, French bean, watercress, red chili,
cabbage, capsicum, petai bean, sweet corn, xiao baicai, honey sweet potato, shallot;
under the category of flowers, it includes ronche jasmine, jasmine with head, jasmine without head;
under the category of fruits, it includes Alphonso mango, mango arumanis, Salacca, pink guava,
rambutan, water melon, mangosteen, rock melon; and
under the category of mushrooms, it includes champignon mushroom and portabello mushroom.
The company realizes that in order to maintain the export quality standards of horticultural products that
suits the consumer needs, there should be cooperation between both the trained and educated suppliers
and farmers. In addition, the company provides the best seeds to the farmers and trains them so that they
can treat and manage the products well. The cooperation covers, among others: the development of
production bases, selective harvesting, post-harvest management, cold chain system, as well as packaging
and storage techniques.
To maintain the quality and freshness of its products, the company employs cold supply chain
management to ensure the standard of quality management for each product, starting from the farm where
the products are harvested to the warehouse and from the warehouse to the port; Cold supply chain is a
supply chain system that deals with temperature control. Cold chain is an uninterrupted series of storage
and distribution activities which do not experience interruptions in maintaining the stability of the
40

temperature as shown in Figure 3. It is used to help extend and ensure the durability of fresh products. In
addition to maintaining the stability of the temperature, under the cold supply chain, ensuring the air
quality level (related with levels of dioxide carbon, oxygen, moisture, and others) is required.
The company has trucks, each of which is equipped with cooling facilities and cold storage which can
hold vegetables and fruits of more than 300 tons/day. Each of the companys cold storage area has a
different temperature. Vegetables and fruits that are stored in any storage area are in accordance with their
durability. Also, the company maintains its product quality by enforcing a strict quality checking system
at each production stage, such as seed selection, harvesting, separation, and packaging stage.
Harvest Pre-Cooling
Cold
Storage
Sale

Figure 3 Supply Chain Management of Cold activities
There are several barriers that are considered severe in the implementation of supply chain management
by the company. The first is the changing culture of the farmers who are used to applying the traditional
techniques without considering the value-added to the crops. Another is the differences in the
characteristics between the Indonesian farmers and the farmers in the developed world. The fact indicates
that the Indonesian farmers have no knowledge as to where the product will be marketed and as to what
the market actually needs. If they know who the product users are and what the expectations of the users
are, they may be able to plan their production process better and can innovate to meet the users
expectations.
According to the company, implementing supply chain management is considered difficult to do when it
comes to farmers under the age of 40 years. They have difficulty in implementing new ways to add value
to their crops, such as selecting crops harvested in the farm and in applying selective harvest systems to
obtain good quality and increase the selling price of the crop. For an illustration, there was a farmer who
sold sour tasting strawberry crops in the local market. The strawberries had a sour taste, because they
were harvested when they were still in their young age, so their sugar level was low. This was done by the
farmer so that he could sell the products at a longer period of time. Actually, the farmer could have sold
the strawberries with higher sale price if the strawberries had been harvested at their 80% maturity level;
Harvesting Pre-Cooling Freezing Selling
41

their tastes would have been sweeter and their fruit size would have been larger. Changing the culture of
the farmer takes around 5 to 6 months.
Furthermore, there are several challenges faced by the company, which are associated with the
development of logistics system, particularly with small farmers with less strategic location. The
challenges relate to the characteristics of farmers who generally have a small capital, whose production is
below the demand, whose cost and operating system are inefficient, who have low production quality;
who have a considerable distance from the center of collection, market, and ports, who have a minimum
access to information, who have difficult areas to reach because of the terrain and inadequate
transportation, who have high freight transportation costs, and who have little knowledge and information
related to production making decisions.
Inspire of the above-mentioned challenges, the company also has some advantages by working with the
small farmers. One of the advantages is that the company has been successful in developing the
companys logistics systems. Another is that the company is able to assist the farmers with a small farm
to control their farming operations easily and precisely, to detect problems in the field quickly, and to
give extra care to their farm.
As lessons learned from this case study is that the development of a clustered horticultural agribusiness
area may be able to serve multiple markets, i.e. domestic and export market. To ensure the success of the
above-mentioned development, the following steps should be taken. First is to conduct a mapping on the
variability of horticultural commodities based on their harvest time to determine which commodity type
to be developed that can ensure the supply availability in the local market. Second is to conduct a
mapping on the use of land for horticultural farming in a clustered horticultural agribusiness area,
including optimizing the use of land. Third is to develop farm management system based on GAP (Good
Agriculture Practices) collectively in a clustered horticultural agribusiness area. Fourth is to build the
capacity building of the management of Association of Farmer Groups (gapoktan) in providing its post-
harvest services, starting from the crop harvest time to the distribution stage, to its members. Fifth is to
implement supply chain management and hybrid production system (push-pull production system) in
order that the Association of Farmer Groups is in the position to manage the services of integrated facility
for consolidating the collection and distribution at the level of the clustered horticultural agribusinesses.
Sixth is to use protected agricultural technologies and irrigation systems for the cultivation of seasonal
horticultural that are able to eliminate the effects of climate change. Seventh is to develop food safety and
traceability from farm to consumers. Eighth is to develop a market led agricultural extension. Ninth is to
42

develop a model of integrated facilities for consolidating the collection and distribution at the level of the
clustered horticultural agribusiness area. Tenth is to develop a horticulture farming business that is based
on market contracts. Eleventh is give a value added to the marketing for the horticultural consumers in the
modern market. Twelfth is to engage various stakeholders to collaborate in building a clustered
horticultural agribusiness to serve multiple markets. Banks, in this case, has to be involved to provide a
supply chain financing scheme. The last is to conduct a further study that is aimed at examining the
reliability of other collaborative approaches for horticultural supply chains in other regions and
commodities.

Conclusions
Based on the case study of Alamanda Sejati Utama, which has implemented the collaborative approach
for horticultural supply chain in its business system, it can be concluded that to ensure the quality and
stability of supply of horticultural products, attention should be given not only to the operations
performed by the company but also to the operations performed by the farmers as the main producers of
agricultural products. As for the collaboration between a company and farmers, it could be built through a
sense of mutual trust. This mutual trust can be fostered if each member in the supply chain knows the
benefits that will be acquired. Concerning the scope of negotiations, it can cover not only about pricing
but also about the value that can be created by each member of the supply chain. In addition, the
guaranteed long-term relationship among the members of supply chain collaboration could help the
farmers focus on the production process that conforms to the standards of operational procedure. Also, in
order that a cohesive relation among the members of supply chain collaboration can be created, a sense of
trust should be built on individual basis, and not on organization basis.
In addition to building trust, providing trainings to increase the knowledge of farmers and improving their
welfare need to be attended to. These efforts to increase the farmers knowledge can be done, among
others: by increasing their knowledge on the system of planting and harvesting scheduling to ensure the
availability of supply; by training the them to replicate best farming practices that have benefited the
application of supply chain to business systems to enable them restructure their horticultural supply chain
to meet a market demand; and by mentoring them to build their production capacity. The supply chain
consolidator that conduct the mentoring program can also can make some institutional innovations, such
as risk reduction, learning transfer, problem solving, and communication media.

43

References
Ahumada, O. and Villalobos, J.R. (2009), "Application of planning models in the agri-food supply chain:
A review", European Journal of Operational Research, Vol. 196, No. 1, pp. 1-20.
Chen, X. and Feng, J. (2007), Agricultural supply chain problems of information control, Journal of
Science and Management, Vol. 11, pp. 38-42.
Higgins, A.J., Miller, C.J., Archer, A.A., Ton, T., Fletcher, C.S. and McAllister, R.R.J. (2010),
"Challenges of Operations Research Practice in Agriculture Supply Chains", Journal of the
Operational Research Society, Vol. 61, No. 6, pp. 964-973.
Oliver, K. and Webber, M. (1982), Supply Chain Management: logistics catches up with Strategy, in
Outlook by Booz, Allen and Hamilton.
Perdana, T. and Kusnandar (2012), The Triple Helix Model for fruits and vegetables supply chain
management development involving small farmers in order to fulfill the global market demand: a
case study in Value Chain Center (VCC) Universitas Padjadjaran, Procedia - Social and
Behavioral Sciences, Vol. 52, pp. 80-89.
Shukla, M. and Jharkharia, S. (2013), "Agri-fresh produce supply chain management: a state-of-the-art
literature review", International Journal of Operations & Production Management, Vol. 33, No. 2,
pp. 114-158.

44

Chapter 3

Heavy Equipment Supply Chain in Indonesia

Togar M. Simatupang
Indonesia

ABSTRACT
Heavy equipments hold an important role for completing projects and production functions to deliver
predetermined outcomes. Mobilization and utilization of heavy equipment are complicated tasks.
Heavy equipment supply chain is composed of owners, manufacturers, and users which requires tight
coordination amongst actors. However, very little research has been done on the characteristics of
heavy equipment supply chain. This research is thus conducted to characterize heavy equipment
supply chain in a developing country and to identify barriers and opportunities. A special attention is
given to provide recommendations on how heavy equipment supply chain supports infrastructure
construction. Using the results of an empirical study, the paper provides a better understanding of
heavy equipment supply chain and the development of operational opportunities. It also offers a
somewhat different view of the concept of supply chain management in a developing country that will
be of significant interest to practitioners in the field.
KEY WORDS: Heavy equipment, heavy equipment supply chain, construction, infrastructure, supply
chain analysis, Indonesia

INTRODUCTION
Business opportunities of heavy equipment in Indonesia appear to become the target of heavy
equipment manufacturers to expand their markets. This is of course based on the growing macro-
economic conditions and the rapid growth of development. After more than a decade underinvested in
infrastructure, the government resumes investing in infrastructure to support economic growth. Poor
roads, crumbling bridges, delayed shipping, and inefficient bureaucracies are an expensive burden to
45

the country. Deficiencies in transport systems add unnecessary logistics costs that reduce the
productivity and competitiveness of business and households. Investment in infrastructure becomes
one of the government priorities. As a consequence, the public works in the future certainly require
more heavy equipments.
Resources availability becomes very important to support infrastructure construction for ensuring
effective and efficient deliverables. Infrastructure development generally requires three sources
including materials, manpower, and heavy equipment. Heavy equipment determines the success of the
construction and serves as a focal point to synchronize specifications and materials with the project
sites. The spectrum of construction equipment includes not only simple construction equipment used
by non-skilled workers but also large and heavy equipment which requires special skills. The use of
heavy equipment in infrastructure can be divided into three main categories, namely heavy
construction equipment, heavy road equipment, and heavy transportation equipment.
Heavy equipments are not just needed by infrastructure construction but also by other sectors in
mining, farming, forestry, and industry for the purpose of mobilization of goods and services. In
Indonesia case, limited national supply of heavy equipment manufacturers may jeopardize the
availability of heavy equipment for construction since its share is about 20% of total demand. The
production capacity of the national heavy equipment in 2011 was approximately 7,353 units, while
the national demand for heavy equipment in 2011 is expected to reach 17,360 units (Bank Mandiri,
2012). This means that demand for heavy equipment was largely met through imports. Heavy
equipment shortage situation makes the seizure of heavy equipment from various sectors such as
mining, forestry, plantation and construction.
Increased investment in infrastructure has not been balanced by the availability of heavy equipment.
The balance of the future demand and conditions of heavy construction equipment availability seems
not to be the focus of attention. On the one hand, the government was worried about not getting the
supply of heavy equipment while increasing the value of investment in infrastructure. On the other
hand heavy equipment suppliers have not been able to respond to the demand because it is not
possible to develop the production capacity of heavy equipment in a relatively short time. This
condition may hamper the development of the national construction industry as a whole.
To answer the challenge of meeting the needs of heavy equipment in support of the construction of
infrastructure in the future, there is a need to nurture a synergy among the stakeholders to manage
heavy equipment supply chain better so as to run the infrastructure in Indonesia smoothly. Therefore,
this current research intends to assess heavy equipment supply chain in support of infrastructure
investment. The results are expected to obtain depth information regarding the conditions and issues
46

of heavy equipment supply chain and build understanding among relevant stakeholders to address the
various problems faced.
The remainder of the paper is organized as follows. The next section provides a review of related
studies of heavy equipment supply chain, and the section that follows discusses the research method
of this study. The main findings are presented based on interviews and secondary sources of data.
Finally, the closing section of this paper presents some conclusions and further research.

RELATED STUDIES
Infrastructure investment is a basic necessity to ensure national and regional connectivity that
facilitates the flow of goods, people and services. The smooth flow of goods, people and services can
reduce the high cost economy and create a more competitive and cohesive region. Connectivity will
also enhance balanced growth and reduce development disparities. In spite of the importance of
infrastructure role, the current practice of infrastructure construction heavily focuses on quality, cost,
and delivery with little attention paid to supply chain management (Xue et al., 2008). Infrastructure
construction consisting of different actors from contractors, designers, investors, suppliers, and
transporters requires proper coordination to transform materials with the aid of equipments into
physical facilities to the user according to the required value. Therefore, control of the construction
supply chain must include all parties involved in the supply of resources from the upstream to the
downstream chain of events.
Construction supply chain management offers new approaches to coordinate different actors to
improve delivery time and reduce the costs of facility construction (Sullivan et al., 2010). The way to
procure materials and services determine overall efficiency and effectiveness of the project. Emphasis
on construction supply chain management makes it possible to deal with global sourcing of materials,
labour shortage, and the scarcity of construction materials and equipment. Cranes, bulldozers,
backhoes, excavators, and shovels are among the heavy equipment items used in construction. Multi-
tier construction supply chain management becomes an emerging practice used to gain advantages in
efficiency and effectiveness. The heavy equipment supply chain is the second tier starting from
equipment requirements to specific site characteristics and technical complexity to utilize reliable
heavy equipments in the construction site. Therefore, managing heavy equipment supply chain in
ensuring efficient delivery of the project appears to become a critical point in the construction supply
chain.
The use of heavy equipment provides valuable information about types of projects and procurement
of new heavy equipment. In this study, an attempt has been made to develop a supply chain
47

perspective of heavy equipment for obtaining the main characteristics of heavy equipment
procurement and utilization in supporting infrastructure construction. Heavy equipment is usually up
to the users through a series of procurement processes that may relate with rentals, distributors, and
owned and operated heavy equipment companies. On the one hand, the users or contractors for a
particular project might be different over time. They need reliable supply of heavy equipment to
improve productivity. On the other hand, the providers of heavy equipment are the same companies
that maintain the conditions of heavy equipments. This situation makes the use of heavy equipment in
construction dissimilar to other sectors in mining, plantation, and forestry. Rather than as fixed assets,
heavy equipments in construction are mobilized to different project sites and act as a means of
service.
Heavy equipment supply chain as a main object in construction is relatively new. There is specifically
little attention paid to assess heavy equipment supply chain to support the development of
infrastructure. Sullivan et al. (2010) treat heavy equipment as an input to construction supply chain.
Prasertrungruang and Hadikusumo (2007) investigate practices and problems in heavy equipment
management for highway contractors in Thailand. Specific research attempts to project sales of heavy
construction equipment and market shares of main manufacturers (Gross and Weiss, 1996; Gross, and
Hester, 2000). Other studies are related to technical, ergonomics, and engineering sides of heavy
equipments (Coburn, 2004; Legris and Poulin, 1998; Zadoks, 1997). Few researches have emerged to
study a particular production side of heavy equipment. For example Min (2009) explored Caterpillar's
supplier diversity program and Keene et al. (2006) studied a project of applying a six-sigma method
and a multi-echelon inventory optimization model in reducing and stabilizing order-to-delivery times
at the same company. Similarly, Fredriksson (2006) identifies the use of several coordination
mechanisms which are critical for the operational performance in modular assembly processes.
Most of the articles addressing heavy equipment supply chains are concerned with a single
manufacturer with inbound and outbound linkage and exclude the utilization of heavy equipment at
the user hands. Supply chain management (SCM) is viewed as the management of an interconnected
or interlinked between node businesses involved in the production of heavy equipment. Hertz et al.
(2001) found that the implementation of cost reducing reengineering projects of its distribution chain
resulted in a better business' network of suppliers and distributors. Rao et al. (2000) developed a
rapid-response supply chain that fulfils customer demand. Lonn and Stuart (2003) examined how a
heavy equipment manufacturer using dealer inventory returns policies to improve its dealer service
levels. Paper (1997) evaluated the value of creativity in business process re-engineering of a heavy
equipment distribution process. Holmqvist and Stefansson (2006) explored an innovative RFID
solution together with collaboration among supply chain actors in the heavy equipment distribution.
48

Meanwhile, the supplier relationship was studied by Versendaal and Brinkkemper (2003) to identify
benefits and success factors of procurement process by using buyer-owned electronic trading
exchanges. Still in the focus of supplier relationship, Lambrechts et al. (2010) found the HRM forum
of the suppliers teams contribute to collaborative learning.

