Mastering the Post-Pandemic Logistics Revolution (Research By TCS Thought Leadership Institute)
Sowmya Mullur Rajagopalan Head, Travel, Transportation and Hospitality, Tata Consultancy Services
Arun Pradeep Surendra Mohan Business Head, Travel, Transportation and Hospitality, Tata Consultancy Services
“Exclusively curated for TCS Perspectives – TCS’ Management Journal (by TCS Thought Leadership Institute)”
The interconnected infrastructure of supply chains through which logistics companies move goods has become the foundation of the global economy. But that foundation was shaken to the core when the COVID-19 pandemic hit. While initial measures to reduce its spread halted the flow of many goods, the pandemic has also shaken up demand. Manufacturers of certain goods saw an abrupt drop in orders while others witnessed an explosive increase.
Yet all in all, the logistics sector has been remarkably resilient despite the upheaval. A shining example of the industry’s capacity for rapid innovation came late in 2020 after the approval of two coronavirus vaccines in North America and Europe. United Parcel Service ramped up dry ice production at its hubs to preserve the medicines on their trips from pharmaceutical plants to health care institutions.
This is no surprise to us. The global logistics sector has had to evolve rapidly amidst the e-commerce revolution of the last three decades, a span in which e-commerce’s share of total retail sales in the world’s biggest market—the U.S.—nearly tripled from 6.4% to 16.0%.97 There is no doubt that online retail stalwarts such as Amazon, Alibaba and Wayfair have shaken up the $9.6 trillion global distribution and logistics sector.
The pandemic certainly has slowed supply chain traffic. Global merchandise trade plummeted by a historic 27% year-over-year in the second quarter and 5% in the third quarter, with forecasts for the global value of trade to drop 7% to 9% for the entire year.
But the slowdown of goods is not the only story. There have also been moments of delivery surge. Before the Christmas holiday, soaring demand for shipping packages to U.S. consumers was projected to create a shortage of freight capacity and delays of one to two days for parcel deliveries.100 In the 34-day peak period between Thanksgiving and Christmas, demand was projected to outstrip delivery capacity by 7 million parcels daily— more than twice the number of the 2019 holiday season.
In the interim, logistics companies have made a number of innovative moves to increase capacity, including:
- Bringing in new partners like auto rental companies to support last-mile delivery capacity.
- Shifting some cargo shipments from trucking lines to rail freight and helping railroads set up intermodal parks for short-haul lines.
- Increasing space at railyards near seaport terminals to handle overflows in shipping containers.
But it’s important to note that these moves are urgent short-term fixes to three longer-term challenges for logistics providers: consumers’ rising expectations for e-commerce service, the growing impact of distribution companies on the environment and the emergence of new and innovative logistics players. (On the latter point, one only needs to look at Amazon’s logistics moves over the last decade to recognize this, including its purchase of warehouse robot maker Kiva, the launch of a $1.5 billion air freight center in Kentucky for opening in 2021 and the embrace of aerial drones for delivering packages.
What should logistics providers do to deal with these fundamental forces of change? We believe the place to begin is to understand more deeply what’s wreaking the havoc.
Three Supply Chain Disruptions:
As we see it, the pandemic has accelerated systemic changes that have been going on for some time. Three trends are most important:
The rise of digital native players in the transport of goods—both B2B and B2C—that are upending existing relationships and business models. In America, the big disruptor is Amazon, which has built a vast fleet of planes, trucks and delivery vans. These investments not only reduce the company’s shipping costs but also increase on-time deliveries to its Prime subscription customers, an estimated 126 million people in the U.S. in the fall of 2020 (and 65% of its total U.S. customers), a three-fold rise since 2014.102 While Amazon delivered fewer packages than FedEx in 2019 (2.5 billion compared to 3 billion), the e-commerce giant is expected to surpass FedEx’s volume by 2022.103 In June 2019, FedEx announced it would no longer provide U.S. express delivery of Amazon packages.104 Amazon has its sights on logistics providers, too. It launched a new trucking service in May that lets other retailers use the service, not just Amazon, according to one publication.
Eroding service quality as demand soars. With so many consumers ordering home deliveries, logistics providers face increasing risks of delayed packages, missed deliveries, damaged or mishandled packages. Online shoppers have come to expect the delivery as part of the purchase experience. Disappointing them can erode a retailer’s relationship with them—and with the logistics companies that failed to deliver the goods according to expectations.
The increasing pressure to institute sustainable business practices. Logistics companies face ongoing pressure to seek efficiencies at every point in their operations, from fuel consumption, to the transport capacity management and reductions in carbon footprints, to be more sustainable organizations.
