Yamato CEO on New Rates: The Lifetime Cost of Shipments Are the New Standards for Pricing

Yamato Holdings Co., Ltd. CEO Masaki Yamuchi to Nikkei: if customers decide to leave us, then that cannot be helped. 

So the heavy discounts for high volume customers came at a time when your business was predominantly C2C based on the efficiencies gained in the first mile? 
Yamauchi:Yes, that is correct. That is how it was for us when we first started with Ta-Q-Bin. It was a time when there were more than 30 players in the parcel delivery market. At the time, I believe the management's decision to approve of the heavy discounts was so that we could gain market share by securing such high volume customers.
     But times have changed now. Market share is not our top priority. We focus more on offering a convenient and high value-added services to our customers and we have been investing to offer more of that.

This time, Yamato announced that you will cap the volume of parcels you receive, which is a powerful message that it is not about market share for you. When did this change in emphasis on market share come about as a management mandate? 
Yamauchi:This is extremely difficult to answer. We went to buy market share when it mattered and the market was very competitive. But today, the rivals of yesteryears are merged as in the case of Nittsu's Pelican service and Japan Post. 
Did Yamato specifically feel a sense of urgency when Japan Post was aggressively pursuing market share leading up to their IPO? 
Yamauchi:No, not by then. There was a time leading up to that time when we felt that Japan Post was aggressively pursuing market share to show that they were growing. Around that time, we began to see prices fall in the market and the causing much confusion. We deliberately made a decision to distance ourselves from that.
     For customers who want to cut costs to increase their competitive edge, there is nothing we can do if they decided to use other suppliers based on cost alone. On the other hand, we have customers who want to offer better service and products to grow their business.
     At the moment, Yamato is focusing on servicing the latter group with our best efforts, and we are openly honest with the former group to say there is only so much we could do for them. And if price is all they care for, and they choose to move away from us, we feel there is nothing we could do about it.
     The Yamato brand is built on the strong commitment to ongoing delivery of good service. This is what we believe in at Yamato and this is how we will serve our customers.

You have made public announcements that you will pay retroactively for unpaid overtime and will implement measures to increase the number of staff. Was the implementation of such measures delayed due to the misguided anticipation that productivity was on the rise in your operations? 
Yamauchi:As you can see from the volume growth trends for Ta-Q-Bin, we have implemented a wide range of measures to improve productivity in response. That is exactly why we managed to grow our volumes to the levels we see today and have been able to manage our operations efficiently to date.
     There is no mistake that productivity is on the rise. Just a quick look at the number of parcels handled per driver per hour is a clear indication of this. Productivity increase was realized through our full time drivers, the use of part time staff, and by implementing various innovative solutions over time.

Don't you think that part of the productivity increase was the result of staff not reporting their overtime work accurately?
Yamauchi:Productivity is measured by using the number of recognized active manhours and parcels processed. We monitor such activities through portable devices used by our staff, so if there were manhours we failed to capture, then such miscalculations may have occurred. We have identified areas where we failed to accurately capture necessary data, and that is why we are implementing the work style enhancement programs to steer it back to accurate figures.

No Consistency in Hiring Plans 

When we look at your hiring trends, we fail to see consistency in your hiring plans. 
Yamauchi:I agree that our number of new hires fluctuate between financial  years, but there are times when we hire more people in anticipation of volume growth and get too far ahead on overhead as a result of actual growth being more mild than expected. We also have the team collection initiative that has boosted productivity. Such factors may influence the number of new hires for the following year to be smaller.

In the period ending March 2016, the total number of Ta-Q-Bin business employees have declined. Why did this happen? 
Yamauchi:Sometimes, even if we plan to increase staff, we cannot hire accordingly. We did not plan to reduce employees, but that year saw our numbers fall not by planning, but as a result of many things. Because of this, we increased the amount of outsourcing to correspond with the growth in volumes.

Can't you increase salaries and hourly wages to secure the number of persons you need? 
Yamauchi:I doubt that alone would be sufficient. For example, if we could triple or quadruple the hourly wages, there would be people who welcome that. But we have cut up the work hours into small blocks like mornings and late evenings. In some areas, it is difficult to find people who are willing to work those hours and agree to other conditions, too. Such issues result in the inevitable imbalance of hiring when comparing areas and regions.

At what point did you and your management team realize you had a crisis on hand?
Yamauchi:Both management and the head of the Union are constantly monitoring what goes on in the front lines. For example, discussions on how to reduce work hours was a joint initiative with the Union.
     We announced that we would make an extraordinary payment to staff for reported unpaid overtime, but as I mentioned earlier, the point when we began to realize that reality was beginning to move farther and farther away from plans is around the summer of 2016. We abruptly began to face difficulties in hiring staff and our manpower was insufficient to maintain our business operations.

How did your operations people see the way things were up to last summer? 
Yamauchi:Up to about 18 months ago, we were having no difficulty in hiring part time staff in all regions. However, from around last summer, we started seeing an obvious drop in responses to advertisement.