RESEARCH METHOD
The issue of supply chain coordination among the actors related to heavy equipment supply chain is
explored in this research. Most notably, the analysis would seek the huge issue of integrating demand
and supply, the need to synchronize the supply chain with the demand chain, and the opportunity for
multi-lateral collaboration amongst actors through a shared information network. The main approach
used is supply chain analysis that assess about inputs and outputs between actors and value added
along a supply chain through agent accounts. The links between inputs and outputs can be expressed
in physical flows of material and services needed to manufacture, distribute, and utilize heavy
equipment.
The meaning of the supply chain starts from procurement through production, distribution, sales and
finally to the user. Heavy equipment supply chain is not isolated but form a certain flow of a chain of
logistics activities. The supply chain is subject to supply chain constraints, regulation, and business
practice. The members of a supply chain are linked through not only the transfer of product from
production, distribution, and users, but also associations, supporting business, training and education
institutions, standard agencies, and government agencies. The supply chain is a one-way process.
Each link in the chain is not split each other but linked through business transactions accompanied by
the flow of heavy equipments (micro logistics). Micro-logistics issues to be discussed include the flow
of the activities of manufacturers, distributors, owners, and main transport companies for production,
transfer, storage, and services for users.
Building a supply chain analysis requires to gather data to draw a flowchart showing flows of material
in physical and informational form through heavy equipment supply chain. The process of supply
chain mapping is important to obtain an overview of the chain, the equipment flows, the position of
the actors, and type of interaction between the actors. Data sought from informants is also directed to
identify obstacles in procurement, mobilization, and utilization of heavy equipment.
Research method employed in this study is descriptive in nature. There are three main questions,
namely to what extend the map of heavy equipment supply chain in Indonesia, what problems are
faced by supply chain heavy equipment, and to what extent the government provides support to heavy
equipment supply chain. The objectives of analysis are two fold. First, the achievement of the
49

fulfilment of heavy construction equipment is reflected in the availability of sufficient and good
quality of heavy equipment. Second, the identification of several initiatives is obtained to encourage
different actors along the supply chain in helping the government in infrastructure development.
The original contribution of this research is developing effective and streamlined supply chain system
to avoid a crisis of heavy equipment in the future. The benefit of this research for research community
is the contribution in the area of construction supply chain. For business and government, this
research contributes as a reference of knowledge in defining strategy and program in heavy
construction equipment in supporting infrastructure.
There are several steps conducted in this research starting from supply chain mapping of heavy
equipment, identification of supply chain issues, SWOT analysis, and identification of strategic
initiatives of heavy equipment fulfilments. The variables used in the research include heavy
equipment definition, life cycle of heavy equipment, equipment catalogue, indicator of availability,
demand indicator, matching demand with supply, problems faced by actors, and trading terms of
heavy equipments.
Data sources were stemmed from secondary and primary data. Secondary data from research reports
and the internet such as heavy equipment (www.alatberat.org), HINABI (www.hinabi.org),
information on heavy equipment (alatberat.info), Portal of Equipment (www.alatberat.web.id),
Looking for Heavy Equipment (www.carialatberat.com), Tender Indonesia (www.tender-
indonesia.com), Indonesia Finance Today (en.indonesiafinancetoday.com), Center for Equipment
(pusat-alatberat.indonetwork.co.id), Credit information Centre (kredit-ku.com), Rental of Equipment
Indonesia (www.rentalalatberat.net), and training centre for investment resources
(investasikonstruksi.net).
Primary data were collected through interviews with the actors to focus on the problems faced by
heavy equipment supply chain. The list of questions regarding heavy equipment supply chain in
support of infrastructure construction includes identification of stakeholders and their concerns,
current issues, and trading terms amongst actors. The strength of heavy equipment supply chain is
about advantages of the service of heavy equipment and why. About drawback consists of what is bad
in practice, what needs to be fixed, and that needs to be prevented. About the opportunities are related
to the good opportunities facing in heavy equipment supply chain, national issues, government
regulation, local developments, and some interesting trends happening in heavy equipment supply
chain. About threats are regarding obstacles in this area, national issues, government regulation, and
local developments. Questionnaires and interviews were conducted with associations, manufacturers,
users (e.g., Hutama Karya), agents, owners, Ministry of Agriculture, Ministry of Public Works,
customs, and experts. Data from interview were categorized to identify common theme. The results
50

were verified in three focused group discussions attended by representatives from related associations
and experts.

FINDINGS
Heavy equipment is often defined as equipment and/or machinery used as a production tool to
complete the work or produce something. The types of heavy equipment include lifting equipment,
material handling equipment, transfer equipment, power tools, all of which are not operated on the
road. In international terminology, heavy equipment is always categorized into machinery or
equipment, not classified into vehicle. Heavy equipment operators are listed in the Standard
Classification of Occupation Indonesia. They consist of 833 farm machinery operators and other
moving machinery. The current product catalogue refers to producers of heavy equipment, such as:
Caterpillar, Komatsu, Kato, Hitachi, Hyundai, and Volvo and Kobelco. They are dominant producers
for heavy equipment.
Heavy equipment and construction tools are generally grouped according to their usage per sector.
They are then grouped into other categories that are based on their type and function. They can further
be subdivided according to their size and weight. The examples of categories according to usage per
sector are agriculture machinery, construction equipment, mining equipment, forestry equipment,
general purpose equipment. Other categories are according to their function. For example, heavy
equipment for road construction includes bulldozers, excavators, compactors, motor graders, and
asphalt paving; equipment for building includes pile hammer, bore piling, tower cranes, generators,
and passenger elevator; equipment for bridge construction includes launching beam and concrete
paving; equipment for transporting materials includes dump trucks, mixer trucks, tanker trucks, and
crane trucks; equipment for special purposes includes rock breaker, water pump, and drilling
equipment. There are also categories according to the size and weight of tools, for example heavy
duty equipment, medium duty equipment, and light duty equipment.
Heavy equipment is a capital good to support production activities in mining, agriculture, forestry,
construction, infrastructure, and so on. An example of heavy equipment is the production machinery
that is used in a manufacturing industry. Table 1 shows the main characteristics of heavy equipment
supply chain. The availability of heavy equipment is insufficient for supporting different market
segments. The nature of heavy equipment is inter-changeable for different sectors. For example,
excavator and bulldozer can be used in both mining and construction sectors. The situation of
equipment supply chain was characterized by domestic heavy equipment for industry that was only
able to meet 45 percent of national demand or 20,000 units in 2011 (PAABI). On the other hand,
51

pusbinsdi.net data showed good condition in terms of the number of heavy equipment, which are
around 83,653 units or 87.3% of the total national equipment availability that was listed in Jakarta.
Table 1. Characteristics of heavy equipment supply chain
Characteristics Current condition
Commodity type Capital Good
Availability Shortage
Actors Users, owners, services (financing, rental,
auction, repair, maintenance, recondition),
distributors, producers, importers, vendors
Dominant Actor Producers and distributors
Market Segmentation Mining (55%), Agro (15%), Forestry (10%),
Construction (20%)
Trading Terms Price and sales according to market dynamics.
Permits: producers, vendors, agents, services,
recondition, financing, and importer
No regulation: registration
Affirmative action: none

The availability of heavy equipment in Indonesia has grown from year to year. This is caused by the
increasing trends of additional heavy equipment annually that makes the accumulation of heavy
equipment availability in the country increases. According to APPAKSI, the accumulation of heavy
equipment availability in 2012 was as many as 38.315. In relation with the current availability of
heavy equipment, mining sector is the sector with the largest operation of heavy equipment, with the
amount of 20.69%; followed by plantation, with the amount of 9.18%; the construction sector, with
the amount of 5.36%; and the agricultural sector, with the amount of 3.065%.
The number of heavy equipment cannot be accurately identified because there is no rule of equipment
registration. The strength of local owners is their ability in determining the economical tariff and in
controlling targets to attain definite results. Other problems of heavy equipment in Indonesia are its
procurement procedure; its terms, which vary from one tender to another tender; its demand is not
fixed or temporal, small in volume, and highly varied; its information investment plans are segmented
by location; its treatment from autonomous regions, for example there is one region that treats the
procurement of heavy equipment with minimum purchase cost, not on lifecycle of heavy equipment.
Stakeholders of heavy equipment supply chain
The term of a supply chain is used to refer to the overall group of actors or persons, such as a
producer, a distributor, a user, as well as a legal entity. Heavy equipment supply chain encompasses
the sequence of operations which starts from heavy equipment suppliers, producers, distributors to
purchasers and users of heavy equipment at the level of the service. Stakeholders in a heavy
equipment supply chain consist of upstream and downstream actors. The processes occurring in the
52

chain of heavy equipment between actors is shown in Figure 1. The map is based on the identification
of all of the major links in the heavy equipment chain. It distinguishes which are located domestically
and externally, including business services participating in the chain to flow heavy equipment to be
available for use.
Infrastructure
Construction
Component
Supplier
Domestic
Producer
DOWNSTREAM
Owner
UPSTREAM
Sole
Agent
Non-
Infrastructure
Construction
Part Trader,
Maintenance
Supplier Distributor Owner Services Users Producer
Rentals
Recondition
Auction and
Leasing
Contractors
Importer
Imported
Component
Second Hand
Importer
Mining,
Forestry,
Agro, etc.

Figure 1. Map of heavy equipment supply chain

The upstream side of the supply chain produces and sells heavy equipment to downstream actors. The
upstream members include suppliers, manufacturers, and distributors. The flow of upstream supply
chain is started from part and component suppliers. The production element of supply chain begins
when a manufacturing innovates to create a heavy equipment product.
Manufacturers act as producers of heavy equipment that is made of raw materials and other
components supplied by the suppliers. Most of producers are located overseas. The producers directly
send the products to local dealers where buyers are able to purchase them. In the case of no existence
of local producers, the dealers import heavy equipment from the overseas producers. Most producers
guarantee the availability of heavy equipment to be sold. With this system, importers and distributors
are more secure to have stock.
The heavy equipment industry in Indonesia is highly competitive and concentrated. Indonesia has four
main producers of heavy equipment accounting for around 96% of total production volume with
products including excavators, bulldozers, motor graders, and dump trucks. The four top market
shares are PT Komatsu Indonesia producing heavy equipment with the brand of Komatsu (43%), PT
53

Hitachi Construction Machinery (HCMI) with the brand of Hitachi (21%), PT Caterpillar Indonesia
(previously PT Natra Raya) with the brand of Caterpillar (19%), and Kobelco with 13% market share
(Popp, 2013). There is another producer PT United Tractors Pandu Engineering which produces
forklifts with the brand of Patria. Komatsu's production capacity is 3,600 units a year of heavy
equipment including 240 units of dump trucks. PT Caterpillar Indonesia is 80% owned by Caterpillar
from the United States and the rest is owned by PT Marga Tiara Trakindo. The sole agent of
Caterpillar in Indonesia is PT Trakindo Nusantara. HCMI produces excavators, the types of heavy
equipment with the largest market in the country.
There are two associations related to the upstream side of heavy equipment supply chain, namely:
Heavy Equipment Manufacturer Association of Indonesia (HINABI) and the Indonesian Association
of Heavy Equipment Companies (PAABI). HINABI is an association of Heavy Equipment
manufacturers of Indonesia. It was established in 1983, along with the initiation of local production in
Indonesia. HINABI consist of various industries in the field of heavy equipment manufacturing, such
as: for construction, mining, road construction, handling equipment and components as well as
attachment for manufacturers.
The missions of HINABI are to develop the national heavy equipment industry supported by reliable
local industries and reliable human resources. The main objectives of HINABI are to facilitate
communication and exchange information among members with regard to any kind of common issue
for the benefit of each member and to become a strategic partner to government and other related
institutions or organizations in setting up a favourable business and industrial environment for the
development of heavy equipment industry in Indonesia.
The Indonesian Association of Heavy Equipment Companies (PAABI) is one of sole agent
associations of heavy equipment which is subordinate to the Ministry of Commerce. PAABI has
twenty-three members, all of which are brand-holding sole agents. Ten members with the highest
sales are PT Trakindo (Catterpilar), PT United Tractor (Komatsu), PT Hexindo Perkasa (Hitachi), PT
Daya Kobelco (Kobelco), PT Traktor Nusantara (Sumitomo), PT Intraco Penta (Volvo), PT Tantindo
Sumitomo (Sumitomo), PT Gaya Makmur (XMG/ Santui), PT Oscar Mas (Hyundai), and PT
Kobexindo (Daewoo). The types of machine that are the most widely marketed are excavator, dozer,
wheel dozer, back hoe loader, compactor, articulated dump truck, asphalt finisher, motor grader,
crane, and forklift.
The downstream members are owners, services, and users that directly own, use, and maintain heavy
equipments. Owners are entities that buy equipment. Users are individuals, contractors, miners,
government agencies, and planters that use equipment. Owners and users might be the same entity in
a particular sector such as mining and agriculture that uses the equipment until its lifecycle ends. In
54

the construction sector, the contractors often rent when there is a need to deploy heavy equipment for
specific products. The construction sector requires a large variety of heavy equipment types but with
small volume of work.
The other actors in the downstream side are reconditioning companies and re-manufacturers that
import and modify second-hand equipment from overseas. The needs of used heavy equipment that
have been reconditioned are continuously increasing, particularly for the project under Rp.10 billion.
Reconditioned heavy equipment sales in 2012 were estimated at 5,000 units. The estimated demand
for reconditioned heavy equipment will grow by 10% over the implementation of various
infrastructure projects in the local regions as well as upon the improvement of the performance of the
plantation and mining sector.
One of the dominant associations in the downstream side of the supply chain is the Association
Management Company Heavy Equipment / Construction Equipment Indonesia (APPAKSI) or the
Association of Indonesian Construction Equipment Hire and Rent. APPAKSI was founded in 1987,
which was originally a partner of Public Works Department (PU) in Indonesias development
program, especially in the provision of heavy equipment and construction tools. APPAKSI members
generally lease heavy equipment or construction equipment to projects on an hourly, a daily, or a
periodically basis although some also lease equipment on a long-term contract basis. The projects
undertaken vary, such as projects in the field of construction, infrastructure, forestry, agriculture, and
mining.
Heavy equipment financing is one of the services that support the purchase of heavy equipment.
Seeing the increasing of heavy equipment market, financing heavy equipment business is still quite
large. Currently, the business opportunities that are potential and still promising are the heavy
equipment sales in coal mining and plantation sectors. Thus, business people are optimistic that heavy
equipment industry will continue to grow. Low and stable interest rates have encouraged the growth
of leasing businesses (heavy equipment leasing). Approximately 90% of the sales of heavy equipment
are made through multi-finance services. Although the size is still about one-third of the total multi-
financing, the growth of multi-finance services is relatively high, or higher than that of consumptive
financing business, which is mostly automotive financing. In 2011, the leasing financing business
grew 40%, much higher than consumptive financing, which grew by 27%. Currently, the interest rate
in leasing business is in the range between 14% and 15%. In the future, the trend of interest rate in
leasing business is estimated to remain stable due to the low interest rate policy that will still be
applied through the year 2013.
The entry of domestic and foreign investors in the era of free markets results in positive impact for the
heavy equipment financing business. Interesting issue is the financing/leasing of heavy equipment,
55

which so far has been handled by the leasing companies owned by several large companies. There has
been no leasing company that finances the leasing of heavy equipment with no attention to the brand
of heavy equipment. Some heavy equipment financing companies that are affiliated with major
companies are, among others: PT Chandra Sakti Utama Leasing, which is one subsidiaries of the Grup
Trakindo Utama, which finances the purchase of heavy equipment with Caterpillar trademark, and
other heavy equipment are sold by Grup Trakindo Utama; PT Komatsu Astra finance, as corporate
finance/leasing heavy equipment jointly control the entity (50:50) between Astra and PT Komatsu
Indonesia, with a focus on the business of financing Komatsu heavy equipment for customers in the
mining industry; and PT Arthaasia Finance as corporate finance/leasing of heavy equipment, which is
under Hitachi Capital Corporation.
Demand of heavy equipment
The characteristics of heavy equipment for production have made the equipment depend on the
development of other sectors, including the regulatory. The sales of Komatsu branded heavy
equipment mostly come from the mining sector, reaching 62% of the total sales. In general, when the
economy is growing, the sector such as industry, construction, and plantation will also grow, which
then will create a new growth in heavy equipment needs. Demand for heavy equipment could rise if
commodity prices, particularly from the mining sector, are projected to improve. If there is a
contraction, then the demand for heavy equipment will decrease. However, in general, demand for
heavy equipment experiences fluctuative trends of growth. One thing that makes the trends are
increasing is the growing needs of energy such as oil palm, oil, and gas in the country. For example,
the steadily annual sale growth of more than 40 percent has been booked over the past five years by
PT Intraco Penta, the main distributor of Volvo heavy equipment. This example shows the dynamic of
the Indonesian market.
Demand for heavy equipment in Indonesia is predicted to continuously increase if the growth of the
construction, forestry, agriculture and mining sector increases. The main buyers of heavy equipment
are the mining sector accounting for 55%, the agro industry for 15%, the forestry sector for 10%, and
the construction sector for 20% of the total sales. The demand of heavy equipment and capacity of
production over the period of 2008-2015 is shown in Figure 2. According to HINABI, domestic data,
regarding the production of heavy equipment and the level of sales, indicate that the previous sales of
heavy equipment in 2012 is projected to increase by 10% to 15% to reach 17,000 units, much higher
than the projected figure in the range of 15,000 units in 2011. While the capacity of national heavy
equipment industry only reached 9,500 units, the gap shows the number of 15,658 units. This means
nearly 62% of the national heavy equipment demand is met by imported production. This is
reinforced by the high level of competition in the global market that is caused not only by heavy
excess capacity in developed countries (global excess capacity) but also by weak demand (especially
56

Europe and China). It is expected that more imported equipments that will enter the Indonesian
market when the imposition of tariffs is at zero level.