These three trends now force distribution and logistics companies to make major changes this decade:
- Focus on the customer experience, especially the end customer
- Adopt new digital business models to take advantage of profound shifts in industry and customer behavior.
- Integrate sustainable supplychain management strategies to be more environmentally and cost conscious. They go hand in hand.
While numerous logistics companies have made big investments in data and analytics, each of the above moves require an even greater reliance on collecting, processing, analyzing and using digital data. When they possess such data and the capabilities to exploit it, logistics providers can better sense fast-changing market dynamics and respond more quickly to customer needs.
Focus on the Customer Experience— Especially the End Customer
In a shifting landscape, the fundamental question for logistics company leaders is this: Who owns the customer experience—the logistics company, the retailer or the firm that made the goods? In the days when consumers bought the overwhelming majority of their products at stores, the answer was simple: The retailer. But that has changed given that for the online shopper, the delivery of products to their homes has become as important as the in-store retail experience.
This is an extremely important concept to recognize. In a store, shoppers are in control. They select the package and walk out with their purchase. The logistics company is not part of the customer experience.
When a product is delivered to the home, however, if a logistics company consistently mishandles consumers’ purchases, damages their packages or delays their deliveries, they will eventually hear from the retailer. Sellers will ultimately be forced to choose shipping partners not on price but rather on the quality of the service delivery and positive customer experiences.
This is to say that until the last decade, logistics companies have not owned the entire customer experience. Even if their names were on an envelope or box, they were doing the bidding of the retailer, the seller. But now with players like Amazon becoming a bigger presence in shipping—and sellers evaluating shippers based on the experience they provide customers—logistics companies must make service quality a competitive differentiator. This is the case for both their B2B customers (the sellers) and end consumers.
So how can logistics providers improve their increasing piece of the customer experience? Mastering digital data is at the center of it. These moves have become table stakes:
- More rigorously tracking deliveries, including placing QR codes on package labels. That lets end customers scan the code on their smartphone and send immediate feedback to the shipping company. Such input can help shipping companies identify hard-to-track inefficiencies—unproductive drivers, unreliable transportation equipment and more.
- Making websites, mobile apps and other online channels to customers much easier to use. More intuitive user navigation and faster response time on queries like delivery status updates can go a long way to getting a retailer and its customers to favor your delivery service over the competition. Take UPS, the $74 billion (revenue) logistics giant that ships products globally. Its 5,200+ U.S. stores use a system that 106 UPS generates package labels and tracks shipments.106 In the future, many UPS customers may prefer creating their own labels online or through the app instead of standing in queue at the store, especially during peak season. Putting this work into the hands of consumers gives logistics companies the opportunity to develop their own relationships with end customers.
- Revealing their delivery performance to retailers and other business customers. With statistics in hand, a logistics firm that’s on top of its game can show off its performance to retailers and other B2B customers: its data on shipment volume handled in a given period to show the quality of its services, low percentages of mishandled incidents and claims filed, and so on.
These actions are crucial. But they aren’t enough. Rethinking the entire business model may be necessary, too.
Adopt New Business Models to Take Advantage of Industry and Customer Behavior Shifts
Over the last decade, many logistics companies realized they must get far more sophisticated at using digital data. Transportation companies that excel at leveraging this data have created new revenue streams and made other changes to their business models. FedEx and UPS are among those driving major transformational programs with big data.
FedEx is a case in point. An initiative that leverages the company’s package tracking data, Microsoft’s AI and cloud computing prowess and robotics expertise of the inventor of the Segway personal transportation device (Dean Kamen of DEKA) is illuminating. In 2019, FedEx and DEKA announced the development of a small autonomous vehicle: a robot resembling a box on four tires, to be used by retailers to deliver products to customers within a few miles of their stores.107 FedEx would use its package scanning and tracking technology, and tap Microsoft’s AI and cloud computing capabilities, to provide near-real-time tracking of products en route to their destinations. (FedEx says its current tracking provides only a few updates for every package.)
FedEx’s ability to closely monitor deliveries with high value and in great need to arrive on time—think medical freight or a factory needing a critical part, as the company explains—would make its transportation network more attractive.108 All this would help the $69 billion firm greatly expand its same-day delivery service. For a firm whose early brand message was “When it absolutely, positively has to be there overnight,” the ability to use digital data to deliver the goods the day they are ordered and know exactly where they are before they get there could help it make inroads into lucrative market segments. Perhaps FedEx’s new brand message will soon become: “When you need it in hours, maybe minutes.”
