THE FUTURE OF THE SUPPLY CHAIN AND LOGISTICS INDUSTRY

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1 THE FUTURE OF THE SUPPLY CHAIN AND LOGISTICS INDUSTRY This paper will familiarize the reader with: The future profile of the supply chain and logistics industry in 15+ years The factors affecting the speed of adoption How many of the new innovations will develop and the likelihood of industry-wide adoption The impact which disruption will have on jobs in transport and warehousing Nowhere will the effects of the Fourth Industrial Revolution be felt more than in the development of the transport, logistics and supply chain industry. However, it is far from clear whether the outcome for the industry will be positive or negative much will depend on choices being made in the coming years. Figure 1 Industry-wide adoption or niche application? It is also far from obvious which of the many innovations that are being researched and developed will go on to become mainstream. The figure above attempts to predict those which will be widely adopted and those which will remain niche. We consider that warehouse automation leads the way in industry-wide adoption over the next ten year plus. Not only will automation become much cheaper over the coming years but trends such as labour-shortages will make it much more attractive for warehouse operators to invest in capital goods rather than be squeezed by rising labour costs. We see that investment will ramp up significantly in the next five years. Secondly, investment in alternative fuels will rise significantly, driven by public policy decisions to impose diesel bans in urban areas. The Internet of Things and Artificial Intelligence will be steadily integrated within the supply chain and logistics sector, but there may be unexpected consequences and problems as the technology is adopted. Likewise, Blockchain, after the hype has disappeared, will become just another form of technology, efficiently facilitating trade flows and increasing trust in commerce. Other technologies will develop but, due to a number of challenges, will not be as widely adopted. Despite becoming technically feasible, autonomous trucks will still face regulatory hurdles as well as 1

2 negative public perception. 3D Printing will become an increasingly important part of the manufacturing process but it will still be many years before costs fall to a level which can see it integrated into mass production. Crowd-shipping will be a niche part of the last mile delivery process although gradually gaining traction. Autonomous ships gain acceptance in the shipping industry, but the long investment horizons mean that industry change is by evolution, not revolution. Drones, despite massive hype, only ever fulfil a niche role in the industry, at least in terms of last mile delivery. However, in some geographies, particularly remote areas subject to existing extreme weather events or areas effected by global warming events where transport infrastructure fails, they may be vital tools. They are more widely adopted in warehousing and other non-public spaces where they prove useful in terms of scanning items and stocktaking. SPEED OF ADOPTION Although identifying innovations which will have a material impact on the industry is hard enough, it is even harder to determine the timing of the impact. For instance, it took a further decade after the dotcom boom (and bust) at the turn of the century before mainstream retailing was significantly affected. Likewise, it has been difficult to judge the speed of adoption of 3D Printing, the Internet of Things or road freight marketplaces. One of the reasons for this is that these innovations do not exist in a vacuum. The challenges which they are designed to meet are ever shifting and this can have a major impact on the levels of value they can generate. At a company level, the incumbent players in the market do not stand still and they are often adept at assimilating new technologies or developing competing and more effective ones. Take alternative fuels, for example. There is no doubt that if diesel engine technologies had not advanced to the extent that they have, the adoption of hydrogen cells, electric vehicles or biofuels would have been much faster. The fact of the matter is, however, that diesel engine vehicles have become more efficient which has consolidated the technology s market leading position in terms of cost and all-round utility. Manufacturers believe that there are many enhancements to come, and if it hadn t been from the public policy imperative, there would be few commercial reasons for change. In addition to this is the concept of an innovation ecosystem. This essentially means that the required infrastructure needs to be in place before an innovative new business model can be adopted. Alternative fuels are, again, a good example. Before drivers or companies feel confident in investing in the new type of electric propulsion system, a comprehensive charging network must be built to address concerns over range anxiety. It is only when old technology has no more room for improvement and when the infrastructure that supports the innovation is in place that substitution can start to happen. It is rare that this creation destruction, the fastest substitution, occurs quickly. More often technologies will exist side-by-side for a period until old technology or business models are abandoned. This description could apply to the continued use of paper documents in international trade. Whilst everyone accepts that it can only be a matter of time before all processes are digitized, the ecosystems for this to take place still are not there. Likewise, hybrid engines are a very good example of this coexistence. The new technology works in parallel with the old removing the problem of the lack of charging infrastructure. Another example of this is printed barcodes and RFID sensors. It would seem logical that the amount of information which can be stored on a sensor and the uses to which this could be put would have led to fast adoption by the industry. However, the cost of the sensor versus low cost printing, the ubiquitous 2