Figure 2. Demand versus capacity and production trends of construction and mining heavy equipment

However, demand in 2012 experienced a decline. PT United Tractors Tbk (UNTR) feels there is
sluggish in the heavy equipment business. During 2012, the supplier of Komatsu heavy equipment
only sold 6,202 units of heavy equipment. In fact in 2011, a subsidiary of PT Astra International Tbk
is able to sell as many as 8,467 units of heavy equipment. In fact, when turned into years, demand for
heavy equipment from UNTR has not improved. The number of sales during January 2013 was only
409 units. However, in the same month in 2012, UNTR was able to sell 617 units. Indeed, UNTR
sales recorded in January 2013 was the highest since October 2012. The rising sales of heavy
equipment in January are because there were consumers who plan to purchase a new product at the
end of last year. During the period from October 2012 to December 2012, they were only able to sell
747 units or an average of 249 units per month.
There are at least three factors that caused heavy equipment sales drop significantly in 2012. First was
that commodity prices weakened and was not as bright as the previous period. Consumers were more
careful with weakening commodity prices that occurred. This made customers reduce ordering heavy
equipment. Then the policy of restrictions on exports of minerals that make many miners could not
sell products directly to overseas. Slow contribution in the field of mining equipment sales began,
dropping to 15%. In addition, the competition in the heavy equipment industry was also higher. There
57

were more players or distributors of heavy equipment that were able to offer competitive prices,
especially in small machine type with the size of 20 tons.
Seeing the business prospects, players have prepared strategies to take advantage of every opportunity
for expansion such as by expanding their types of products, opening new branches, launching
innovation and improving after sales services. A number of world class heavy equipment producers
began to see the potential market in Indonesia. According to the Indonesian Association of Heavy
Equipment Companies (PAABI), imported products have a 45% share of heavy equipment market in
the country. Locally assembled products still have the majority share of 55%. The association
predicted that next years imported products will likely increase its market share to 50%. An official
of the Directorate General of Transport and Telecommunications and Informatics equipment said
there are a number of worlds large heavy equipment companies that have built their factories in
Indonesia, such as: Sumitomo Group of Japan, Doosan Group of South Korea, and Sany Group of
China). There are also other Japanese investors that plan to relocate their heavy equipment factories
from abroad to Indonesia.
The growing market of heavy equipment has been utilized by business players in the heavy equipment
industry, such as: PT Kobexindo Tractors, PT United Tractor Indonesia, and PT Trakindo Utama, PT
Hexindo Adiperkasa, and distributors of heavy equipment. Currently, the biggest consumer of heavy
equipment in the country is the mining sector, especially coal mining companies. The business players
also see potential market in the sector construction and other agricultural industries, which are
predicted to expand in the coming years.
In the near future, the potential demand of heavy equipment stems from the construction sector.
According to Danang Parikesit, special assistant to the minister, Indonesians demand for heavy
equipment for mining, plantation and construction, will increase from about 42,000 units in 2012 to
50,500 in 2013 (The Jakarta Post, 2013). The value of construction contracts in the country is
projected to increase to $40.3 billion in 2013. International suppliers remain upbeat about the future of
the market, especially as demand from the construction sector has started heating up after the launch
of the acceleration and expansion of Indonesian economic development (MP3EI) last year, which
needs more than US$460 billion investment in infrastructure alone within the next 10 years. The
master plan has been complemented with President Regulation Number 26 Year 2012 about Blue
Print of National Logistics System (Sislognas).
Supply of heavy equipment
There are various types of heavy equipment produced in Indonesia. The first category is related to
construction and mining equipment, such as: hydraulic excavator, dumb truck (off high way), and
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bulldozer. Second, equipments for road construction are vibrating roller compactor, and static
pneumatic tire roller. Others include special equipment (towing tractor), engineering product (special
attachment, mining, and oil applications), component (fabrication component, casting component,
forging component), and remanufacturing components of heavy equipment. Komatsu has the largest
types of products, such as: excavators, bulldozers, motor graders and dump trucks. The type of
bulldozer mainly weighs 20 tons although the factory could produce a 45-tons excavator and a 28-tons
bulldozer. A new product of a 20 ton excavator, PC 200, was offered wit a price of US$ 111,000 or
around IDR 1 billion. The excavators have been equipped with KOMTRAX (Komatsu Machine
Tracking System), which has website, which could be monitored at any time and any place. Natra
Raya, the brand holder of Caterpillar, produces excavators, bulldozers and motor graders. The
Caterpillars excavator of 320C type is the competitor of Komatsus 20 ton excavator of PC-200 type
in the market.
Due to the sensitivity in demand condition of other sectors, production volume of heavy equipment
has a high fluctuation from time to time. HINABI monitored the total production of four main
construction and mining equipment, namely: hydraulic excavator, motor grader, wheel loader,
bulldozer, and dump truck as shown in Figure 3. Among the types of heavy equipment assembled in
the country are excavators, bulldozers, motor graders, dump trucks, and forklifts. Excavators
dominate the country's production of heavy equipment. In the first half of 2010, the production of
excavators totalled 1,324 units or 53% of the country's total production of heavy equipment.
Bulldozer production was 23% of the country's total production of heavy equipment or 2,495 units.

Figure 3. Construction and mining equipment production

2145
2148
1494
3195
3717
1258
3115
5229
4860
70
114
148
246
282
35
15 0
0
0
0
0
581
866
864
1222
1680
114
1430
1853
1506
17
116
112
126
232
107
146
271
11
0
1000
2000
3000
4000
5000
6000
7000
8000
2004 2005 2006 2007 2008 2009 2010 2011 2012 (3Q)
P
R
O
D
U
C
T
I
O
N

V
O
L
U
M
E
Hydraulic Excavator Motor Grader Wheel Loader Bulldozer Dump Truck
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For the period 2004 - 2008, production volume of heavy equipment was steadily increased. However,
heavy equipment industry was badly hurt by the global financial crisis resulting in a sharp fall in the
country's production of heavy equipment to 1,814 units in 2009 from 5,914 units in 2008. The main
producers of heavy equipment in Indonesia, such as: Komatsu, Caterpillar, and Hitachi suffered a
setback. Many orders were cancelled since the projects, mainly construction and property, that needed
the equipment were also cancelled. The main problem was difficulty in securing funds from lenders
which tended to be more cautious and selective.
The condition, however, changed for the better in entering 2010. In the first half of 2010, the country's
production of heavy equipment reached 2,495 units exceeding the production of 1,814 units
throughout 2009. The demand for heavy equipment surged again to become 4,691 in 2010. Indonesia
was among the few countries recording a positive growth in 2009 with a sustainable growth that was
driven mainly by the consumption sector of the domestic market. In addition, the demand for coal
rose again, especially from China and India, which recorded high economic growth amid the global
depression. The price of crude palm oil also rose, causing the expansion of oil palm plantations that
will need heavy equipment.
HINABI noted that production of heavy equipment in 2012 reached 7.947 units. This volume
increased by 8.6% compared to 2011, whose volume was 7.350 units. However, the production target
of 10,000 units was not materialized in 2012. Most of the sale contribution came from the mining
sector. Manufacturers of heavy equipment sales declined due to the weakening of coal prices. Many
corporate clients terminated the contract on fleet tractor equipment production because the mining
companies cut their production. For example, the sales of heavy equipment of United Tractors in
October 2012 fell as many as 19.6% to 5,704 units compared to the same period in 2011, whose sales
were as many as 7,097 units. Heavy equipment sale contribution of the mining sector reached 55% of
the total sales by the end of October 2012. This figure is down from the same period the previous
year, in which the heavy equipment of the sector contributed 68% of total sales. The increase in heavy
equipment sales contributed only to two sectors, namely: construction and agricultural sectors. The
contribution of the agricultural sector rose from 8% to 24% by the end of October 2012, while the
construction sector rose from 5% to 15%. On the other hand, the contribution of heavy equipment in
the forestry sector remained at 6% of the total sales.
The basic materials for heavy equipment imported by the country include centre brackets, monitor
panels, engines and hydraulic parts. The heavy equipment components, such as: cutting plates, tires,
batteries, and under carriage parts have been produced domestically. The products of heavy
equipment industry in the country had a local content ratio of 30%-50% in 2009. In 2010, the local
content ratio is to be increased to 50%-60%. In 2011, excavators had a local content of 50%, dump
trucks 30%, bulldozer 45%, motor graders 40%, and forklift 40%.
60

Ministry of Industry plays a key role to support the upstream supply chain of heavy equipment. Heavy
Equipment Industry Development Policy and the components associated with the development policy
of the national heavy equipment industry, firstly, have to improve the industrial components and sub-
components of heavy equipment in the country, to increase the local content, to improve workforce
skills and competencies, and to develop local raw materials to meet the required specifications. The
second policy relates to the nationwide program of heavy equipment industry to facilitate the
provision of incentives, such as government borne import duties (BMDTP) for the import of raw
materials in order to improve competitiveness, cooperation in the field of technology among
academics, R & D Centers and technical assistance from abroad for the heavy equipment and
component sector, and running training in the field of welding and fabrication to industrial
components and sub-components. The next policy relates to the program of coaching sub contractors
(particularly the SMEs), periodically conducting meetings between the subcontractors and Hinabi
members, conducting an exhibition of components that will be localized, conducting various meetings
with small and medium industries while acting as a facilitator between the sub-contractors of raw
materials, being active in conducting meetings between suppliers and banks, and being a facilitator
between the sub-contractors and banks.

ANALYSIS
One of the highlights is the issue of supply chain readiness of Indonesia to support its infrastructure
development. As we know it, Indonesia has lagged far behind in the infrastructure since the economic
crisis of 1998. Indonesian infrastructure spending perched in the range of 3-4%, whereas to maintain
6% economic growth, the infrastructure investment required minimum of 5% of gross domestic
product. Lately, attention to infrastructure sector has improved. Three ministries are responsible to get
a better budget allocation for the infrastructure. They are Ministry of Public Works, Ministry of
Transportation, and Ministry of State Owned Enterprises. As an example, in 2013 the budget
allocation for infrastructure development of Ministry of Public Works is about IDR 79.55 trillion or
increased 21.43% compared to IDR 62.5 trillion in the previous year of 2012.
Focused group discussions and interviews were conducted to get the issues related to the readiness of
the supply chain for heavy equipment in the construction of infrastructure. The issues collected were
then analyzed to know the level of interest and their priorities. After that in the FGD, TOWS were
analyzed, including the determination of the strategy for preparing the supply chain of heavy
equipment to support the infrastructure construction sector.
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Table 2 describes the diagram of Strength, Weaknesses, Opportunities, and Threats Analysis. This
diagram explains how Strength, Weaknesses, Opportunities, and Threats analysis can be applied to
key planning areas in heavy equipment supply chain. The objective of heavy equipment supply chain
in the construction of infrastructure is expected to increase construction productivity, efficiency,
safety, and reduce negative impacts on the environment (eco-operations). The main concerns of heavy
equipment supply chain are about the concept of utility through mobility and rejuvenation (new
equipment investments).
Table 2. TOWS Analysis
Components of TOWS
Analysis
Opportunities (+)
O1: Increase in
infrastructure investment
O2: Government
reformation on infrastructure
regulation
Treats (-)
T1: Insufficient heavy equipment
T2: Short term demand
T3: Burdensome import
procedure of special equipment
Strengths (+)
S1: Owners with local
knowledge
S2: Associations of
actors
S1O1: Develop network
amongst actors (S1)
S1T1: Provide incentive for
dedicated construction
equipment (S6)
S2T3: Develop import procedure
of special equipment (S7)
Weaknesses (-)
W1: Limited financing
scheme
W2: Limited demand
and equipment
availability information
W3: No standards in
quality, catalogue, and
technology
W4: Lack of competent
operators and
mechanics
W1O1: Develop effective
financing scheme (S2)
W2O2: Develop monitoring
system of equipment state
(S3)
W3O2: Specify standards of
equipment (S4)
W4O2: Develop cooperation
with education and
certification institutions (S5)
W1T2: Promote multiyear
projects (S8)
W2T2: Develop monitoring of
incoming and ongoing projects
(S9)
W2T1: Develop cooperation
with suppliers of energy, parts,
and tires (S10)

By using TOWS analysis of internal factors, there are several strengths in the heavy equipment
industry. The first is that in general the machinery owners are specialized in the construction field
(S1) in addition to the supply chain actors that have heavy equipment associations (S2). The tool
owners have a good knowledge of the work area in Indonesia. They can do better tool mobilization
and planning with more efficient ways of working in accordance with field conditions. Other strengths
are the presence of the association of heavy equipment owners in fighting the availability of heavy
equipment that is economical and safe.
Meanwhile, there are still some weaknesses, namely: financing pattern (W1) and information about
the availability of heavy equipment is still limited (W2); standards of technology, safety,
environmental and catalogue still do not exist (W3), and lack of competence and composition
operators and mechanics (W4). The problems of financing/leasing heavy equipment, so far are
handled by the leasing company owned by several large companies, so the financing / leasing is only
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done on a few specific heavy equipment, with a tendency to prioritize heavy equipment with the
trademarks belong to the large company themselves. The decline in sales in the mining and plantation
sectors is mainly caused by the difficulties in securing loan funds from banks, which have become
more cautious in providing loans. Lenders are more cautious after the huge traumatic experience of
non performing loans following the 1998 monetary crisis.
The other drawback is the difficulty to detect the information request on the use of heavy equipment
in the construction sector. Certainty on usage needs cannot be planned in the long term because it
depends on the time of tender. Meanwhile, the buyers of new tools in the construction sector are likely
to wait for a new stable state than make a purchase commitment. The absence of standards is also a
weakness in the heavy equipment supply chain. The life span of a machine is usually five years,
during which the machine may be used for other purposes, such as agriculture and plantations (agro)
before it is used for construction purpose. For example, there is no standard in the use of second hand
heavy equipment as far as the technical, safety, or gas emissions are concerned. The weakness in
standardization also includes the lack of understanding on green infrastructure requirements. Europe
and China's economic slowdown has resulted in the rush of promotions and offers on heavy
equipment from abroad. This raises the potential harm to consumers when there is no after-sale
guarantee, and there is a circulation of substandard products. The last downside is the lack of
operators who have competence in the operation and the scarcity of certified mechanics for the
maintenance of heavy equipment.
From the external factors, there are several opportunities that have increased investment growth (O1)
and the emerging regulations that facilitate the planning, implementation and financing construction
projects (O2). But there are also threats such as: lack of heavy equipment to infrastructure
construction activities (T1); demand for construction is not fixed, short-term, and the criteria of tender
are not transparent (T2); multiple taxation (T3); and the troublesome of specific import procedures of
heavy equipment (T4). The first threat will hinder construction work when the machine is not
available. The amount of heavy equipment can be sufficient, but at a peak period such as the last
quarter of the year at the end of the project, they often have to wait for the heavy equipment that is
being used in another project. In addition, the construction sector only uses 20% of national heavy
equipment, and the types of the heavy equipment are highly variable. Heavy equipment in the
construction sector has less attention than that in other sectors, such as in the mining sector, forestry,
and agriculture. In the field, mobilizing specific tools is not an easy matter because of the limitations
of Indonesias ports or the places to perform disassembly or assembly. Poor road infrastructure to the
project site is a high cost economy. The threat of inadequacy in heavy equipment also occur in the
preparedness of managing heavy equipment for handling a major disaster considering Indonesia lies
in the ring of fire, which is vulnerable to disasters.
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The second threat is a matter of uncertainty and lack of continuity of the project that results in low
utilization of heavy equipment. The prediction of demand for each type of equipment is even more
difficult. This will be detrimental to owners who do not earn enough revenue to cover the equipment
purchasing and operating cost. According to the Ministry of Public Works, 87% of Construction
Services Agency (BUJK) is qualified as small and general ones. The ability to have its own heavy
equipment is very limited. Likewise, the number of BUJKs, which is specialized in heavy equipment,
is still rare. Heavy equipment rental business is also underdeveloped. Moreover, the guarantee of
heavy equipment supply from subcontractors or leasing has not yet been included to be one of the
assessment factors in the construction bidding process.
The third threat is considered to be the biggest blow for the owners of heavy equipment because they
are required to pay a double tax. In the normal course of business, the owners of heavy equipment are
mandatory tax payers of import duty of their heavy equipment and of the income they earn from
leasing their heavy equipment. Tenants or project owners, unlike the owners of heavy equipment, pay
value added tax. However, since the issuance of Law No. 34 Year 2000 on Regional Taxes and
Regional Retributions, heavy equipment and large tools are classified as "Vehicles". Consequently,
some local governments then issued a law on the imposition of road tax for heavy equipment.
Lampung province is the first one that implemented such a law in 2002. Billing road tax for heavy
equipment has also been implemented by the Government of East Kalimantan in early 2005. Not all
heavy equipment is in operation and settled in one project, especially for short-term rental of
construction heavy equipment. Such heavy equipment always moves from one region to another
region. Hence, the imposition of local taxes will be overlapping and multiple.
The fourth threat relates to project postponement because there are no tools for specific jobs, such as
dredging for beach and underground construction. This certainly will raise an expense if purchasing a
new machine is made because the purchased tools will be taxed. On the other hand, a large project is
required to have qualified tools to do its work. Therefore, it is expected that a tax-free for a specific
type of heavy equipment is given.
Based on TOWS analysis, the strategic initiatives can be divided into four groups: SO strategy (to tap
opportunities with existing strength), ST strategy (to avoid treat with existing strength), WO strategy
(to tap opportunities by reducing weaknesses), and WT strategy (to avoid treat by dealing with current
weaknesses). First, ST strategies develop a network of cooperation among supply chain actors of
heavy equipment (S1O1): construction supply chain membership requirements; facility consolidation
(WEB or cloud computing) that leads to auction, lease, sale and purchase; bid documents on the basis
of supply chain support for heavy equipment.
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Second, ST strategies provide incentives for heavy equipment for construction (S1T1): duty-free
mobilization, fuel subsidies (subsidized diesel fuel, as long as the project goes according to hours
worked), the distribution facility to the site of work (assembly between the harbours); and develop
procedures for the import of specialized heavy equipment, ease of importing specialized equipment
(S2T3).
Third, WO strategies develop effective financing scheme (W1O1): terms, interest rates, credit,
insurance, right to use, underwriting; develop a system of monitoring the status of construction
equipment (W2O2): Registration tool (registered), the use of GPS that is connected to the internet
portal; applying the standards of using the tools (W3O2): warrant of fitness (WOF), operators, safety,
environment, security maintenance (asset management), the catalogue of equipments, technical
standards for work (kind of tools that should be used for a specific job); developing partnerships with
educational and certification institutions (W4O2) such as upgrading competent operators and
mechanics, facilities and asset management, heavy equipment operator and mechanic training
facilities, safety and health training facilities.
Fourth, WT strategies apply a multiyear project scheme (W1T2); develop a project plan and monitor
the project (W2T2): certainty of information on the infrastructure of construction project (schedule,
location, and absorption); cooperating with energy suppliers, parts, and tires (W2T1).
There are ten initiatives to develop heavy equipment supply chain to support infrastructure
construction. They are outlined as follows: The first initiative is to develop a cooperation network
among supply chain actors of heavy equipment: membership requirements for construction supply
chain; facility consolidation (WEB or cloud computing) that leads to the auction, lease, sale and
purchase; bid documents on the basis of supply chain support of heavy equipment. One idea that
needs to be developed is a Smart Mobility, which is divided into three components, namely:
information tools, transporters, and the integration between the users and the owner of the machine
(e.g., Dudek and Stadtler, 2005; Liu et al., 2007).
Second, effective financing schemes (terms, interest rates, credit, insurance, right to use,
underwriting) are proposed to support the smooth procurement of new heavy equipment. This
initiative requires massive support from manufacturers and suppliers of heavy equipment so that
specialist and leasing business can attract more support from financing and warranty system.
The third initiative is related to the development of monitoring system on the status of construction
equipment: registration tool, database of heavy equipment supply, and the use of GPS should be
connected to the internet portal. Suppliers, both manufacturers and distributors, can provide
information related to the potential, the availability, the amount of sales and other related operational
65

construction equipment. Data base is also useful for heavy equipment mobilization in the event of a
natural disaster. The importance of such data base was proved when mitigating the disaster in Aceh in
2005.
The next initiative is to apply industrial standards of heavy equipment such as warrant of fitness
(WOF), certification of operators and mechanics, safety, environment, asset management, equipment
catalogue, technical work (equipment types that should be used for a specific job). Further
applications of this initiative includes eligibility of "green" heavy equipment for production,
improvement of operating efficiency (fuel saving and productivity improvement), improvement of
mobilization efficiency, and a reconditioning industrial development that meets the standards. Catalog
development of demand is also needed for the references on the use and development. In practice, the
capacity and the role of associations as well as a synergy in promoting standardization need to be
improved.
The fifth initiative is to develop partnerships with educational institutions and certification bodies in
terms of training operators and mechanics to be competent, developing training facilities for asset
management upgrades, developing training facilities for heavy equipment operators and mechanics,
and conducting safety and health training.
Sixth, providing incentives for construction heavy equipment, such as duty-free mobilization between
districts, fuel subsidies (subsidized diesel fuel, as long as the project goes according to hours worked),
providing work site facilities (assembly between the harbours), and tender terms that consider total
cost of ownership. These incentives are also intended to encourage the development of local capacity
in anticipating the increased demand and the improvements on the heavy equipment procurement
system. The strategic value of specialized subcontractors and rental businesses also needs to be
fostered by stakeholders. Nowadays, heavy equipment is used solely as a means of production in the
area of business and is not using subsidized fuel, but using industrial tariff fuel. Taxation should be
seen from the multiplier effect it creates, whereas in the production side, it is the products that should
be taxed, not the production equipment. The reason is that it will inhibit the production activity, which
in turn reducing the potential revenue from the economic activity. The elimination of double taxation
on the heavy equipment by more than one region can create a more conducive investment climate to
support economic growth in the region.
The seventh initiative is to develop procedures for the import of specialized heavy equipment by
simplifying the procedure of importing specialized equipment. The next important initiative is to
promote multiyear project schemes and disseminate best practices of multi year project schemes that
include the effective procurement and utilization of heavy equipment.
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The ninth initiative is to develop a project plan and project monitoring plan. The government is
expected to provide the information about its medium and long term needs of heavy construction
equipment that are in line with its plan to increase investment in infrastructure development. Demand
analysis can be performed based on the sale data and the data of the use of heavy construction
equipment which are obtained from the data base development. Again, cooperation between
stakeholders is necessary to formulate the needs of heavy equipment. The last initiative is the
promotion of cooperation among the energy, spare parts, and tires suppliers for ensuring highly
reliable equipments.