Of course, the Memphis, Tennessee based company isn’t the only digital innovator among logistics companies. Logistic aggregators, backed by innovative technologies, are connecting businesses with offerings like real-time visibility of cargo, pay-as-you-go warehouses, combination of intermodals, brokerage systems and customs clearance at ports of entry.
Building out such services is not simple. For the typical logistics company, working directly with end consumers is a big, and important, business model change. Creating products tuned to the end customer and letting them choose their logistics partner would require a new branding strategy. But gains could be sizable. By creating and promoting differentiated and more valuable customer experiences, logistics companies would no longer be at the mercy of the retailers that have been driving much of their business. They would put their fate more directly into the hands of consumers.
Exactly how could logistics companies curry the favor of homeowners who do much of their shopping online? We see five initial ways:
- Subscription-based models. Logistics companies could offer subscription-based models akin to Amazon Prime accounts. For a fixed annual fee, customers can opt for a preferred logistics provider to do all of their shipping up to a certain amount. While shipping is never free and is, in fact, a cost borne by the seller, applying a subscription ID during checkout for “free shipping” scenarios could also earn customers a discount on their total payment. PostNord, the holding company for postal services in Sweden and Denmark, has implemented this model. In PostNord’s implementation in Sweden, retailers’ checkout screens prompt customers to select their preferred shipper (if they have one). It is but a matter of time, marketing and branding to see preferred shippers emerge in other geographies.
- Digital identities. Giving a consumer a digital identity is akin to providing an automated credit card. A logistics provider could tag the digital ID (with appropriate credit card and shipping information) to a customer’s desired product or service and automatically charge and ship the product. This offering makes sense in an era in which contactless, digital wallet enabled commerce is widespread, and millions of consumers are accustomed to pointing their smartphones at a point-of-sale kiosk to complete fast, secure transactions.
- Partnerships with online retailers. If Amazon has crossed from retail into the shipping business, why can’t shippers venture into retail? By partnering with one of the online retail platforms, and integrating elements of their respective systems, a logistics company could serve as the default delivery partner for all the products sold on the retailer’s platform. Such a partnership would give the logistics company the option to manage the entire supply chain for the seller, from factory to warehouse to the end customer’s door. Importantly, it also would give the logistics company a stake in all sales made on the platform. To succeed, a logistics company would have the ability to capture customer-specific data, such as delivery preferences and order frequency. Then it could work with the retail partner to pursue an effective marketing strategy through segment targeting and engagement. Belgium’s leading postal operator, bpost, demonstrated this strategy when it acquired U.S. e-commerce logistics provider Radial in 2017. The move enabled bpost to offer value-added e-commerce logistics and expand its U.S. operations.
- Renting capacity in sorting and distribution centers. In densely populated urban areas, managing the last mile of the delivery process is difficult and costly. Small, local players—like the “man in the van” or the “woman on the bike”—offer tough competition in this area to postal and logistics companies. Instead of competing directly, logistics companies can offer capacity in their sorting centers and distribution centers for a fee. This is where data and analytics capabilities are essential. By predicting peaks and troughs in demand, and offering sorting capacity where it’s most needed, logistics firms can extend their ecosystem to these smaller players—as paying customers for their available spaces, when and where they are needed most. A great example of this is Wincanton, the UK’s largest logistics firm. In 2019, it launched a cloudbased service (oneVASTwarehouse) to quickly match up UK buyers and sellers of warehouse space.
- “Micro logistics” and fulfillment. Micro logistics refers to smaller, more agile warehousing and distribution networks located closer to the delivery destination, especially in urban areas, an opportunity that calls for a new business model.
Logistics has been shifting, first during the U.S.-China trade war, and more recently because of the pandemic, to more locally based activities. Take the evolution of warehousing as a prime example. Instead of erecting gigantic facilities, distributors are increasingly building smaller warehouses closer to markets—spaces that can be assembled and dismantled as needed. In addition, anticipatory logistics, which prepare suppliers to have adequate products on hand to meet customer needs, is rising due to increasing customer demand for faster deliveries.
On the last point: These changes are in the right direction, but they are not enough by themselves. The need for fast last-mile delivery is critical—so much so that large warehouses located outside city limits are becoming redundant.
With micro logistics, companies can take control of final-mile shipments using small, garage-like spaces for warehousing and partnering with gig economy service providers. It’s ideal for inventory planning for fast-moving, frequently ordered items (stocked in micro-hubs) and less well suited to more discretionary purchases (served from larger out-of-city hubs). This is starting to occur. UPS, FedEx, uShip and Uber are picking up “gig logistics” providers to extend their reach to last-mile deliveries.