3 nature of the barcode s ecosystems (from retailers to manufacturers and the logistics providers in between) and its reliability, have meant that the RFID revolution has taken decades to occur. The problem for market analysts or managers is that it is difficult to judge how quickly these infrastructure or ecosystem issues will be addressed, especially as the dynamic is continually shifting. Not only are there business investment and technological developments to take into account, but also government intervention. Subsidies for green energy initiatives, which may kick start a technology (or skew the market depending on your perspective) depend on public policy and vacillate depending on the administration of the time. The change in attitude towards diesel over the past five years is a case in point. Once encouraged as a way of cutting greenhouse gas emissions it is now vilified as a source of noxious pollutants despite no change in quantifiable evidence. FUTURE PROFILE OF LOGISTICS SEGMENTS It is possible to see any number of alternative pathways for each of the main logistics segments. However, in our opinion, the key attributes of each segments are as follows. Figure 2 Logistics market attributes 2035 Logistics segment Alternative Fuels Digital technologies Automation Physical technologies Notes Road freight transport Warehousing Freight Forwarding/ International Trade Shipping Express/parcel Air cargo Electric or Hydrogen Photovoltaic n/a Electric or Natural Gas Electric or Electric Clean sulphur free fuel Hydrogen Platforms/exchanges Collaborative Shared Autonomous (semi) Platooning Predictive maintenance Asset tracking IoT tracking Higher utilization rates Shared Virtual Artificial Intelligence Automated and robotic Augmented/virtual reality Tiny fulfilment Drones IoT inventory management Smart and green Smaller units Digitized Control Towers 4PL Blockchain/smart contracts Freight marketplaces Digitized metadocuments Blockchain/smart contracts On-demand Artificial Intelligence Crowdshipping (niche) Route planning Dynamic delivery options n/a Autonomous (semi) Automated hubs Robotics Autonomous vans (semi) n/a Broking becomes less important as segment increases value add through manager role Larger ships IoT tracking Lower unit costs Consolidated industry South-south volumes Drones (niche) 3D Printing Optimized for City deliveries Digitized metadocuments Autonomous (semi) IoT tracking 3D Printing impacts intermediate high tech volumes Faster clearance Road freight In our view, over the next years, diesel engines will be phased out as governments actively support alternative fuels. The demand for high frequency, small package, e-commerce deliveries will mean that electric vehicles become the main alternative for urban areas. Natural gas and hydrogen cells are the preferred technologies for longer distance and higher payloads. Vehicles have a high degree of automation and platooning will become commonplace on main trunk roads. Investment in road infrastructure means that there is a continuous flow of data between vehicles and highways control towers as well as between vehicles themselves. In most administrations, drivers are still required by law but have a negligible role in driving the trucks. However, drivers hours 3

4 regulations have been loosened which means that vehicle utilization has increased significantly, improving profitability. Greater visibility of loads has meant an increase in vehicle utilization and more unitization of shipments has facilitated transhipment opportunities, speeding up deliveries. Networks become more dynamic, with complex routing and delivery decisions being made by AI-driven transport management systems. Warehousing Warehousing has become largely automated. Robots are responsible for most of the functions which would have been fulfilled by humans and are controlled by AI. E-commerce dominates the warehousing sector, so large numbers of single items are picked on a frequent basis. However, rather than large centralised distribution centres predominating, e-retailers make use of local warehouses to store most frequently ordered items, providing same day delivery services in urban areas. These warehouses are based at retail parks, utilizing large retail premises which increasingly became redundant in the 2020s as online sales grew in popularity. Inditex S.A., the parent of Zara, has already announced that it is exploring the use of existing stores as mini fulfilment centres or distribution centres. This strategy allows them to fulfil customer orders from the closest store, in the event the item is not available in a central facility. Distribution centres have become greener, powered by solar energy. Heating and lighting is of less consequence as human workers rarely enter the picking areas. Warehouse footprint will also decrease as autonomous trucks approach docks more efficiently and large car parks for workers are no longer required. In addition, shared warehousing platforms mean that the market becomes much more flexible with many fewer long term leases. Warehouse management systems have visibility of inventory wherever it is located and the distribution of stock across a wide geographical area reduces transport costs and the risks of disruption to centralized operations. Freight forwarding Freight forwarding is still an essential function in the facilitation of international trade. However, parts of the traditional role have become automated such as quotation, documentation and freight booking. Instead, the forwarder will fulfil a control tower role, acting as a neutral manager of shipment flows, assessing risks and re-routing as necessary. Artificial Intelligence will play an important part of their offering. Forwarders unique visibility of multiple transport networks will mean, for many shippers at least, that disintermediation is pointless and the forwarder s ability to consolidate multiple shipments will remain a competitive advantage. Shipping The transportation element of the shipping industry will have experienced significant change by Much of the worldwide fleet will be powered by electric engines or Liquid Natural Gas (LNG) and ships will be increasingly autonomous although still not entirely crewless. Ships spare parts will be printed at facilities at ports and then flown to ships by drone. Sensors on board ships will provide for predictive maintenance. 4