CONCLUSIONS
In this study, an attempt has been made to develop a supply chain perspective of heavy equipment for
obtaining the main characteristics of heavy equipment procurement and utilization in supporting
infrastructure construction. There are two cycles of heavy equipment supply chain, namely:
procurement cycle and utilization cycle. The procurement cycle occurs when a company purchases
equipment. The utilization cycle is directly related to the use of heavy equipment by the users from
different sectors. Demand of heavy equipment is still dominated by the mining sector. The producers
of heavy equipment are sensitive to any changes in the mining sector. The fluctuative demand of
heavy equipment depends on the economic condition of the sectors that require heavy equipment. The
local supply of heavy equipment is still low compared to imported heavy equipment.
For the construction sector, future projection shows that there will be increased infrastructure
development to accelerate and expand the economic and social development. This implies that
effective and efficient construction supply chain is the key to infrastructure development. This
research indicates that heavy equipment supply chain determines the success of the infrastructure
construction. If ensuring reliable and efficient heavy equipment cannot be done, it can delay
infrastructure construction, thus incurring unnecessary costs. Supply chain analysis in this context is
relevant since this method is able to capture characteristics of heavy equipment supply chain and to
identify a policy scenario that covers a number of supply activities of heavy equipment services to
support infrastructure construction. Management of heavy equipment supply chain aims to achieve the
fulfilment of the required conditions for construction heavy equipment which is reflected in the
availability of sufficient, effective, efficient, and good quality of the equipment.
There are ten proposed policy development strategic initiatives to develop heavy equipment supply
chain for construction purpose. The initiatives still need to be verified in terms of their importance,
usefulness, and acceptance. To be good regulations or guidelines, the initiatives need to be drafted
67

with detailed explanation. The results of supply chain analysis show the importance of networking
amongst actors of heavy equipment provision, information system for monitoring the condition of
heavy equipment, and incentives for heavy equipment dedicated to support construction. Also, several
programs need to be implemented in the near future, including a pilot project related to heavy
equipment for infrastructure construction on certain economic corridor. The study on heavy
equipment registration and the accuracy of available heavy equipment, including the mobility of the
heavy equipment needs to be addressed. It also relates to communications system for the actors
involved that includes the incorporation of the concept of supply chain systems with energy supplies
and spare parts that are greener, cheaper, more efficient, and safer. The concept of supply chain heavy
equipment cannot be seen only as one sector. It must be seen as an ecosystem that is closely related to
the wider construction supply chain.
This paper is the first step towards a description of heavy equipment supply chain in Indonesia. This
relates to the discussion of supply chain management as a mapping of inter-organizational links in
facilitating ownership transfers and service transactions. Further research should be conducted. It
should explore collaborative systems that unify the supply chain members in providing excellent
service to the next sector, the role of government, the effect of the ASEAN Economic Community
(AEC) that creates free flows of construction services, and conflict resolution of different actors to
attain more efficient, effective, and fair relationships. This will eventually lead to the possibility of
achieving specific conditions that shape willingness to cooperate, of obtaining instruments for
sustaining collaborative efforts in matching demand with supply, and consequently of knowing more
on experimenting with the collaborative models.

ACKNOWLEDGEMENTS
This work was supported by the Ministry of Public Works Republic of Indonesia. The author would
like to acknowledge the following individuals for their contributions to this report: Tonny
Notosetyanto, Gatot Sudjito, Pratjojo Dewo, Mochammad Natsir, Yaya Supriyatna, Rusli, Suwanto,
Andias Mintoharjo, Achmad Fajar Hendarman, and others that participated in the key informant
interviews.

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70

Chapter 4
The Formulation of Sourcing Strategy Model at
Telkom Indonesia

Togar M. Simatupang and Ega Nugraha Putra
Indonesia

Abstract
Telkom is a state owned company that provides services in telecommunication, infotainment,
multimedia, and edutailment. Nowadays, the development of telco industry is increasing rapidly as a
result of the price war that has been created by several celuler operators. This condition has made
Telkom improve its approach to provide products and services so as to satisfy its customers. One
potential approach is to examine its procurement system that supports the customer services. The
main problem faced by Telkom is the uniformity of its procurement processes that tends to produce
undesired effects, such as less consolidation, inefficient procurement, unavilable performance
indicators, difficulty in terminating or continuing decision, and no coordination with the investment
committee. The purpose of this research is to offer sourcing strategy model that differentiates services
or technologies. The basic model is based on a portfolio approach that have two axes, i.e stratgic
impact and supply risk. Each service or technology can be identified in one of four quadrants,
namely: strategic items, leverage items, bottleneck items, and non-critical items. Each quadrant has
its own strategy. In the implementation (action) plan, several initiatives that need to be applied
include establishing a sourcing committee, preparing procerement system and procedure, and
implementation schedule.

Keywords: Sourcing strategy, Kraljic matrix, telco industry, procurement process, Telkom

Introduction
The rapid technological developments in this era have made technologies keep changing.
Consequently, both the consumers and entrepreneurs have to adapt to the changing technology
quickly. The rapid technological developments also require Telco industry to shape its future
71

customer services based on the advancement of technology in order to provide better services to its
customers. Therefore, effective and efficient procurement of new technology needs to be conducted to
ensure customer satisfaction.

Today many businesses are starting to enter the telecommunication business. It is proved by the fact
that many mobile operators appear, such as xl, Indosat, Esia, Axis, and many others. This business
situation has resulted in a "price war" that causes consumers more confused. For that reason, the Telco
industry needs a sourcing strategy to ensure an efficient procurement process of technologies or
services. In relation with the procurement processes of technologies/services, the Telco industry has
challenges in how to provide relevant services to the needs of the community. These challenges are
mainly concerned with rapidly changing technologies, uncertain consumer demands,
application/technology acquisition, unstable economic levels, and many others. When there are fewer
competitors in the telecommunication market, the revenue will continue to increase because the
market share is still large. Consequently, when income increases, both the cost and margin business
will also increase. Implementing a sourcing strategy may result in efficiency by way of lowering the
expenditure costs of procurement of goods/services, thus widening the proft margin.

Under the supply chain management cycle, it can be seen that the market identification, business
planning, planning and engineering design, and the sale are initially conducted before they are used
for funding the market identification itself. Under this cycle, there is the procurement stage, which is
important (Holcomb and Hitt, 2007). Therefore, an efficient and effective procurement system should
be conducted so that the cost, which is in accordance with the companys budget allocation, can be
controlled by the company. However, a uniformed procurement process of goods or services is often
performed by Telco companies. Along with the becoming more complicated technological
developments, Telco companies no longer use the uniformed procurement process of goods and
services. Because of this fact, this research is conducted with the aims are not only to specify a
sourcing strategy model that is able to classify different items, such as services and technology, to be
procured but also to develop appropriate strategies for different categories.

A case study conducted by a national telecommunication company known as Telkom Indonesia was
chosen. In this case study, the importance of formulating a sourcing strategy was emphasized.
Nowadays, Telkom is conducting procurement processes for its capital and operational expenditures.
In doing so, it requires a sourcing strategy model that streamlines its procurement processes to
achieve cost effective services to its customers. The model is expected to enable Telkom in creating
its better competitive advantage compared to its competitors, thus keeping its leading position in the
Telco business in Indonesia.

72

PT Telkom Indonesia
PT Telekomunikasi Indonesia, Tbk. (TELKOM) is the largest provider of network services and
telecommunications in Indonesia. Telkom is a semi-privatized, majority state owned company.
Telkom is now serving millions of customers nationwide and providing a strong portfolio of
information and communication services - including fixed line, fixed wireless phone, cellular phone,
data and internet, and network and interconnection services - directly or through its subsidiaries.

At the end of 2012, Telkom's customer base has grown to 16.6% compared with the same period last
year to become 121.5 million subscribers. Significant increase of number of subscribers also recorded
on broadband service. Number of broadband service subscribers increases 42.5% to be 15.9 millions
meaning Telkom have the largest broadband subscribers in Indonesia. While fixed telephone also
increases 4.0% to be 8.8 millions. Recorded also growth of BlackBerry subscribers to 68.7% to be
5.1 millions. Flash subscribers also grow fast at 45.6 % to be 8.6 millions and Speedy subscribers
become 2.1 millions. To meet the increasing demand for seamless connectivity and mobility, Telkom
has expanded its business portfolio that includes TIMES - Telecommunications, Information, Media,
Edutainment, and Services (Hernady, 2010) and the development of Indonesia Digital Network
(IdNet).

The number of employees of Telkom is currently about 25,683 people. Telkom also initiated Telkom
Corporate University to develop Telco human resources in order to compete at international markets.
The net profit of Telkom was IDR 12.85 trillion in 2012 increased by 17.24% from IDR 10.96 trillion
in 2011. The total revenue of this company was about IDR 41.39 trillion in 2012 or grows 2.91%
compared with IDR 40.22 trillion in the same period in 2011. Such a revenue increase is caused
mainly by additional number of cellular subscribers and high sales in data service, internet and
Information Technology (IT) reaching IDR 27.62 trillion and revenue interconnection reaching IDR
4.27 trillions. The main revenue was composed of 53.65% from fixed-line cable subscribers.

Telkom has been adapting itself to the increasing development of technology in order to satisfy its
customers. Today, telecom operators are arising, which create a "price war" that makes consumers
confused in choosing a telecom operator. Telkom, therefore, must be able to perform the effective
procurement process so as to widen its profit margins, thus creating a competitive price with the best
quality (competitive advantage).

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Vision and Mission of Telkom
The vision of Telkom is "To become a leading Telecommunication, Information, Media, Edutainment
& Services (TIMES) Player in the Region". Telkom is trying penetrate the market of the Southeast
Asian, Asia, and the Asia Pacific region so that it becomes a leading InfoCom company.

Telkom has two missions. The missions are to provide TIME Services with an excellent quality and a
competitive price and to be a role model as the best managed Indonesian corporation. Telkom will
provide the best service to satisfy its consumers by providing competitive prices so as to become the
best company in serving the needs of its customers. The company has five Corporate Values (5C).
They are Commitment to Long Term, Customer First, Caring Meritocracy, Co-creation of win-win
partnership, and Collaborative Innovation.

Business Coverage
Telkom has developed innovative services in the fields of Telco, such as Information, Media,
Edutainment, and Services or TIMES. Telkoms focus on delivering TIMES services are as follows.
First, Telecommunication is Telkoms legacy business. Telkom has built its reputation on delivering
fixed wire line services, such as Plain Ordinary Telephone Services (POTS), fixed wireless
telephony, data communication services, broadband, satellite, leased networks and interconnection
services, and cellular telephone services through its subsidiaries, Telkomsel. Telkoms
telecommunication services have reached all market segments: individual customers, small and
medium enterprises (SME), and corporate customers. Second, Information services are being
developed by Telkom as one of its New Economy Business (NEB) models. These integrated
services are aimed at facilitating business processes and transactions, including Value-Added Services
(VAS) and Managed Application/IT Outsourcing (ITO), e-Payment, and IT enabler Services
(ITeS).

Third, Media is another Telkom business model that is developed as a part of NEB. The services
offered include Free To Air (FTA) and Pay TV to suit modern digital lifestyles. Fourth,
Edutainment is one of the core business models in Telkoms NEB, targeting the younger user market
segment. Telkom offers a broad range of services, including Ring Back Tones (RBT), SMS Content
and portals among many others. Lastly, providing services is one of the Telkom business models,
which is oriented to customers. The services include Telkom Customer Portfolio to Personal,
Consumer/Home, SME, Enterprise, Wholesale, and International Customer.

Business Situation
Currently, the role of the procurement of a technology/service is no longer under the authority of
Chief Purchasing Officer (CPO). It has undergone a transformation, where the role of procurement
74

has been transferred to the supply management. At this time, industry competition is very tight, so the
industrialists is focusing not only on the cost reduction but also on offering the highest quality
products. Therefore, a supplier with a good quality product, a good delivery time, and many others are
required. Telkom, as a company that has various products, also requires the procurement process that
have a competitive edge.

Position of Telkom in the spectrum of world class supply chain management
Currently, PT Telkom is one of the biggest players in the telecommunication industry, not only
engaged in the industry but also engaged in the information, media, and edutainment (TIME). It is
therefore necessary to supply management strategies to make Telkom move towards a better
development (IT & Supply Directorate., 2010).

Figure 1. The spectrum of world class supply chain management
Source: Telkom Master Plan 2011-2015

In Figure 1, it can be seen that supply chain management moves from the traditional to the integrated
management. Telkom wants its technology procurement systems/services to be able to move toward
the integrated management so that it can become a worlds leading telecommunication, information,
media, and Edutainment company. Supply management is a series of events, starting from the market
identification to the product reaches the consumers. Therefore, the supply management process plays
a very important role from the initial stage to the income earning stage. Teltkom in maintaining its
INTEGRATIVE SUPPORTIVE INDEPENDENT PASSIVE
No strategy, only
responding to the
requests from other
functions.

Adopting a new
technique, although it
is not in line with the
corporate strategy.

Supporting the
company's strategy
by implementing
new strategies
Full integration with
the company's
strategies, and
becoming part of a
cross-functional
team that develops
the strategies
The strategic role
The effectiveness
of cross-functional
teams
A strategic
contribution to the
business as the
basis for
performance
measurement
The involvement of
supply
management team
in the
development of
corporate strategy
In line functional
strategies
Moderate strategic
role
Purchasing
function as part of
the sales team
Carefully selected
and motivation
driven suppliers as
strategic assets
Continuously
monitored and
analyzed. markets,
products, and
suppliers
No functional
strategies.
Dominated by the
administration
activity
Focused on cost
reduction
Decentralization of
the purchasing
process
Limited
opportunities for
human resource
development
Limited in the use
of IT
No model of
continuous
improvement
Owning a functional
strategy, but not
aligned with the
corporate strategy.
Little strategic role
cost reduction
related Performance
Relying on the
working of cross
function
Awareness of top
management on the
procurement
contribution to
profit.
Awareness of top
management on HR
needs.
75

existence and in increasing its competitiveness should also consider its capability on good/service
procurement so that a more effective cost can be achieved.

The Telkom models of supply chain strategy
In the model of supply management strategy, a well reformulated strategy is required in which it
reflects the company's strategy and desire to achieve a strategic contribution toward the companys
competitiveness. In Figure 2, it can be seen that the supply management model requires three major
infrastructures, namely:
the organization with well-defined and integrated structures and functions either within or outside
the organization itself,
the competent human resources to manage the supply chain processes,
the sufficient information technology to support the execution of supply chain processes.

ACTORS RESULTS

Figure 2. Generic model of Telkom supply chain strategy
Source: Telkom Master Plan 2011-2015

The main processes of supply management in Telkom consist of:
the supply Management, which includes how suppliers are managed to contribute value-added
to Telkoms businesses in the long run,
the procurement strategy, which includes both procurement models and relationships with
suppliers, all of which are determined based on differences in the characteristics of the
technology/services required by Telkom,
the supply planning, which includes procurement planning process of technologies/services to
meet users needs,
Continuous Improvement

SUPPLY CHAIN
STRATEGY
PROCESS
Supply
Management
Procurement
Strategy
Supply Planning
Supply Delivery

Supply Chain
Performance
ORGANIZATION
HUMAN
RESOURCES
INFORMATION
TECHNOLOGY
76

the supply delivery, which includes procurement execution, the technology/services ready for
use by the users, and the process of construction projects undertaken by suppliers.

The final result of the above-mentioned processes is the creation of measurable and communicable
supply management performance on a regular basis. All processes in Figure 2 above require a
mechanism to perform a continuous improvement to keep a superior supply management
performance so as to create Telkoms competitiveness. The process of supply management strategies,
especially the sourcing strategy, greatly affects the efficiency of the company. Therefore, procurement
of technologies/services should be adjusted to the needs of Telkom.

