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.1
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%.2 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 the 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 year3, 4 (see Figure 1).
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.5 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:
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.6)
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:
1. 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 2014.7 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 2022.8 In June 2019, FedEx announced it would no longer provide U.S. express delivery of Amazon packages.9 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.10
2. 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.
3. 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:
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:
These actions are crucial. But they aren’t enough. Rethinking the entire business model may be necessary, too.
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 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.
1 Aircargo News, Nov. 25, 2020, accessed here: https://www.aircargonews.net/airlines/freighter-operator/ups-ramps-up-dry-ice-production-ahead-of-covid-19-vaccines/
2 DigitalCommerce360.com, March 3, 2020, based on U.S. Commerce Department data, accessed at: https://www.digitalcommerce360.com/article/e-commerce-sales-retail-sales-ten-year-review/
3 United Nations Conference on Trade and Development (UNCTAD), Sept. 09, 2020, accessed at: https://unctad.org/news/covid-19-shipping-data-hints-some-recovery-global-trade.
4 UNCTAD.org, October 2020 update. Accessed at: https://unctad.org/webflyer/global-trade-update-october-2020
5 Data from ShipMatrix, according to an Associated Press article, “Online shopping surge could lead to holiday delivery delays,” November 11, 2020. https://apnews.com/article/shopping-coronavirus-pandemic-shippingholiday-shopping-postal-service-866c7244f823e427511bfabb56d071da.
6 CB Insights report on Amazon, accessed here: https://www.cbinsights.com/research/report/amazon-strategyteardown/#trans
7 Estimate by Consumer Intelligence Research Partners, as cited in DigitalCommerce360.com. https://www.digitalcommerce360.com/article/amazon-prime-membership/
8 Supply Chain Dive, Dec. 13, 2019, https://www.supplychaindive.com/news/amazon-logistics-volume-surpassups-fedex-2022-morgan-stanley/569044/
9 TechCrunch, Aug. 7, 2019. https://techcrunch.com/2019/08/07/fedex-ends-ground-delivery-contract-with-amazon/
10 The Information, Nov. 10, 2020. https://www.theinformation.com/articles/inside-amazons-trucking-ambitions.
11 UPS web page, accessed here: https://pressroom.ups.com/pressroom/ContentDetailsViewer.page?ConceptType=FactSheets&id=1426321563187-193
12 FedEx press release, Feb. 27, 2019. Accessed here: https://newsroom.fedex.com/newsroom/thefuturefedex/
13 TechHQ, May 22, 2020, accessed here: https://techhq.com/2020/05/starting-a-logistics-revolution-fedexcollaborates-with-microsoft/
14 bpost to Accelerate the Expansion of its E-commerce Logistics Business With the Acquisition of Radial,” October9, 2017. Accessed here: https://www.radial.com/press-room/press-releases/bpost-acquisition-radial
15 Wincanton web page, accessed here: https://www.wincanton.co.uk/propositions/warehouse-solutions/onevastwarehousecom