5 Shipbuilding technology will increase the capacity of each ship but this will limit the number of ports at which they will be able to call further. Networks of feeder ships will become as important as the function of headhaul and backhaul. Transit time between hub ports will decrease as fuel costs will fall and there will be no need for slow steaming. This may present problems for some of the larger vessels specifically designed for slow steaming as their engines may have to be replaced, which may not be cost effective. But there may be a role for them as floating manufacturing or distribution centres that are able to be moved to where demand is required. 3D Printing and other advanced manufacturing could very well take place on board, where the requirements are access to raw materials, power and decent communications. Express and parcels Electric vehicles will dominate the last mile segment of the express and parcels industry with dense networks of re-charging stations. Increasingly vehicles will be autonomous, although a vehicle manager will replace the driver. Their role will be primarily to move the package from vehicle to end-recipient. The market will be characterized by a wide number of operating models. These will include drone delivery to remote locations; robot delivery in a specific urban context and crowd-shipping with increased use of public transport as well as personal vehicles. On-demand operations will become an important addition to the established hub and spoke networks of the express parcels carriers. The huge volumes of e-commerce deliveries will require co-ordination by control towers using Artificial Intelligence. Parcels hubs will be completely automated although faster moving items will be stored at local centres in urban areas for on-demand delivery. Air Cargo The world s aircraft fleet will consist of a mix of traditional jet fuel and hybrid electric-powered. Reduction in jet engine noise will allow airports to operate 24/7, meaning that additional runways will be unnecessary. Eventually a step change in battery technology will allow the development of allelectric planes, reducing weight, increasing payload and eliminating emissions. The reduction in the cost of air cargo will stimulate demand and make it economic for shorter distance movements of freight. The development of air taxis (as proposed by Uber) could result in high value, low weight cargo being moved on a localized basis by air. All Airway Bills and other documentation will be digital, improving efficiencies and reducing clearance times, for example. Use of sensors will enable air cargo to be tracked in real time as well as provide comprehensive data on the status and environment of the consignments. A headwind for the industry will be the adoption of 3D Printing which will reduce the need for the movement of air cargo around the world. THE FUTURE FOR TRANSPORT AND WAREHOUSING JOBS According to Oliver Cann of the World Economic Forum, The Fourth Industrial Revolution, combined with other socio-economic and demographic changes, will transform labour markets in the next five years, leading to a net loss of over 5 million jobs in 15 major developed and emerging economies. Although this figure applies to industry as a whole, the transport and logistics sector is not immune from 5