Research Method
In conducting the improvement of procurement of technologies/services, the following things must be
done. The first step is to perform a search for alternative models of procurement of
technology/services that are able to provide solutions to the problems faced by Telkom. There are
many models that have been developed, among of which are Kraljic model (1983), Olsen and Ellram
model (1997), Elliott-Shircore and Steele model (1985), Hadeler and Evans model (1994), Gelderman
and Van Weele model (2003). Of the several alternative models, the Kraljic matrix is chosen in this
study because it best meets the needs of Telkom.

The reasons of choosing the Kraljic model are as follows. Telkom requires a model to classify
technologies/services so that strategies for technologies/services that are not merely based on value
can be made. Kraljic matrix has a model to classify technologies/services. The matrix has two
dimensions (risk and impact) that are in line with the needs of Telkom. Other models have different
goals from Telkoms needs, especially in sourcing strategy. Olsen and Ellram model (1997)
emphasizes on managing the relationships with suppliers, Elliott-Shircore and Steele model (1985)
emphasizes on classifying the financial value, and Hadeler Evans model emphasizes on the
complexity and value (Hadeler and Evans, 1994). All models are based on the Kraljic matrix, which is,
by far, the most dominant in the procurement strategy and is used by various companies in various
sectors (Canils and Gelderman, 2005; Carter and Narasimhan, 1996; Gelderman and Semeijn, 2006;
Gelderman and Van Weele, 2003; Lee and Drake, 2010). Kraljic matrix has an advanced matrix
containing the dimension of corporate power and supply market power with which the relationship
between the company and the market supply can be managed. Kraljic matrix is the foundation of the
strategy model developed by Gelderman and Van Weele (2003; 2005). Thus, by using Kraljic matrix,
Telkom can also develop a strategy from each technology/ service model that is developed by
Gelderman and Van Weele (2005) and Canils and Gelderman (2005).

77

Based on the dimensions of the strategic impact and supply risk impact, the hierarchy of the factors
that can influence each dimension can be made. Next step is to perform a verification test on the
hierarchy to the three respondents and four technologies/services in Telkom. If the hierarchy of
factors does not pass the verification test, the factors that influence the dimension of strategic impact
and supply risk have to be changed. However, if the hierarchy of factors passes the verification test, a
set of questionnaire of these factors shall be made to test the validity of the eleven
technologies/services, namely: Consultant, Licensing, Insurance, IPTV, Metro E, Speedy, OSP
Jarakses, Tera Router, Stationery (ATK), Satellite, and MSAN.

A validation test towards the result of the questionnaire to the eleven technologies/services shall be
performed by comparing the questionnaire against the initial hypothesis of the expertise of Telkom.
If it does not pass the validation test, the factors that influence both the dimension of strategic
impact and supply risk have to be changed. However, when it passes the validation test, the
procurement strategy (sourcing) that adopts the Gelderman and Van Weele model (2005), consisting
of nine strategies, can then be made. This strategy shall be applied to the eleven technologies/services
that have been classified and have passed the validation test.

Furthermore, a follow-up action can be done towards each available strategy so that it can be
developed and can resolve any problem that exists in Telkom. A comparative study needs to be done
to determine how the competitors use certain models to conduct the procurement of goods /services
from which Telkom can obtain meaningful inputs.

Findings
Root Cause Identification
Currently in Telkom, a uniformed procurement process of all technologies/services is employed,
which has caused the following things:
1. The absence of consolidated procurement. In the absence of consolidation on any procurement,
any technology/service procurement budget is made uniformed, thus technolog/service
classification is not conducted. This will lead to inefficient procurement costs, because any
technology/service shall be generalized regardless of whether it gives big or little strategic impact.
2. Inefficient procurement processes. Applying the uniformed procurement of all
technologies/services has resulted in inefficiency, because it cannot reduce the cost of
technology/service procurement, moreover if the procurement does not give enough big impact.
78

3. The absence of performance measurement. By applying uniformity, the efforts made to any
technology/service will be considered the same regardless whether it has given either big or little
impact, thus making the performance measurement on the technology/service unfair.
4. Unable to determine which technology/service to be terminated or exploited. Telkom will have
difficulty in determining which technology/service must be terminated or developed. Technology
that must be terminated is the one that requires a big procurement cost or a substantial risk and
does not have strategic impact. Conversely, technology/service that must be developed is the one
that incurs little cost, causes a small risk, and have considerable strategic impact.
5. Lack of coordination with the investment committee. The Investment Committee is in charge
of directing the team and overseeing the investment management team in applying investment
policies and day-to-day investment strategy. In Telkom, the Investment Committee will not
consider the aspects of technology/service procurement in its assessment, criteria setting, and
evaluation towards the implementation of any investment. Therefore, coordination from the
Sourcing Committee is needed so that the parties involved in the investment know the classified
procurement.

The root of the above-mentioned problem is caused by the uniformity of the technology/service
procurement that is employed by Telkom, resulting in the requirement of sourcing strategy that can
classify any procurement of technologies/services. This root problem gives negative symptoms. The
solution to this root problem is to find a method to classify the technology/service.

Portfolio Approach
The portfolio approach used in this study employs Kraljic matrix model. As for the basis of the
modified strategy or the recommendation, Gelderman and Van Weele approach (2005) is used. The
reason for using the approach of Gelderman and Van Weele (2005) is that it is because the Kraljic
matrix can be developed to determine the specific purchasing strategies for each quadrant. To identify
the impact of the factors of both the strategic impact and the supply risk dimension on the matrix,
three stages have to be undergone. The stages are the identification of the library (Lin, 1995; Roose
and Rydman, 2005), the identification of the first round, and the identification of the second round.
The verification of stage two and three was done to the four respondents, namely: the Assistant Vice
President Systems & Control (respondent 1), Manager Supply Management (respondent 2), Assistant
Manager Program & Schedule Review (respondent 3), and Assistant Vice President Supply Analysis
(respondent 4). Figures 3 and 4 are the final results of criteria development of the strategic impact and
procurement risks, including their hierarchical structure (Saaty, 1994).

79

Strategic
Impact
Competence
Factors
Economic
Factors
Image
Factors
The influence of
procurement of
technologies/
services on the
total of
purchasing value
(CAPEX /or
OPEX)
The influence
of technology/
service
procurement on
the increase of
value-added
services of PT
Telkom
The influence of
procurement of
technologies/
services on the
increase of the
excellence of PT
Telkom over its
competitors
The influence of
procurement of
technologies/
services on the
increase of service
diversification of PT
Telkom
The influence of
brand image in
the purchasing of
technologies/
services
The influence
of procurement
on the increase
of the current
revenue or on
the potential
revenue in the
future

Figure 3. Hierarchy of Factors of Strategic Impact Dimension

In Figure 4, it can be seen that the factors that influence the strategic impact dimension are as follows:
1. the economic factors (A), which is influenced by such sub-factors as:
the proportional level of procurement technologies/services to the total value of CAPEX
purchasing (A1),
the extent of the influence of the procurement of technologies/services over the increase
of PT Telkoms revenue (A2), and
the extent of the influence of the procurement of technologies/services over the increase
of value-added services of PT Telkom (A3).
2. the competence factor (B), which is influenced by such sub-factors as:
how important the excellence of procurement of technologies/services over the excellence
of the competitors procurement of technologies/services (B1), and
how big the procurement of technologies/services over the control of technologies
(diversifying Services) of PT Telkom (B2).
3. the image factor (C), which is influenced by such sub factors as:
how important the factor of the brand (brand image) in the procurement of
technologies/services is (C1).

80

Supply Risk
Technology
Characteristics
Environment
Characteristics
Technologica
l Innovations
Technology
Complexity
Product Life
Cycle
Supply Market
Characteristics
Substitution
degree of
supplier
Importance of
technical
capability
Supplier
Bargaining
Power
On-time and
budget
completion
The
substitution
degree
Long term
commitment
of supplier
Compliance to
regulation

Figure 4 Hierarchy of Factors of Risk Supply Dimension

In Figure 4, it can be seen that the factors influencing the supply risk dimension are as follows.

1. the characteristics of the technologies/ services (D), which include:
the degree of importance of considering technological innovations (D1),
the degree of purchasing complexity (D2),
the speed of changing of technology (product life cycle) (D3), and
the substitution degree of technologies/similar services (D4).
2. The supply market characteristics (E), which include:
the size of the bargaining power of suppliers (E1),
the substitution degree of similar suppliers (E2),
the existence of long-term supplier (E3),
the degree of technical and commercial competence of suppliers (E4), and
the ability of suppliers in completing an on time and in the right amount of budget (E5).
3. The environmental characteristics (F), which include: the degree of requirements for the
compliance with the government regulatory (F1).

Examples of Outsourcing Items

The eleven technologies/services that are tested are Consultant, License, Insurance, IPTV, Metro E,
Speedy, OSP Jarakses, Tera Router, Stationery (ATK), Satellite, and MSAN. Each item is described
as follows.
Stationery, which includes: the use of office stationery such as paper, pens, and others; the
objective is to support the activities of PT Telkom; OPEX: -; and having no direct revenue.
Satellite, which includes: buying a satellite of Russia /America /Europe; the objective, which is to
provide telecommunication infrastructures and secure voice services, data, and broadband;
CAPEX, which is trillion rupiahs; and having direct revenue in trillion rupiahs.
81

MSAN,which includes: buying service access node (MSAN) to respond the needs of Telkoms
broadband subscribers; the objective, which is to provide and secure Telkoms broadband
services; CAPEX, which is from tens of billion rupiahs to hundreds of billion rupiahs; and having
direct revenue in hundreds of billion rupiahs.
Consultant, which includes: providing consultancy for various needs, such as organizational
transformation; consulting, financial consulting, marketing consulting, and others; the objective,
which is to assist Telkom in addressing a specific matter which requires expertise; CAPEX,
which is from tens of billion rupiahs to hundreds of billion rupiahs; and having no direct revenue.
Insurance, which includes: the procurement of insurance of Telkoms asset, Satellite, Directors,
Employees, etc.; the objective, which is to protect Telkoms assets; CAPEX, which is in hundreds
of billion rupiahs; and having no direct revenue.
IPTV, which includes: the procurement of IP-based TV service payment; the objective, which is
to diversify services in the market; CAPEX, which is, at present, it is several billion rupiahs, and
it is predicted to be in hundreds of billion rupiahs in the future; and the current direct revenue is
zero rupiahs and is predicted to be in hundreds of billion of rupiahs in the future.
License, which includes: the procurement of license for Telkoms devices that have been
purchased; the objective, which is to secure the operation of devices that have been purchased;
CAPEX, which is from tens of billion rupiahs to hundreds of billion rupiahs; and having direct
revenue in hundreds of billion rupiahs although it has a potential lost opportunity.
Metro E, which includes: the procurement of infrastructure (service node) of Broadband for an
area; the objective which is to secure data and Broadband services; CAPEX, which is from tens
of billion rupiah to hundreds of billion rupiahs; and having direct revenue from tens of billion
rupiahs to hundreds of billion rupiahs.
OSP Jarakses, which includes: providing Telkoms network to either FO or Copper customers; the
objective, which is to secure Telkoms voice and broadband services; CAPEX, which is in tens of
billion rupiahs; and having direct revenue that relates to the RK or DLC in tens of billion of
rupiahs.
Speedy, which includes: providing Radius, BRAS, DSLAM, RDSLAM to support Speedy; the
objective, which is to secure Speedy services (Broadband Telkom); CAPEX, which is in hundreds
of billion rupiahs; and having direct revenue from hundreds of billion rupiahs to trillions rupiahs.
Tera Router /IP Backbonne, which includes: providing IP transport (remotely transmisis Telkom);
the objective, which is to provide and secure safe path/highway for Telkoms traffic; CAPEX,
which is in hundreds of billion rupiahs, and having direct revenue from hundreds of billion
rupiahs to trillions of rupiahs.

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Results of Aggregated Weights

The weighting and assessment were done based on interviews with the four respondents. Each
respondents weighting was aggregated to obtain a weight as many as one. This weight will then be
used in processing the classification data of technologies/services. The results of the aggregated
weights are as follows.

Table 1. Weights of aggregated AHP on Strategic Impact Dimension

A B C Geometric Mean Weight
A
1 3.873 7 3.004
0.575
B
0.258 1 3.873 1.886
0.361
C
0.143 0.258 1 0.333
0.064
Total 5.223

Economic dimension

A1 A2 A3
Geometric Mean Weight
A1 1 0.333 3.409 1.043 0.264
A2 3 1 5.439 2.536 0.641
A3 0.293 0.184 1 0.378 0.095
Total
3.958

Competence Dimension

B1 B2
Geometric
Mean
Weight
B1 1 5.664 2.380 0.850
B2 0.177 1 0.420 0.150
Total 2.800

Image Dimension

C1
Geometric Mean Weight
C1 1 1 1
Total 1

The description of A, B, C, A1, A2, A3, B1, B2, C1 can be seen in the hierarchy shown in Figure 4.
The calculation example is labeled A (Economic Factors).
Geometric mean = 9004 , 3 7 * 3.873 * 1 C * B * A
3 3

Weight = Geometric mean A / Geometric mean (A + B + C) = 3,004/5,223 = 0,575

83

Table 2. Weights of Aggregated AHP on Supply Risk Dimension (2.1)
D E F Geometric mean Weight
D
1 4.583 6.708 3.133
0.717
E
0.218 1 3 0.868
0.199
F
0.149 0.333 1 0.368
0.084
Total 4.369

Characteristics of Technological/service Dimension (2.2.)

D1 D2 D3 D4 Geometric mean Weight
D1 1 9 7 3 3.708 0.592
D2 0.111 1 0.333 0.126 0.261 0.042
D3 0.143 3 1 0.333 0.615 0.098
D4 0.333 7.937 3 1 1.678 0.268
Total 6.262

Characteristics of Market Supply Dimension (2.3)

E1 E2 E3 E4 E5
Geometric
mean
Weight
E1 1 0.333 0.333 0.258 0.111 0.317
0.041
E2 3 1 0.333 0.258 0.111 0.492
0.063
E3 3 3 1 0.333 0.143 0.844
0.108
E4 3.873 3.873 3 1 0.333 1.719
0.220
E5 9 9 7 3 1 4.427
0.568
Total 7.798

Characteristics of Environmental Dimension (2.4)
F1 Geometric mean Weight
F1 1 1 1
Total 1

The description of D, E, F, D1, D2, D3, D4, E1, E2, E3, E4, E5, and F1 can be seen in the hierarchy
shown in Figure 5. The calculation example is labeled D (Economic Factors).
Geometric mean = 133 , 3 6.708 * 4.583 * 1 F * E * D
3 3

Weight = Geometric mean A /Geometric mean (A + B + C) = 3,133/4,369 = 0,717

Consistency test
From the results of aggregated weights, the consistency test is then performed to see how consistent
the weighting is done by the respondents. The results of weight consistency test are presented in
Tables 3-8 as follows.

84

Table 3. Consistency of Strategic Impact Test Dimension
A B C
Raw
Average
Consistency
Measure
A
1 3.873 7 3.958 4.349
B
0.258 1 3.873 1.710 3.193
C
0.143 0.258 1 0.467 3.277
Average Consistency Measure = (4.349 + 3.193 + 3.277)/3 = 3.104
CI =
Average-3
2
= (3.104-3)/2 = 0.052
RI = 0.58 (from table)
CR = CI/RI = 0.052/0.58 = 0.089
CR < 0.1 = Consistent

Table 4. Consistency of Economic Test Dimension

A1 A2 A3
Raw
Average
Consistency
Measure
A1 1 0.333 3.409 1.581 2.725
A2 3.000 1 5.439 3.146 3.358
A3 0.293 0.184 1 0.492 3.117
CI =
Average-3
2
= (3.067-3)/2 = 0.033
CR = CI/RI = 0.027/0.58 = 0.057

Table 5. Consistency of Competency Test Dimension

B1 B2
Raw
Average
Consistency Measure
B1 1 5.664 3.332 2.000
B2 0.177 1 0.588 2.000
Average Consistency Measure = (2 + 2)/2 = 2
CI =
Average-2
1
= (2-2)/1 = 0
RI = 0 (from table)
CR = CI/RI = 0/0 =

The image dimension is consistent because its matrix is one multiplied by one.

85

Table 6. Consistency Test of Supply Risk Dimension
D E F
Raw
Average
Consistency Measure
D
1 4.583 6.708 4.097 3.382
E
0.218 1 3 1.406 2.690
F
0.149 0.333 1 0.494 3.184
CI =
Average-3
2
= (3.085-3)/2 = 0.042
CR = CI/RI = 0.042/0.58 = 0.073

Table 7. Consistency Test of Characteristics of Technologies/services
D1 D2 D3 D4
Raw
Average
Consistency
Measure
D1 1 9 7 3 5 5.114
D2 0.111 1 0.333 0.126 0.393 4.350
D3 0.143 3 1 0.333 1.119 3.605
D4 0.333 7.937 3 1 3.068 3.654
Average Consistency Measure = (5.114 + 4.350 + 3.605 + 3.654)/4 = 4.180
CI =
Average-4
3
= (4.180-4)/3 = 0.060
CR = CI/RI = 0.060/0.9 = 0.066

Table 8. Consistency Test f Characteristics of Supply Market

E1 E2 E3 E4 E5
Raw
Average
Consistency
Measure
E1 1 0.333 0.333 0.258 0.111 0.407 6.108
E2 3 1 0.333 0.258 0.111 0.941 4.177
E3 3 3 1 0.333 0.143 1.495 4.797
E4 3.873 3.873 3 1 0.333 2.416 5.818
E5 9 9 7 3 1 5.800 6.145
Average Consistency Measure = (6.108 + 4.177 + 4.797 + 5.818 + 6.145)/5 = 5.409
CI =
Average-5
4
= (5.409-5)/4 = 0.102
CR = CI/RI = 0.102/1.12 = 0.091

86

The characteristics of environmental dimension are consistent for the one-multiplied-one matrix. The
results shows that all dimensions are consistent because they are below the 10% level, so the results of
the aggregated weights can be used for processing the data of each respondent.

The Results of Aggregated Classification of Technologies/Services of the Four Respondents

Table 9 illustrates the combined results of the classifications of the four respondents, whose results
are then averaged. The averaged results subsequently become a reference in strategy making.