At the press conference, you said you were "too late in noticing" the crisis. Do you feel there were ways you could have caught it earlier? 
Yamauchi:It is not that we did not notice, but rather, we saw a dramatic change come on abruptly and we were scrambling to respond. However, there is the fact that the change was much faster than we had anticipated. You can say that was an oversight on our part in retrospect. 
We understand that volume increases started as early as 2013 and operations staff were under much pressure since then. 
Yamauchi:I am not sure how to respond to that other than that it is true that our volumes began to grow fast and we began to see an increase in the number of failed delivery attempts as well as concentration in the late night time slot. I believe this coincides with the growth in e-commerce related parcels volumes. However, it is not until less than a year ago that we began to feel that our operational staffing was insufficient for the volumes. 
How did you monitor the failed delivery attempts? 
Yamauchi:We did not actually capture it as a data point and thus, it was not as visible. We began to feel that the number of failed delivery attempts were on the rise especially in urban areas as e-commerce related deliveries rose significantly. However, we only began to capture data the last two years. We also came to understand that as same day delivery began to be more popular, failed delivery attempts also began to increase. 
Yamato has been investing a total of 200 billion yen ($1.8 billion US) in such mega logistics facilities as the Haneda Chronogate and Atsugi Gateway. The concept of non-stop logistics was endorsed to operate gateways in Atsugi, Chubu, and Kansai 24/7x365 where core channel transport were to be transformed into frequent shuttle operations. However, as the mega facilities operate nonstop and bulk shipments become more frequent, your front line operations for Ta-Q-Bin have remained unchanged. Isn't this gap causing the additional burden on your front line staff?
Yamauchi:Based on the traditional business model, perhaps it is easy to conceive that as e-commerce shipments increase, bulk line haul should also increase. But with e-commerce shipments, there are localized, regional warehouses, so shipments actually increase within that region and not across regions. At present, Yamato sees the potential for bulk line haul growth in B2B traffic. With B2B, there is the issue of holding inventory and inventory being in transit. So by increasing the bulk line haul, we are assisting in reducing the inventory in transit.
     I urge you not to think that our mega facilities are there for e-commerce business. Yamato is focusing on this B2B channel as one of our future pillars. And we expect volumes in this channel to increase. When that happens, the gateways at Atsugi, Chubu, and Kansai will really become effective as will our bulk line haul network.
For the period ending March 2017, your operational profit target was 90 billion yen ($8.1 billion USD), but for the past ten years, your performance has been around 60 billion yen ($5.4 billion USD). What is the cause of the gap between your target and actual performance? 
Yamauchi:We had not anticipated the vast growth of e-commerce shipments and changes in tax laws at the time of creating our medium-term business plan. Also, we have our Value Networking Strategy, which is to promote international and B2B logistics, but we are facing some delays on that front. 
Did you expect BtoB logistics to grow more? 
Yamauchi:BtoB logistics requires our customers to migrate from their existing platforms to ours, which takes one to two years to execute. The sales process is also longer and the lead times requires is longer than we had expected. 
In the world of BtoB logistics, it is said that customization of logistics systems for each individual client is key. Do you see limitations in realizing B2B logistics on your existing Ta-Q-Bin platform? 
Yamauchi:We want to create a platform and offer it as a standard to the entire industry to help boost efficiency across the board. If we build a system that is good for a particular customer only, that would be beneficial to that particular client, but such a system may be challenging to use for other clients and especially small and medium sized businesses. Yamato wants to create a platform that is accessible and easy to use for small and medium sized businesses. 
How much does B2B contribute to your overall parcels traffic at this time? 
Yamauchi:When seen in the overall picture of all of Ta-Q-Bin, approximately 10% of everything that we receive is from individual consumers and the other 90% originate from businesses. Of the 90%, B2C is 50%, and B2B is about 40%. Our target for the Value Networking Strategy is still very small at this point.  
As your Value Networking Stragety with BtoB logistics at its core is delayed, why did you not think of increasing volume you take on from high volume customers like Amazon Japan to increase the volume going through Haneda Chronogate and other gatweays? 
Yamauchi:That was never in the equation. If we did that, that would finish us. The beauty of Chronogate is in offering high value-added logistics services, not just pushing volume through. 
The history of Ta-Q-Bin has been the history of creating new demand. As e-commerce thrives and grows, do you feel that Yamato is being challenged to change the way you manage your business? 
Yamauchi:Ever since we began offering Ta-Q-Bin, we indeed have a history of creating such new services as golf Ta-Q-Bin, ski Ta-Q-Bin, and Cool Ta-Q-Bin that were made possible by management focusing on the needs of our shippers. However, what we now need to focus on is enhancing the trust we gain as a social infrastructure.
     The challenges we are facing now is even giving management a sense of crisis that the trust we have built to date may be compromised or destroyed. That is why we have to shift our management focus now on our employees, who are the people who meet our customers to build and maintain that trust. 
When you say "now" are you referring to the unpaid overtime pay issue? 
Yamauchi:Yes. We have to once again respond properly to the changing environment and establish an operations base that enables us to sustain our trusted service offer to our customers. The only way we can succeed is through our people. We have to get back to being a company where our employees enjoy working with us. And to realize this, we have to reduce the volume we take in temporarily and we are seeking support from customers who can understand that.
     Customers who are only making deicisons based on price will leave us and that cannot be helped. First and foremost, we have to get back to where we were. Then, we will proceed with our Value Networking Strategy and other strategies to face new frontiers. Utilizing new technology will enable us to expand our shipping volumes. We have no intention of shrinking our volumes forever. 

### Masaki Yamauchi Profile ###
Yamauchi joined Yamato in 1984 and became an Executive Officer in 2005. In 2008, he became CEO of Yamato Logistics Co., Ltd. and then CEO of Yamato Transport Co., Ltd. in 2011. In 2015, he was promoted to CEO of Yamato Holdings Co., Ltd. 

The original interview was published on Nikkei Business Online on 29 May 2017 in Japanese only.