6 the impact of the emerging technologies. It is not just manual positions which are at risk. Artificial Intelligence will automate many of the positions filled presently filled by white-collared office workers. However, there is an alternative view of this issue. Instead of looking at the new technologies as a threat, they could turn out to be a lifeline. Labour shortages in the sector are endemic and technologies which increase efficiencies, assist existing workers in their jobs or fill a labour gap will help to keep supply chain costs down. Warehousing automation As has been discussed earlier, robots are already starting to play an important role in warehouses. The logical conclusion of this trend is the development of so-called dark warehouses. In fact unmanned and completely automated fulfilment centres are already beginning to come online. One such dark warehouse, built for Chinese e-retailer, JD.com, occupies 40,000 sq m in Shanghai s Jaiding District. The facility has the capacity to fulfil 200,000 orders per day and is operated by a combination of robotics and other automated technologies, which can self-calculate how to avoid collisions and optimise routes. The facility has just four human employees. Such automation, though, comes with restraints the facility can only handle certain types of goods, uniform in size, shape and weight, as the robotic picking arms cannot lift packages heavier than 3 kg. However, it must be assumed that advances in technology will extend the type and weight of products which are compatible with automation. Truck drivers to Truck managers? The controlled nature of the warehouse environment (and for that matter cargo handling facilities and areas in ports and airports) means that the substitution of robots for labour could be viewed as an inevitability. Outside of highly regulated areas, however, it is far more difficult to replace human workers. Even if the role of the driver was completely eliminated, without considerable advances in robot technology, the delivery of the package from curb to the end user would still need a human, at least for the foreseeable future. Having said that, it is far easier to envisage a full load or even a part load being delivered by fully autonomous truck. The technology will be in place but whether the public or politicians are ready to accept completely driverless vehicles is another matter. Therefore, it is likely that the role will change rather than be eliminated. CONCLUSION Every aspect of society and business is being transformed by a new generation of innovative solutions and the supply chain and logistics sector is no exception. Whether societal, economic or environmental, innovators are scrutinizing the industry s greatest challenges and developing new business models and concepts with which to address them. Many of these innovators come from outside of the industry and this has resulted in entirely new approaches to seemingly intractable problems. Using models from, amongst others, the financial services, IT and personal mobility sectors and integrating these with advances in new technologies as well as ideas from the sharing and circular economies, no part of the business is immune from disruption. Where does this leave the incumbents which have dominated the industry for so long? Or the relationships between shipper, carrier, forwarder and customer which are seemingly set in stone? 6

7 Survival and success will rely on the ability for all parties in the supply chain to continually examine the value which they generate and, where necessary, adapt to the new business environment. There are many reasons for optimism. The improvements in logistics efficiency; reduced levels of environmental impact and a model which focuses on value generation rather than on labour costs will create long term sustainability for the industry. However, there are also many unanswered questions. If the logistics sector is transformed from one of high labour intensity to one characterised by high technology and automation, what are the societal implications for the many millions of workers no longer required? This will be a major conundrum for politicians. For a greater understanding of the industry and the forces shaping it, please consider Ti s latest report: Total Logistics

8 About Ti Insight For further information about this article please contact John Manners-Bell at or visit the Ti website at Ti Insight is a leading UK-headquartered logistics and supply chain market research and analysis company providing: Supply Chain and Logistics Market Research Reports Global Supply Chain Intelligence (GSCi) online knowledge platform Consulting and Market Research projects Training, Conferences and Webinars. Ti has acted as advisors to the World Economic Forum, World Bank, UN and European Commission as well as providing expert analysis to the world s leading manufacturers, retailers, banks, consultancies, shipping lines and logistics providers. Expertise includes: Analysis of the corporate strategies of leading express, freight forwarding and logistics companies. Global usage and perception studies of shipper and logistics provider behaviour. Micro-economic analysis of key logistics segments: express, freight forwarding, road freight, contract logistics, warehousing, air cargo, shipping and e-commerce logistics. Analysis of supply chain strategies employed in industry vertical sectors: pharmaceutical, fashion, high tech, oil and gas, chemical, cold chain, automotive and retail. Market sizing and forecasts of key logistics segments. Intelligence on emerging markets logistics sectors in Asia, Africa, Latin America, Eastern Europe and Middle East. What Sets Ti Apart? Led by leading industry experienced experts Globally recognised and trusted brand Global Associate Network provides a multi-country, multi-disciplinary and multi-lingual extension to Ti s in-house capabilities More than fifteen years of knowledge delivery to global manufacturers, retailers, banks, consultancies, shipping lines and logistics providers Unique web-based intelligence portals On-going and comprehensive programmes of primary and secondary research. 8

9 All rights reserved. No part of this publication may be reproduced in any material form including photocopying or storing it by electronic means without the written permission of the copyright owner, Transport Intelligence Limited. This report is based upon factual information obtained from a number of public sources. Whilst every effort is made to ensure that the information is accurate, Transport Intelligence Limited accepts no responsibility for any loss or damage caused by reliance upon the information in this report. This is not a complete analysis of every material fact regarding this company. The opinions expressed here reflect the judgment of our analysts at this date and are subject to change. 9