Table 9. The Results of Aggregated Classification of the Eleven Technologies/Services
X Y X Y X Y X Y X Y
1 Stationery (ATK) 1,000 1,000 1,131 1,000 1,134 1,000 1,537 1,000 1,200 1,000
2 Satelite 3,771 3,458 3,787 3,945 3,084 3,784 3,260 3,331 3,475 3,630
3 MSAN 2,405 2,936 1,985 2,903 2,049 3,240 2,112 2,934 2,138 3,003
4 Consultant 3,101 1,641 3,182 1,858 2,618 2,064 2,887 1,793 2,947 1,839
5 Insurance 2,553 1,216 2,871 1,431 2,714 1,216 3,139 1,513 2,819 1,344
6 IPTV 3,204 2,848 2,799 3,307 3,036 2,808 3,209 3,000 3,062 2,991
7 Licence 3,211 2,064 2,643 1,946 2,591 1,064 2,765 1,848 2,803 1,731
8 Metro E 2,262 2,784 2,112 2,936 2,049 2,775 2,445 2,414 2,217 2,727
9 OSP Jarakses 1,999 2,000 2,110 1,882 1,859 2,304 2,225 1,991 2,049 2,044
10 Speedy 2,282 2,784 2,028 3,675 2,112 3,153 2,304 3,146 2,181 3,190
11 TeraRouter 2,070 2,936 2,207 3,307 2,282 2,848 2,134 2,579 2,173 2,917
No.
Mean Mr. Dody
Technology/Service
Mr. Mulyadi Mr. Dhinta Mr. Seno

Based on the averaged results of the four respondents regarding the classification results of the eleven
technologies/services, no different results are found. In other words, they are consistent with the
hypothesis of the Telkoms experts. Figure 5 shows the classifications based on an averaged results of
the four respondents. They are as follows:
Technologies/services which are classified as Leverage Items are MSAN, Tera Router,
Speedy, and Metro E;
Technologies/services which are classified as Strategic Items are Satellite, IPTV;
Technologies/services which are classified as Non-Critical Items are Stationery (ATK), OSP
Jarakses; and
Technologies/services which are classified as Bottleneck Items are License, Insurance, and
Consultant.

87

Figure 5. The Results of Aggregated Classification of Technologies/Services

Sourcing Strategy
After classifying each technology/service which has been tested against the Kraljic matrix, the
procurement strategy is then developed for each technology/service by adopting the model of
Gelderman and Van Weele (2005) and Canils and Gelderman (2005), whose strategy is more
dynamic. Table 10 is the summary of the sourcing strategy for several technologies/services that are
classified based on the four categories.

Benchmarking
A comparative study between Telkom and a local Telco company, PT Exelcomindo (XL), was
conducted. The purpose of the customer department is in accordance with the overall mission of the
company, that is to create products/services that can produce high business value. The company has
been trying to offer products that have good functionality at competitive prices in the market. The
relationship between the purchasing department and other divisions of the company are aligned. The
purchasing department functions to provide value-added to the company. The purchasing department
is under the Directorate of Finance because not only it is a policy of the board of directors, but also
the purchasing department is closely related with financial matters, so it is natural that this department
is under the Directorate of Finance.

0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
5
0 1 2 3 4 5
S
t
r
a
t
e
g
i
c

I
m
p
a
c
t
Supply Riks
Kraljic Matrix (PT Telkom)
Risiko Pasokan
Dampak Strategis
ATK
Satelit
MSAN
Konsultan
Asuransi
IPTV
Lisensi
Metro E
OSP Jarakses
Speedy
Tera Router
Linear (Satelit)
LEVERAGE ITEMS STRATEGIC ITEMS
NON CRITICAL ITEMS
BOTTLENECK ITEMS
88

Table 10. Sourcing Strategy Recommendations
No. Category
Technology
/ services
Proposed Strategies
1.

Strategic
Items
Satelite
Keeping the partnership strategy

IPTV Receiving locked partnership
2.

Bottleneck
Items
Insurance
Receiving the dependency and
reducing the negative consequences
Consultant Looking for new suppliers
License
Receiving the dependency and
reducing the negative consequences
3.
Leverage
Items
Metro E Developing strategic partnerships
MSAN Developing strategic partnerships
Speedy Developing strategic partnerships
Tera Router Developing strategic partnerships
4.
Non
Critical
Items
Stationery
(ATK)
Gathering the needs of customers
OSP
Jarakases
Gathering the needs of customers

The purchasing of goods is arranged through a consolidation, where all needs are collected in a
purchasing departmentas the central purchasing unit-- and is arranged on the basis of the value of
goods. The method used to classify technologies/services in relation with a purchasing/procurement is
by dividing the technologies/services into 2 categories: network and non-network. Then, each
category is put into the Kraljic matrix. The matrix that is used by the company consists of two axes,
namely: the availability of goods and prices. The quadrants of the matrix have different identities,
such as leverage, strategic, bottleneck, and non-critical.

The method that was used in dealing with suppliers is close tender. In other words, the tender was not
done openly. Only players who were eligible to take part in the tender process were invited. This
technique has been used to deal with all suppliers. The methods that were used in designing the
sourcing strategy are leverage Items (maintaining partnerships, developing partnership strategy),
Strategic Items (maintaining partnership strategy, receiving locked partnerships, deciding partnerships
and finding new suppliers), Non-critical Items (individual reservations, needs collecting), and
89

bottleneck items (receiving dependency and reducing the negative consequences, providing many
products, and finding new suppliers).

The close partnership/ partnership maintaining strategy is characterized by a relationship that not only
happens during the project but also happens under a long-term scheme. This partnership also includes
the making of work planning for the future, such as purchasing planning and many others. This work
planning is made for the next one year, in which its review is performed in every three months. To
make the work plan and allocate the budget of the company is generally started with a budget that is
set by the company before a project is created, and its procurement plan is made.

Conclusions
Telkom within the spectrum of world-class chain management is in a position where it is between the
interdependent and supportive position, so it is in the middle of creating a strategy that supports the
company's performance in order to have a good competitiveness. However, the problem is that
Telkom does not have a procurement strategy. So far, its procurement process is conducted without
classifying technologies/services, thus resulting in inefficiency in the process. Therefore, it is
necessary for the company to have a procurement strategy that can classify its technologies/services.
In this study, the model of the Kraljic matrix is chosen. The reason is that this model has two
dimensions in its portfolio matrix. They are strategic dimension and supply risk dimension.

In this study, a comparison between the company and PT Exelcomindo was conducted. The results of
the comparison show that there are some similarities and differences between them as follows:
Similarities: Both the matrix used in Telkom and in XL has the same identity labels, such as
leverage, strategic, bottleneck, and critical. Both Telkom and PT Exelcomindo use the same
strategy for each position.
Differences: The axes in XLs matrix are different from those used by Telkom. The two axes
in XLs matrix are focused on the availability of goods and prices, while the two axes in
Telkoms matrix are focused on the strategic impact and supply risk. The purchasing
department in XL is under the Finance Directorate, while in Telkom, the purchasing
department or supply chain management is under the directorate of IT and Supply, which is
also directly under the BOD/Commissioners. In XL, the arrangement of purchasing goods is
based on the value of the goods, but in Telkom, the arrangement of purchasing goods is based
on the classification. In XL, the Sourcing Committee plays its role on project basis or on
specific condition only, while in Telkom, the Sourcing Committee plays its role from the
initial procurement process to the construction stage.

90

Thus, based on this comparative study, it can be concluded that the XL is still trying to improve its
procurement process of technologies/services by using the classification. However, the improvement
has not been done thoroughly, and for that Telkom may have potential competitive advantages
because it has applied the classification process in its procurement of technologies/services, which is
continuously improved. In addition, the continuous improvement on the sourcing committee is also
conducted to make it more effective and efficient so as to provide added value for the company.

Following the classification of the eleven technologies/services of Telkom company, an action plan
for the strategy that has been made has to be implemented to achieve the objective of the company: to
streamline the procurement process of goods/services. The action plan contains the following things.
First, the procurement strategy is not a mere concept, but it can be applied solve the problems faced
by Telkom. The classification of several technologies/services has been performed, and also the
strategy for each of these technologies has been made. Therefore, it is expected that both the
classification and the strategy may become a model of a real benchmark in the procurement process of
technologies/services.

Second, in the implementation, there should be parties that are in charge of matters relating to the
implementation. The parties that are responsible are as follows:
the Investment Committee, which shall analyze the feasibility of an investment plan issued by
the relevant units;
the IT & Supply, particularly SPC (Supply Planning Center), has to coordinate with relevant
units to implement the LOP (list of projects) that has been approved by the BOD; and
the Sourcing Committee is responsible for the implementation of the classification process of
technologies/services that can give value-added to the company.

Third, the scope of implementation includes the following matters. Establishing the function of
sourcing strategy is proposed. This sourcing committee is formed by the department of IT & Supply
because the committee is responsible for the procurement of goods/services. Therefore, a body is
required to examine the issues of procurement of goods/services. The next step is to disseminate
information to the relevant units. The socialization activities that should be done by IT & Supply
department are as follows: distribution of brochures or flyers, installation of banners about the
planned procurement strategy, installation of Telkom official information on the web about the
planned procurement strategy (conducted by IT Telkom), and delivery of Telkoms implementation
plan via emails.

The procurement unit needs to conduct a FGD (Focus Group Discussion) by involving relevant units
and top management. In the FGD, the issues discussed, which are based on the results of previous
91

brainstorming, should be prepared by a dedicated team. The discussion on every issue in the FGD
should be focused so that a conclusive decision for each issue can be made. If necessary, various
methods can be used here, for example SAST (Strategic Assumption Surfacing and Testing) to bring
up the assumption, or ANP (Analytical Network Process) to set priorities, make decisions, and design
various management frameworks for organizations, such as the balanced scorecard template, Malcolm
Baldridge, and many others. Both brainstorming ideas and FGD have different characteristics.
Brainstorming ideas are spreading, because we have to elaborate on things and try to capture the big
picture of a problem. On the other hand, FGD is tapering, where we focus the discussion of the issues
arising in the brainstorming stage to reach a solution.
Performing tests using various procurement strategies of technologies/services (pilot projects).
Conducting trials on five technologies/services so that the classifications can be done, and the
results of these trials can be seen when compared with Telkoms expertise.
Performing improvement on the results of the trials. In this stage, some improvement may be
made towards the trial results. Based on the improvement, some actions to overcome things that
are not in line with the expectations can then be done.
Go Live. In this stage, the model that has been created can be applied to all technologies/services
that are available in Telkom, so the efficiency can be achieved.

References
Canils, M.C.J. and Gelderman, C.J. (2005), "Purchasing strategies in the Kraljic matrixA power
and dependence perspective", Journal of Purchasing and Supply Management, Vol. 11, No. 1-2,
pp. 141155.
Carter, J.R. and Narasimhan, R. (1996), "Is purchasing really strategic?", International Journal of
Purchasing and Materials Management, Vol. 32, No. 1, pp. 20-28.
Gelderman, C.J. and Semeijn, J. (2006), "Managing the global supply base through purchasing
portfolio management", Journal of Purchasing and Supply Management, Vol. 12, No. 4, pp. 209-
217.
Gelderman, C.J. and Van Weele, A.J. (2003), Handling measurement issues and strategic directions
in Kraljics purchasing portfolio model, Journal of Purchasing and Supply Management, Vol. 9,
No. 6, pp. 207-216.
Gelderman, C.J. and Van Weele, A.J. (2005), Purchasing portfolio models: a critique and update,
Journal of Supply Chain Management, Vol. 41, No. 3, pp. 19-28.
Elliott-Shircore, T.I. and Steele, P.T. (1985), "Procurement positioning overview", Purchasing and
Supply Management, pp. 23-26.
92

Hadeler, B.J. and Evans, J.R. (1994), "Supply strategy: capturing the value", Industrial Management,
Vol. 36, No. 4, pp. 34.
Hernady, J. (2010), Telkom initiative on TIME, Presentation at BizTech Summit 2010, Bandung.
IT & Supply Directorate (2010), Master Plan Supply Management PT Telekomunikasi Indonesia,
Rolling Document 2011-2015, PT Telkom , Bandung, Indonesia.
Kraljic, P. (1983), Purchasing must become supply management, Harvard Business Review, Vol. 61,
No. (5), pp. 109-117.
Lee, D.M. and Drake, P.R. (2010), "A portfolio model for component purchasing strategy and the
case study of two South Korean elevator manufacturers", International Journal of Production
Research, Vol. 48, No. 22, pp. 6651-6682.
Lin, R. (1995), Purchasing strategies for electronic components: a case study of Delta with a
portfolio model, Unpublished Master Thesis, National Central University, Taiwan.
Olsen, R.F. and Ellram, L.M. (1997), "A portfolio approach to supplier relationships", Industrial
Marketing Management, Vol. 26, No. 2, pp. 101113.
Roos, M. and Rydman, L. (2005), Portfolio Model Supporting Development of Purchasing Strategies
- A case study concerning raw material at Casco Adhesives, Unpublished Master Thesis,
Linkping Institute of Technology, Swedia.
Saaty, T.L. (1994), How to make a decision: the Analytic Hierarchy Process, Journal of Accounting
Literature, Vol. 13, No. 4, pp. 212-237.
Holcomb, T.R. and Hitt, M.A. (2007), Toward a model of strategic outsourcing, Journal of
Operations Management, Vol. 25, No. 2, pp. 464-481.

93

Chapter 5
The Alignment of Strategy, Business Model, and
Operating System in Logistics Enterprises

Rizky Yoga Pratama and Togar M. Simatupang
Indonesia

Abstract
Companies need to devise their strategies to reach their goals. Besides strategies, companies need to
define their business model based on strategy to create, deliver and capture values. The business
model then should be implemented through an operating system to realize a value proposition.
However, in real business there are problems coming from the alignment of strategy, business model
and operating system. Misalignment of a strategy, a business model, and an operating system affect
the sustainability of companies. The objective of this research is to examine the alignment of strategy,
business model and operating system. There are two logistics companies surveyed to assess the
implementation of the alignment concept. The first company is the logistic company with its core
business is express delivery, while the other companys core business is warehouse rent-services. It
was found that a strategy, a business model and an operating system have already been implemented
in both companies. However, several misalignments have been identified between the business model
and operating system interactions. Therefore, a concept to overcome these misalignments is offered.
This proposed alignment concept is useful to identify the misalignment of the strategy, business
model, and operating system.

Keywords: alignment, strategy, business model, operating system, logistics, third party logistics

94

Introduction
Logistics is vital for every company in the world. It is essential for the companys competitive
strategy and survival. Logistics has been described as getting the right products to the right place at
the right time and in the right condition (Chartered Institute of Logistics and Transport, 2005).
Logistics touches every aspect of the companys daily operations and has grown into a business
specialty of its own. However, logistics is largely ignored and mostly misunderstood because it is not
very interested. As a business specialty, the explosion of globalism has promulgated the practice of
logistics. Most people want to ship their packages on time and immediately.
Despite challenging business conditions, aggregate global revenues for the third party logistics sector
continue to rise, and far more shippers are increasing their third party logistics services than returning
into insourcing (Langley, 2012). Prospects for third party logistics market in 2013 look promising
(Berman, 2013). Smaller companies newly entering global business are beginning to recognize the
importance of logistics. Instead of its potentials, there are also threats for third party logistics
providers whether from the existing competitors or from new entrants.
Third party logistics providers need to create a sustainable strategy that fits their activities doing
many things well, not only few, and integrating among them (Porter, 1996). The activity that is done
by a company is intended to generate, deliver, and capture value for their customers. Through a
business model, company can describe how to do it (Osterwalder and Pigneur, 2010). Osterwalder and
Pigneur (2010) describe that a business model can be used as a blueprint for companies to implement
their strategy through company structures, processes, and systems. Osterwalder and Pigneur (2010)
also describe that a companys operating system is the way how a company achieves its goal.
However, the alignment of strategy, business model and operating system in companies has not been
established yet. Misalignment of strategy, business model and operating system might cause problems
to companies in doing their business. Companies might do their business costly and inefficiently. This
research aims to develop the alignment of strategy, business model and operating system concept
which can help us to figure out the alignment of strategy, business model, and operating system in a
company. In addition, this research also attempts to apply this alignment concept in real companies.
The paper is structured as follows. The introductory section consists of research background and
problem statement, as the basis for this research objective and as the structure to achieve this research
objective. Literature review is presented to give information about the gaps in the existing research.
The next section proposes a conceptual model which is used to complement the research method. The
findings of this research are outlined, which is then followed by the discussion about the findings. The
last section provides the conclusion of this research.
95

Literature Review
Business model is a companys method for making money in the current business environment
(Wheelen, 2010). While Slywotsky, cited from Morris et al. (2005), perceives business model is the
way a company select its customers, defines and differentiates its offerings, defines the tasks it will
perform and those that will be outsourced, configures its resources, goes to market, creates utility for
customers and captures profits. It is similar with the proposed business model of Osterwalder and
Pigneur (2010), which is represented by their business model canvas building blocks. It is segmented
into several categories which are the value creation, value delivery, and value capture. Also, business
model elucidates how an organization is linked to external stakeholder, and how it engages in
economic exchanges with them to create for all exchange partners (Zottet al., 2011).
There are a lot of definitions about business model. However, all studies proposed different
definitions for business model. Although different researcher proposed different definition, the
essence of each definition can be found. The essence of each definition is value creation, value
deliver, and value capture revenue generation. After finding the essence of each definition, it can be
proposed that business model is as an organization method in doing business by creating, delivering
and capturing value for its customers. Pijpers and Gordijn (2007) define value as anything that can
satisfy a need or use for transfer with another object. From those definitions, value can be found in
any offered services and products. Thus, the dimensions of business model are value creation, value
delivers, and value capture.
Each dimension has its own element. Value creation elements are the key resources, key partnerships,
and key activities; value delivery elements are the customer segments, customer relationships, and
channels; and value capture elements are the revenue streams and cost structures. Osterwalder and
Pigneur (2010) include these elements in their business model canvas elements. The value proposition
of the business model canvas is the intersection between each dimension. The value proposition
concerns the reason a company creates value, the decision on what to offer and how it will be offered
to the customer, and the decision on selecting which value will generate profit to company.
Strategy is a unique position, making clear trade-offs, and tightening fit. It involves the continual
search for ways to reinforce and extend companys position (Porter, 1996). While, Farjoun (2002)
proposed strategy as the planned or actual coordination of the firms goals and actions that
continuously adapt the firm to its environment. Kates and Galbraith (2007) explain that strategy sets
companys direction and encompasses the companys vision and mission as well as its short-term and
long-term goals. While Hambrick and Fredrickson (2005) define strategy as an integrated,
96

overarching concept on how the business will achieve its objectives. In addition, they also proposed
strategy parts, which are arenas, vehicles, differentiators, staging & pacing, and economic logic.
Next step is to define the interaction between business model and strategy. Casadesus-Masanell and
Ricart (2010) argue that that a business model refers to the logic of the firm, i.e. the way it operates
and how it creates value for its stakeholders. On the other hand, they stated that strategy referred to
the choice of a business model through which a firm competed in the marketplace (a business model
can be seen as a reflection of the realized strategy). It means a business model is a choice that being
implemented by companies. Even Stefanovic and Milosevic (2010) argue the conceptual integration
between strategy and a business model can be traced along one dimension, which is the time
dimension. The temporal dimension represents a strategy that includes a set of different business
models if they are changing over time or a strategy that consists of a single business model if it has
not been subjected to any kind of changes. The difference between strategy and business model is in
its focus. Strategies focus on competition and reaching objectives, while business models focus on the
action taken to satisfy customers.
Next interaction is the interaction between business model and operating system. Osterwalder and
Pigneur (2010) state that business model acts as a blueprint for a company to implement its strategy
through the companys structures, processes, and systems. The way a company implements its
strategy is regarded as the companys operating system. While Casadesus-Masanell and Ricart (2010)
define operating system as the residual choices open to a firm based on the business model that it
employs, concrete actions that are selected within predefined domain which is defined by the chosen
business model. In other words, operating system is how a company creates, delivers and captures a
value. It involves the interaction among actors, activity, and value. (Pijpers and Gordijn, 2007).