The trend also points to the future. The potential for driverless delivery is more feasible within a contained, well-defined geographical area. FedEx’s delivery robot in the works illustrates this well.
Aligning Sustainable Supply Chains with Corporate Goals
Using distribution resources more efficiently and reducing waste (of fuel, vehicles, storage spaces) make for good business. By integrating sustainable choices into supply-chain management, and bringing innovative technologies into the mix, global logistics companies can align sustainability with the need to be more cost-efficient.
Data is integral to the effort. It can significantly improve the ways a transportation company identifies the drivers of waste, optimizes delivery routes and forecasts supply and demand cycles. It also helps identify partners and carriers that use best practices in mitigating the environmental effects of carbon dioxide emissions.
We see multiple opportunities for logistics companies to improve their profitability through sustainable practices. Among them:
- Streamlining the transportation network. Logistics companies can reduce “empty” miles, improve efficiency and optimize fuel usage by analyzing transport networks. For example, smart utilization of truck space can help avoid shipping “air”—i.e., having too much empty space. Adopting leaner, less bulky packaging as warehouses shift closer to the delivery destinations is another way to reduce waste.
- Collaborating with smaller players to create an ecosystem. Logistics companies can seek partnerships that transform them into a more sustainable enterprise. Partnering with local providers, instead of investing in expensive assets to build capacity, is a means to delivering packages on their last mile while making efficient use of existing resources.
- Entering the recycling business. Logistics firms have an opportunity to enter the reduce, reuse, recycle and disposal “on demand” business. This has the added element of elevating the companies’ “green” quotient, to position their brand favorably in the eyes of their customers.
- Using real-time logistics to reduce delivery problems. The ability to collect immediate customer feedback can help logistics companies correct delivery problems as they occur. Doing so would quickly reduce the rate of returned items, maintain high-quality service and increase customer satisfaction. It could also mean less wasted fuel, labor and other resources.
- Consolidate shipments for efficient use of resources. Logistics companies can analyze their network to consolidate shipments and minimize their number of trucks on the roads. They can reduce energy usage to transport products by moving them directly to the end customer in less-than-truckload (LTL) shipments. In addition, they 124 can combine multiple long-haul LTL shipments onto one truck transported to an LTL center near the destination city, where the shipment can be broken apart. This reduces the use of “empty miles” on the long-haul routes, and conserves energy and other resources.
- Realize revenue on “backhaul” trips. It’s wasteful for trucks to return to the point of origin with nothing on board. By identifying potential “backhaul” partners that might want to lease the space to transport their goods, trucking companies can turn it into efficient revenue producers. Data can provide greater visibility into available transport capacity and match supply to demand. By using capacity that is already on the road, carriers can be more sustainable.
- Go small. One of the easiest ways logistics companies can reduce their carbon footprint is by working within micro-warehouses. These smaller facilities, designed with efficiency in mind, offer simple layouts that can cut both labor and energy costs.
- Switch to electric vehicles. Especially in the last-mile, electric vehicles represent a way to reduce carbon emissions.
- Offer consumers access point pickups. This is an emerging idea that a number of companies have already adopted by forming partnerships. It’s both a sustainability and business benefit because the final stage of transit for packages is fraught with delays and reducing the number of vehicles from the last mile would mean reduced CO2 emissions.
Several logistics carriers have introduced access points for pick up, which include micro-fulfillment centers. Examples include lockers located in convenient places, such as malls, pharmacies and grocery stores.
Logistics companies could also create incentives for consumers to participate. For example, they co-brand services with retailers like free shipping to the fulfillment center. That would encourage consumers to pick up their packages there. Other possibilities include tangible rewards like cash back or vouchers for other goods and services and communicating the environmental benefits of having consumers pick up their goods and save money.
Sustainable business practices offer not only cost savings and revenue opportunities; they strengthen customer relationships and complement efforts to develop new business models.
Along with ongoing resource efficiency efforts, it’s also prudent for logistics leaders to monitor emerging technologies. For example, while 3D printing has not revolutionized supply chains yet, the technology holds great potential to shorten the supply chain process and make logistics more efficient by reducing or eliminating the need to transport materials.
Time to Embrace the Moment
The COVID-19 pandemic has delivered shocks to the systems of logistics companies the world over. But in effect, these shocks have accelerated changes already under way. And while logistics companies face clear threats from disruptors like Amazon, they also have major opportunities to use digital data to strengthen relationships with business customers and consumers, develop novel business models and become more environmentally sustainable businesses.
Taken together, these opportunities can help logistics companies truly differentiate their services in transportation landscape that is up for grabs.