Research Method
The explanation above can give a conclusion about the alignment of a strategy, a business model, and
an operating system. The difference between strategy and business model is that strategy is more
concerned with competition, while the business model is more concerned with the value creation for a
companys stakeholders. In other words, business model is the translation of the strategy that doesnt
include the competition perspective. Therefore, if a business environment changes, the competition
perspective must be included to the changes or adapting the business model to the changes. as for
operating system, it is a concept that occurs when a business model has already been selected.
Operating system is directed by a business model into who, how, and what will be involved in
creating, delivering and capturing a value. The who is represented by an actor, the how is
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represented by an activity, and the what is represented by a value. Operating system is then directed
to achieve the value that is offered to customers. The alignment model will be shown in Figure 1.

Arenas
Vehicles
Differentiat
ors
Staging
&
Pacing
Economic
Logic
Business Model
Value Creation Value Delivery
Value Capture
Arenas
Vehicles
Differentiato
rs
Staging
&
Pacing
Economic
Logic
Arenas
Vehicles
Differentiators
Staging
&
Pacing
Economic
Logic
Business Model
Value Capture
Business Model
Value Capture
Stage 1
Stage 2
Stage n
Inform and Evaluate
Inform and Evaluate
Translate
Translate
Translate
Direct
Direct
Direct
Inform and Evaluate

Figure 1. The alignment framework
The alignment framework then can be modified into the intersection model in the alignment of a
strategy, a business model, and an operating system. As it has been described in the previous
section, almost every dimension of strategy is translated into a business model except the staging
and pacing. The same thing is also applied in the alignment of both a business model and an
operating system, where in every dimension of both a business model and an operating system,
actors, activities and value exchanged will be identified. However, the detail on doing the activities
will not be intersected with a business model. The intersection model can be seen in Figure 2.
As a case study, the research design of this study is to apply a theoretical alignment concept in a real
business situation. By collecting data and analysis through the theory given, the research will draw a
conclusion or present an example of how the theory is applied and translated in a particular case.
Various definitions on strategy, business model, operating system as well as the dimensions and
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alignment of strategy, business model and operating system are presented. It is done to map a
strategy, a business model, and an operating system in a real company. After mapping the strategy,
business model, and operating system in a real company, a concept is made. The concept is then
analyzed to see whether the strategy, business model, and operating system have already been
aligned to one another or not. After analyzing the alignment is done, the solution is then proposed.

Staging
and
Pacing
Business Model
Value Capture
Staging
and
Pacing
Business Model
Value Capture
Adaptive
Factor
A
o
V
A
i
A
o
V
A
i
A
o
V
A
i
A
o
V
A
i
A
o
V
A
i
A
o
V
A
i
The Alignment of Strategy, Business Model and Operating System Intersection Model
Detail
Activities
Procedures
Detail
Activities
Procedures
Inform and evaluate

Figure 2. The alignment intersection model
For empirical evidence, this case study was conducted based on two disguised logistics companies in
Indonesia, namely: Express Delivery Indonesia (EDI) and Warehouse Logistics Indonesia (WLI).
Both companies are top ten companies in the logistics sector. JNE is the leader in the market with
50% of market share and turnover around 1.4 trillion rupiahs. EDIs turnover in 2012 was around 500
billion rupiahs, while WLIs turnover was around 1 trillion rupiahs in 2012.
Indonesian logistics industry prospect is very large. This is because there are many companies use the
third party services to handle their logistics activities. They are conducting this in order to increase
their focus on their core business. Logistics services in Indonesia are categorized into shipping,
cargoes, trucking, freight forwarding, warehousing and distribution, express delivery, and distributor.
99

This categorization can be seen when a company is first established and provides services to its
customers.
Even though there are no exact market values of logistics services in Indonesia, it can be seen from
the logistics cost in Indonesia that reach 24.64% of Indonesian GDP. This number is really big
compared to other countries, for example USA (9.9%), Japan (10.6%), and South Korea (16.4%)
(SWA Magazine). This suggests that the prospect for logistics service providers is really big.
According to SWA Magazine, the big players in Indonesian logistics industry can be divided into their
types of services. In shipping company, there are PT Berlian Laju Tanker Tbk. (BLT), PT Samudera
Indonesia, and Tempuran Emas. In freight forwarding, there are Mitra Intertrans Forwarding,
Kamadjaja, and Fin Logistics. In Trucking/Transportation, there are Dunia Express, Go Trans, and
Puninar. In Express Delivery/ Courier, there are DHL/Birotika Semesta, TNT Indonesia/Skypak
International, and Pandu Logistics. In Warehouse and Distribution, there are Ceva, DHL Exel, GAC
Samudera Logistics, and PT Bhanda Ghara Reksa. Finally, in Distributor, there are Tigaraksa,
Wiralogitama, and Enseval Megatrading.
However, the Indonesia logistics industry is mainly dominated by foreign companies, e.g.: FedEx,
DHL, UPS, CEVA Logistics, TNT, Pantos Logistics, and Maersk, which take more than 60% of
market share. Those foreign companies can dominate because of their experiences and technologies.
Indonesian logistics companies are mainly still using paper-based systems. This might become
weakness for local logistics companies to compete with foreign companies. In addition, in 2015,
ACFTA will be implemented. There will be more competition come from foreign companies in this
sector.
Besides the companies internal problems, logistics companies in Indonesia also face external
problems. One of the external problems faced by Indonesian logistics companies is insufficient
infrastructure in Indonesia. It is not only about the road and traffic jam problem, but it is also ports,
airports, and many other infrastructure problems. In addition, there are still many illegal levies in
every sector in Indonesia.
The primary data gathered by conducting interviews to the heads of area development in EDI and
CEO of WLI. The interviews were conducted for three hours. The interviews were conducted to
identify those organizations strategy, business model, and operating system. After the identification
of their strategy, business model, and operating system were finished, the data gathered were then
analyzed to check whether the strategy, business model, and operating system in each company align
to one another or not.

100

Findings
A. Express Delivery Indonesia (EDI)
The identification was conducted by using Hambrick and Fredrickson's strategy diamond, to map the
strategy summarized. The arenas in which Express Delivery Indonesia operates are well defined: the
company provides express delivery for companies around Jakarta such as telecommunication, bank,
pharmacist, and FMCG industries. In contrast, currently they are not providing product delivery; it is
more to deliver spare part and heavy equipment. EDI can deliver goods to the rural areas, from Aceh
until Papua because their branches can be found in every city in Indonesia. If talking about EDI, it is
talking about air freight delivery as its primary vehicles are organic expansion. Their differentiators
are focus on their employees; strong domestic network; same day services; customized services
through logistics contract; EDI is Air Freight Specialist motto.
As for staging, or EDI speed and sequence of moves, its first move is to spread its network around
Indonesian archipelago. EDI plans to do some research to find the effective road to deliver goods.
After finding the effective road to deliver, the company expands its business into warehousing
management. It is done because EDIs current customers need higher capacity of warehouses and it
looks promising to develop its business to warehousing service provider. The economic logic of EDIs
mainly comes from the competitive price for providing services. Besides service fees, EDI also
generates its revenue from outsourcing its man power and rent its warehouses to other company. The
cost structure is mainly about the SMU or ticket for goods to deliver via air freight. These EDIs
strategies can be seen in Figure 3.
Some of the actions fit together, for example, considering the strong alignment between its arenas,
vehicles, and differentiators. To be able to do the express delivery to any place in Indonesia, EDI does
the organic expansion to build their network throughout Indonesia. EDI conducts some research for
locations, effective routing method, and also for ICT. Before it developed its own ICT, EDI uses the
ICT of its partners although it did not obtain the benefit as promised. EDIs ICT is now used for
integrating its communication system throughout its branches. Also, to increase its customer
satisfaction, EDI provides the same day services. The customers that need to deliver their documents
or goods can use this service. However, currently, their constraint for this service is that they only can
deliver to big cities in Indonesia that have an airport.
After defining EDIs strategies, now we can define its business model. The key activities that are
conducted by EDI are not only the logistics services, but also acquiring and nurturing their customers.
The logistics services activities that are conducted by EDI are warehousing, courier services, air and
sea freight, land transportation, contract logistics, and outsourcing man power. Other activities to
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acquire and nurture customers that are conducted by EDI are customer services to handle customers
complain and give report about their shipment status and salesmanship services to visit the
prospect customers and give some presentation for them.

Arenas
Vehicles
Differentiators
Staging
&
Pacing
Economic
Logic
Arenas
Express Delivery to any place in Indonesia
For Company
Banking, FMCG, Pharmacist, and Telecommunication Industry
Vehicles
Organic expansion
Internal Development
Differentiators
Focus on employee
Strong domestic network
Same day services
Air freight, ONS, Regular, SDS, Sea Freight
Staging and Pacing
First stage: network expansion through
research around Indonesian archipelago
Second stage: Business expansion
Economic Logic
Competitive price
Service fees
Rent fees
Outsource fees
MU cost
EDI is Ai Feight pecialist
Contract Logistics
Using own and partner resources
Delivers document and spare part
Operational cost
Maintenance cost
Delivery cost
Training cost

Figure 3. Express Delivery Indonesia Strategy Diamond

The resources that are used by EDI are not only of their own but also of their partners. EDIs own
resources are warehouses, sales point or branches, motorcycles, medium size trucks, 2 and 4 cubic
volume containers, forklifts, and human resources that are competent in logistics activities
(dispatcher, salesman, finance, customer service). For resources that it obtains from its partners are
trucks, IT services, and warehouses.
The partnership that is implemented by EDI aims solely to satisfy its customers, for example in
delivering its customers goods to destination, storing its customers goods, and supporting its
customers activities. Its partnership is conducted with Airlines Company, Shipment Company, truck
owner, warehouse owner, and IT Company. The partnership with IT Company is conducted to support
any activities in EDI. It is more to do computer and system maintenance in EDI. The values that are
offered to its customers are on-time delivery, safe delivery, and negotiable price, ensuring its
customers that EDI is a specialist corporate and an air freight specialist, having a strong domestic
network, a specialist in delivering spare parts and documents, and focusing on its internal
stakeholders, which is its employees.
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EDI conducts its delivery value process through customer relationships and channels. From customer
relationships, EDI delivers its value by visiting the prospect costumers. EDI also doing some
promotion to the magazine (Islamic magazines such as Insaniyah, Hikmah), newspapers (e.g.,
Republika), and through its own sales point network. The targeted customers which are the reason
EDI creates its own value and deliver the value to its customers. The main EDIs customers are
corporate customers. EDIs more specific targets are the telecommunication, banking, pharmacist, and
FMCG Company. However, EDI does not deliver their products but just delivers their spare parts.
After creating and delivering its own values to the customers, EDI also has a capture value. Its capture
value is composed of cost structure and revenue streams. For the cost structure, it is mainly composed
of the SMU cost and the others such as delivery cost, training cost, maintenance cost, and other
cost. The SMU is the ticket for boarding to the airplane. The reason why this ticket is the main
composition in the cost structure is because EDI services are mainly related to air freight. For revenue
streams, EDI obtains its income from the service fees; warehouse rent fees; and man power
outsourcing fees. Every price from each source of revenue is negotiable. This business model part is
concluded in the business model canvas as shown in Figure 4.

Business Model
Value Capture
Key Partnerships Key Activities
Key Resources
Value Propositions Customer Relationships
Channels
Customer Segments
Cost Structure Revenue Streams
Zyrex for IT Partner
Garuda Indonesia
Pelni
Lyon Air
NAF to Support
Financing Activities
Truck owner
Warehouse owner
Warehousing
Contract Logistics
Express Delivery
Air Freight
Land Transportation
Sea Freight
Outsourcing Man Power
Motorcycle
Warehouse
Sales point or Branches
Container 2 and 4 cubic
Medium size truck
Man power (dispatcher,
warehouse supervisor,
salesman, finance, customer
service, IT)
On-time delivery
Safe delivery
Negotiable price
EDI is Air Freight
pecialist
Strong domestic
network
Company visit
Report shipment status
Promotion
- Newspaper
- Islamic Magazine
- Internet
Sales point scattered
throughout Indonesian
archipelago
Company (B2B)
Telecommunication
Company
Banking
Pharmacist Company
FMCG Company
Few Individual
Customers
MU cost Delivery cost
Training cost Maintenance cost
Services fees Lending and Renting fees
Man power outsourcing fees
Express Delivery
Personalized
Customer Service
Same day services
Focus on employee
Network expansion through
intensive research

Figure 4. Express Delivery Indonesia Business Model Canvas
For operating system, it can be captured from EDIs business process. It will be grouped into actors,
activities, and values. The actors that contribute to create, deliver, and capture values are drivers,
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dispatchers, salesmen, customer services, warehouse supervisors, customers, and partners. The
activities that are conducted in create, deliver, and capture values are visiting customers, picking up
goods, document creation, bagging, transporting, purchasing SMU, storage, and delivering goods to
destinations. The values that are involved in satisfying customer process are money, document, proof,
and goods. This process can be captured using the e
3
value as shown in Figure 5.

Customer
Approve
Contract
EDI Origin
Salesman
Visit Customers and
Promotion
Negotiate Contract
Dispatcher
Pick up shipment
Transport to airport
Warehouse Supervisor
Bagging
Finance Division
Puchase MU
Collect Payment
Airlines Company
Provide Cargo
Service
[Presentation]
[Attracted to service]
[Contract]
[Agreement]
[Pick up]
[Goods]
[MU]
[Goods]
[Money]
[MU Fees]
EDI Destination
Dispatcher
Pick up shipment
Temporary Storage
Deliver to destination
address
[Delivery shipment proof]
[Money]
[
G
o
o
d
s
]
Destination Address
Acquired Goods
[
G
o
o
d
s
]
[
D
e
l
i
v
e
r
y

s
h
i
p
m
e
n
t

p
r
o
o
f
]
[Ownership Right of Goods]
[
D
e
l
i
v
e
r
y

s
h
i
p
m
e
n
t

p
r
o
o
f
]
Send Proof
[
R
e
q
u
e
s
t

P
r
o
o
f
]
Customer Service
Report Shipment Status [Shipment Status]
Need Report [Request]
Payment
Customer Service
Report Shipment Status
[
R
e
q
u
e
s
t

S
h
i
p
m
e
n
t

S
t
a
t
u
s
]
[
S
h
i
p
m
e
n
t

S
t
a
t
u
s
]
Send Goods
Need Delivery
Services
end MU Info
ReuiedMU Info
[
M
U

I
n
f
o
]
[
R
e
u
e
s
t

M
U

I
n
f
o
]
[
M
U

I
n
f
o
]
[
P
i
c
k

u
p
]
Arrive to
Destination Area

Figure 5. Express Delivery Indonesia Operating System

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After mapping strategy, business model, and operating system of EDIs into each framework, next
step is to analyze the alignment of its strategy, business model and operating system. As shown in
Figures 4 and 5, it can be seen that each part of strategy is captured again in the business model part.
It proves that a business model is a translation from strategy into value logic. To see the alignment or
the translation of a strategy into a business model, we need to zoom in the business models
dimension into the sub-dimensions. The alignment matrix from strategy, business model, and
operating system is shown in Figure 6. It is proved from this mapping process.

Translate
Direct

Figure 6. The Alignment Matrix
The alignment between a business model and an operating system is direction. A business model will
direct an operating system to create, deliver, and capture value. In each dimension of a business
model, there are value, activity, and actor as shown in Figure 5. The orange line means the value
creation process, the green line means the value delivery process, and the blue line means the value
capturing process. To look at the relationship between a business model and an operating system can
be done by zooming out the dimension of business model. Therefore, a business model from the value
logic can direct an operating system. Value creation, delivery, and capture process have its own actor,
activity, and value involved.
From Figure 4, we can see one of the value propositions proposed by EDI, that is, express and safety
delivery. In other words, EDI concerns the time to deliver and quality of its own customers goods.
Moreover, EDI also provides report shipment status to its customers. The safety delivery that is
proposed by EDI is realized through the bagging process in EDIs origin. This process also provides
other adding-value processes, which is aggregating its destination into the same bag.
As said in the interviews, the common problem that occurs in the process delivery is about the late
delivery. It can occur because of two things, namely the misdirection of delivery and the routing
105

problem. Misdirection of delivery occurs because of the wrong code translation. For example, when
there is a shipment to Semarang, it will be written down SOQ in the shipment goods. Sometimes, it
sends to Sorong because the people in the warehouse do not concentrate fully when they do the
bagging process. Routing problem occurs when a shipment faces the sorting goods in the
destination area, which is done in the temporary storage process.
The problem that occurs can be prevented by conducting another technique. Rather than using the
three-code that is usually used, it can also use color-code for sorting area shipments. It can be done
both in origin and destination warehouse sorting. In origin misdirection of delivery can be
prevented. In destination warehouse, color-code sorting technique can be used for routing areas.
EDI has already conducted some research for network expansion and for finding effective ways.
However, EDIs research only focuses on finding which way need to be taken, and not for the routing
technique.
For reporting shipment status, sending SMU info and proof delivery are still done manually.
Reporting shipment status from each process picking up, bagging, transporting, and arriving to
EDIs destination and sending SMU info from EDIs origin to EDIs destination is still
done by email or facsimile. For sending a proof delivery from EDI destination to EDI origin, it is
still done by facsimile. These processes can be done efficiently if EDI develops technology for
tracking and tracing. This recommendation has already been proposed to EDI, and they agree with
that recommendation. Moreover, by implementing this technology, EDIs operating system can be
done more efficiently. Several processes can be reduced by the technology, which is the customer
services activity (reporting a shipment status, sending a delivery proof, and sending a SMU info).
Other technologies that can be developed by EDI are the warehouse management system. EDI needs a
system that can support its warehousing activity.
B. Warehouse Logistics Indonesia (WLI)
The identification is done by using Hambrick and Fredrickson's diamond strategy. It is done to map
the summarized strategy. The arenas in which Warehouse Logistics Indonesia or WLI operates are
well defined. For example, the company provides a warehouse and distribution services for industry,
agriculture, bank, and other services. Its core business is warehousing. WLI provides logistic
management services, such as warehousing rent-services, distribution, record management system,
and collateral management services. For distribution, it uses a common land transportation and sea
freight. WLI is based in Jakarta and operates 9 branch offices and 14 sub branch offices all over
Indonesia. WLI is also supported by 150 units of self-owned warehouse, 179 units of rented
warehouses, and 129 management warehouses across Indonesia. Speed and accuracy of delivery,
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competitive price, safety and quality management, and wide network as well as scattered across
Indonesia are the value added that are proposed to customers.
Its primary vehicles are organic expansion and acquisition. WLI differentiators are as follows. First is
that their customers are commonly corporate, so the prospect customers can be reached through
visiting them, or the customers come to WLIs offices. Second, WLI focuses on their employees
welfare by providing several activities that can increase their work productivity. Third is that WLI has
a huge capacity of warehouses. Finally is that they have experience in warehouse providing services.
They provide warehouse rent and warehouse management services.
As for staging, or WLIs speed and sequence of moves, the company currently is improving its
network into Papua province. The next stage from WLI is that it is going to provide courier services.
When its warehousing system has already been established it can support its courier service better.
The economic logic of WLI mainly comes from the competitive price in providing warehouses. Not
only does it earn its revenue from warehouse rent, but WLI also generates its revenue from
distribution fees of companys goods. WLIs cost structure mainly comes from the operational cost
that is composed of the transportation cost and storage maintenance cost. These WLIs strategy part
can be seen in Figure 7.

Arenas
Vehicles
Differentiators
Staging
&
Pacing
Economic
Logic
Arenas
Warehouse and Distribution
For industry, agriculture, bank, and other companies
Vehicles
Organic expansion
Acquisition
Differentiators
Focus on employee
Huge warehouse capacity
Warehousing rent-services, distribution, record
management system, and CMS
Staging and Pacing
First stage: network expansion to Papua
Second stage: Business expansion,
provide new service courier service
Economic Logic
Competitive price
Warehouse management services
Warehouse: own and rent
9 branch, 14 sub branch offices
Operational cost
Maintenance cost
Delivery cost
WLI is waehousing specialist
Safe and Accurate

Figure 7. Warehouse Logistics Indonesia Strategy Diamond

107

Some of the actions fit together because it has a strong alignment among its arenas, vehicles, and
differentiators. To provide warehouse for industry and agriculture companies, WLI owns a huge
capacity of warehouses in scattered area in Indonesia. WLI also improves its network to Papua
province to grab customers in that area.
After defining WLIs strategy, now we can define its business model. In value creation, there are key
activities, key resources, and key partnerships. Key activities that are conducted in WLI are logistics
services as well as acquiring and nurturing its customers. The logistics services activities that are
conducted by WLI are mainly based on warehouse rent-services, warehouse management, and
distribution for supporting activities. Other activities to acquire and nurture its customers that are
conducted by WLI are customer services to handle customers complaints and to give a report about
its shipment status and marketing or salesmanship services visiting the prospect customers and
giving some presentation for them.
To do these activities, WLI is supported by reliable resources. These resources are not only owned by
WLI themselves, but they are also obtained from its partners. WLI owns 150 warehouses, 9 branch
offices, 14 sub-branch offices, container trucks, box trucks, forklifts, and human resources that are
competent in Logistics activities (dispatcher, marketing or salesman, finance, customer service). For
resources that are obtained from its partners are 179 warehouses and some air and sea freight services.
The partnerships are carried to deliver its customers goods to a destination, to store their goods, and
to support their activities. The partnership is also conducted with airlines companies, shipment
companies, and other companies. Another partnership that is done by WLI is with warehouse owners
in several areas scattered around Indonesia. The partnership with IT Company is conducted to do the
computer and website maintenance in WLI.
The values that are offered to its customers are safe storage and competitive price. WLI also offers its
customers such values as a corporate specialist, WLI is warehouse specialist, and a strong domestic
network. Besides the values that are offered to the external stakeholders, WLI also focuses on their
internal stakeholders, i.e. their employees.
WLI conducts their delivery value process through customer relationships and channels. From
customer relationships, WLI delivers their value by visiting the prospect costumers. WLI is also doing
some promotion to the magazine, newspaper, and through its branches that are scattered around
Indonesia. To nurture its existing customers, WLI delivers its value through the marketing/ sales
division. This divisions duty is to report delivery status. The targeted customers are the reason WLI
creates its value and deliver that value to. The main WLIs target customer is corporate. Its specific
targets are the industry, agriculture, banking, and FMCG Company.
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Capture value is composed of cost structure and revenue streams. For cost structure, it is mainly
composed of the operational cost such as delivery cost, maintenance cost, and other costs. For revenue
streams, WLI obtains its income from the warehouse rent fees and services fees. This business model
part is concluded in the business model canvas as shown in Figure 8.

Business Model
Value Capture
Key Partnerships Key Activities
Key Resources
Value Propositions Customer Relationships
Channels
Customer Segments
Cost Structure Revenue Streams
Garuda Indonesia
Pelni
Lyon Air
Warehouse owner
Warehousing and
Distribution
Air Freight
Land Transportation
Sea Freight
Report status
Company Visit
Warehouse, own and rent
Branches and sub-branches
Box Trucks
Man power (dispatcher,
warehouse supervisor,
salesman, finance, customer
service, IT)
Safe and Accurate
Competitive price
WLI is Warehouse
pecialist
Strong domestic
network
Company visit
Report status
Promotion
- Newspaper
- Magazine
- Internet
Branch and sub-branch
scattered around Indonesian
archipelago
Company (B2B)
Agricultural
Banking
Industrial
FMCG Company
Delivery cost
Maintenance cost
Services fees Lending and Renting fees
Focus on employee
Container Trucks
Airlines Company
Sriwijaya Air
Operational Cost

Figure 8. Warehouse Logistics Indonesia Business Model Canvas
For operating system, it can be captured from WLIs business process. It will be grouped into actors,
activities, and values. The actors that contribute to create, deliver, and capture values are drivers,
dispatchers, marketing, customer services, warehouse supervisor, and customers. The activities that
are conducted in create, deliver, and capture values are visiting customers, inbound and outbound
logistics. Values that are involved in satisfying the customer process are money, proof, SI, DN, and
goods. This process can be captured using the e
3
value that can be seen in Figure 9.
After mapping the strategy, business model and operating system of WLIs into each framework, next
step is to analyze the relationship between each concept. As shown in Figure 5 and Figure 6, it can be
seen that each part of strategy is captured again in the business model part. It is proved that business
model is a translation from a strategy into value logic. To see the relationship or the translation from a
strategy into a business model, we need to zoom in the business model dimension into its sub-
dimensions.

109

WLI
OFFICE
Customer
Need Warehouse
Marketing Division
Visit and Promotion
WAREHOUSE
Receive SI
[Presentation]
[Attracted]
Negotiate Contract
Approve Contract
[Agreement]
[Contract]
Distribute SI
Send shipment
instruction (SI)
[Approve]
[SI]
[SI]
Send Goods
Receive Shipment
[Ownership right of report]
[Goods]
Staging and
Checking
Putaway
Reporting
Pick Goods
Send Delivery Notes
(DN)
Distribute DN
[Approve]
[DN]
[Report]
Receive DN
Picking
Scaning and Packing
Dispatcher
Deliver Goods
Finance
Collect Payment
Payment
Report Status
[Report]
[DN]
[Goods]
[
P
r
o
o
f
]
[Proof]
[
m
o
n
e
y
]

Figure 9. Warehouse Logistics Indonesia Operating System
A business model will direct an operating system to create, deliver, and capture a value. In each
dimension of a business model, there are value, activity, and actor as shown in Figure 8. The orange
line means the value creation process, the green line means the value delivery process, and the blue
line means the value capturing process. To look at relationship between a business model and an
operating system, it can be done by zooming out the dimension of the business model. Therefore, a
business model from value logic can direct an operating system. Value creation, delivery, and capture
process have its own actor, activity, and value involved. Figure 9 shows the alignment between
business model and operating system.
In Figure 8, we can see one of the WLIs value propositions: safe and accurate. In other words, WLI
concerns the quality of its customers goods. Moreover, WLI also provides report status services to its
customers. In the operating system, we can see that there are several activities that are still done
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manually, for example the putting away goods and picking goods. A warehouse supervisor just relies
on his memory about the location for the goods that want to be put and the location of goods that want
to be picked up before they are delivered. Several errors might be found from this process, such as
from wrong goods picking to deliver until the inefficient process putting away goods. To achieve the
accuracy, WLI can implement a simple warehouse management system, i.e. by using a sensor with a
lamp indicator which is connected to the computer in a location. Another review of operating system
is the distribution that is proposed by WLI. To improve the accuracy as its proposed value, WLI can
implement the tracking and tracing device. This process also provides another adding-value process,
i.e. giving an exact location of distribution to customers.
C. Comparison
From the findings in each company, in this session the findings in those two companies will be
compared one another. The comparison will be shown in Table 1. As it has already been explained in
the previous section, the alignment between a strategy and a business model is the translation from a
goal focus into value logic to satisfy customers. In the table below, we can see the comparison
between alignment of strategy and business model from EDI and WLI.
It has been shown in Table 1 that both companies have several similarities for their strategy aspects.
However, there are also differences, such as their key activities in the arenas part, value propositions,
staging and pacing, and their economic logic. From Table 1, we can see that the value proposition
from EDI and WLI is different. EDI proposes express delivery for its customers, while WLI proposes
safety and accuracy. Because of the difference in the value propositions, the operating system in EDI
and WLI will also be differently conducted. EDI concerns more with the customers packages
delivery time, while WLI concern more with the accuracy in storing the customers packages.
The alignment of business model and operating system in both companies can be seen in Figures 4
and 8. As it has been explained before, the alignment between business model and operating system is
the direction to the actors in doing their activity to reach a value proposition as the target. However, it
can be seen that the misalignment between a business model and an operating system is identified in
the value creation process. As shown in Table 1, the value proposition of both EDIs and WLIs is
different. Therefore, their operating system will also be different from one another.

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Table 1. Comparison for Findings in Express Delivery Indonesia and Warehouse Logistics Indonesia
S
t
r
a
t
e
g
y

Business Model
Express Delivery Indonesia
(EDI)
Warehouse Logistics Indonesia
(WLI)
Arenas
Customer Segments Company Company
Key Activities
Express Delivery for
Documents and Spare Parts
Warehousing and Distribution
Key Resources
Truck, Motorcycle, Man power,
warehouse (5000 m2),
container, branches
Huge Capacity of Warehouse (Total
1 million ton), truck, man power,
branches
Channels Strong Domestic Network Strong Domestic Network
Vehicles
Key Activities
Organic expansion; branch and
technology
Organic expansion: Branch
expansion, Acquisition: Warehouse
from partner
Key Partnerships air freight activities
Warehouse, freight services (air and
sea)
Differentiators
Value Propositions
Customer: Express Delivery,
On-time Delivery, "Air Freight
Specialist"; Employee: Focus on
Employee
Customer: Safe and Accurate,
"warehouse specialist"; Employee:
Focus on Employee
Key Activities
Delivery services: same day
services, over night services,
regular services
Warehousing and Distribution
Channels
175 branches across Indonesian
archipelago
9 branch offices, 14 sub-branch. 150
self-owned warehouse, 179 rented
warehouse, and 129 management
warehouse across Indonesia
Customer
Relationships
Customer service and Salesman
Visit customers and salesman to
report status
Revenue Streams Competitive price Competitive price
Staging and
Pacing
Adaptive
First step is EDI spread their
network. Next step is business
expansion into warehousing
activities
First step is, WLI improves their
network to Papua. Next step
business expansion into express
delivery services
Economic Logic
Revenue Streams
Mainly from providing services,
other revenue from rent
warehouse and man power fees
Mainly from warehouse rent fees
and distribution fees
Cost Structures
Mainly from "SMU" cost, other
cost from maintenance and
operational cost
Mainly from operational cost
(transportation and warehouse
maintenance cost)

Discussion
From this case study, the framework enables both companies to determine their strategy, business
model, and operating system. The main objectives of the framework are determining the alignment
between the operating system in the companies with their proposed business model. Alignment
between their strategy and business model are well-defined because as it has been mentioned in this
paper that strategy is translated to value logic business model. Both companies lack in some of their
alignment between business model and operating system. The lack of alignment occurs in the
supporting activities done by the companies. For EDI, the lack of alignment occurs in warehouse
activities, while in WLI, the lack of alignment occurs in distribution activities. Even though both
companies declare that their companies are logistics companies, in fact, their existing business model
and operating system show that both of them are part of logistics firms and not the total logistics. EDI
still focuses in courier services, while WLI still focuses on warehousing services. In the interviews,
112

concerning how to determine their strategy, both company plans to do business expansion.EDI plans
to do business expansion in warehouse rent-services, while WLI plans to do business expansion in
courier services. Both activities need a huge amount of investment. Both activities have become core
business for another company. If both companies perform a joint venture, it will improve their
economic logic.
This recommendation has already been proposed to both companies, but one of the companies
declined the recommendation. They argued that their black box could be taken by another company
if they perform a joint venture. They give an example like Samsung and Apple. Apple has the idea,
while Samsung has the man power and manufacture. They performed a joint venture to develop
iPhone. The fact shows now Samsung has become Apples main competitor. Another
recommendation is about developing a simple technique for EDIs warehousing problem, which is the
color sorting and routing technique. As for WLI, the recommendation offered to them is either
implementing an automatic warehouse management system or using the ERP. Another
recommendation for WLI is to develop its tracking and tracing technology, particularly for its
premium customers only.

CassadesusMasanell and Ricart (2012) in their research describe that a business model is the
reflection of a realized strategy. They argue that a strategy and a business model are in same
dimension, which is called the strategic level, while Stefanovic and Milosevic (2011) argue the
integration between a strategy and a business model can be traced along one dimension. It is the
adaptive choice by a company according to the business environmental changes. They overlook the
staging part of the strategy that is proposed by Hambrick and Fredrickson (2005). Staging part
explains about the companys plan for future development. However, in reality the most affecting
factor for future development is not the business plan or business environment changes, but it is the
fulfillment of customers demand. The difference between a strategy and a business model is on their
focus. The strategy focuses on the competition and reaching objectives, while the business model
focuses on the process to satisfying the customers. To align a strategy and a business model,
organization needs to translate their way to reach their goal into the value logic.
For operating system, it occurs after strategic level is decided. Therefore, operating system is in
tactical level. An operating system is directed by the previous level to achieve the proposed value
made by an organization. To see whether an operating system has already been aligned with a
strategic level, first thing to do is to find the companys value proposition. CasadesusMasanell and
Ricart (2012) argue that tactical level is the residual choice open to a firm; it is not entirely true.
Tactical level can be designed. However, it must be designed according to the decided strategic level.
If it is just a residual choice, then it can be assumed that everything can be done without constraints,
113

and the activity result is costly and inefficient in reaching the target. The target and constraint factor
are overlooked by Casadesus-Masanell and Ricart (2012). However, these factors are explained in this
paper under the topic of alignment framework.
This alignment framework that is proposed in this paper can be said better than Solaimani and
Bouwman (2012) who proposes VIP framework. VIP framework overlooks the adaptive factors which
are needed to create sustainability in a companys business. They only focus on the business model
and business process alignment. VIP framework also does not look at the alignment between a
strategy and a business model.
This research also contributes to the existing research since it shows the alignment between a strategy,
a business model, and an operating system. This research certainly gives another insight about the
alignment between a strategy, a business model, and an operating system. However, future studies are
welcomed to be conducted to find a framework to capture those three concepts in one map. Also,
another study that can be conducted is to determine the performance indicators for the alignment
framework. Besides in logistics company, this research can also be applied in any other kinds of
business: profit or non-profit business.

Conclusions
The result of this research leads to three main conclusion. First, both companies, WLI and EDI have
already implemented a strategy, a business model, and an operating system. However, both companies
do not realize that everything they have done is categorized as part of a strategy, a business model, or
an operating system. Each informant learned it after the interviews was finished. It can be inferred that
in Indonesia, companies naturally do their business without firstly planning their business.
Second, the alignment of a strategy, a business model, and an operating system model can be used to
see a strategy from value logic scope and direct actors to do the activities to reach a value proposition.
It is directing who will create, deliver and capture value; how will value be created, delivered, or
captured; and what are involved (the object, information, or money) in creating, delivering and
capturing value. The alignment between a business model and an operating system is the alignment
between strategic levels to tactical levels that are categorized into actors, activities, and values.
Finally, the existing strategy, business model, and operating system that are implemented in both
discussed companies have already aligned some of their activities. The alignment identified is mainly
in the core business of the companies. For supporting activities, the misalignment is identified. In
EDI, the misalignment between its business model and its operating system is identified in its
114

warehousing activities. However, in WLI, the identified misalignment between its business model and
its operating system is in its distribution activities. The misalignment that is identified can be reduced
by an internal development program or through a partnership. As the supporting activities are not their
core business, they can create a partnership with other companies that have those activities as their
core business.

Acknowledgements
The authors would like to thank Azhar Rohman and Jimmi Krismiardhi from EDI and Mulyanto from
WLI through their willingness to provide real business data.

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