Innovation Strategies for the Logistics Sector

Submitted by Marcell Bozsik
on 03/08/18

I recently stumbled upon two very interesting articles in the last couple of days. Both focused on the logistics sector generally and on the automobile transportation sector as well. The first article dealt with the innovation potential of automobile transporting companies. On the contrary, the second targeted the potential competition and challenges the sector might face in the future. It was interesting to see the counterpoints, which made me wonder and gave thoughts for this essay. I intended this essay to spotlight on few specifics without the aim to provide the complete and full picture of the industry.

 

Maritime economists found that on average terms one tonne of port throughput is associated with approximately $100 economic value added, however, this figure is heavily dependent on two additional things (Merk, 2013). Firstly, the larger the port the larger the economic value-added for the throughput tonnes. Secondly, and more importantly, economic value added levels are highly dependent on the type of the handled goods. The study shows that handling automobiles creates the most value for ports. In the biggest ports, automobile traffic provides additional $330 per metric tonne for the local economy, where both the direct and indirect value is counted. These findings show a high variance and indicate that automobile transporters are very valuable employers, but also very beneficial part of the nation-wide economic performance. Put it differently: exporting or importing cars can make the wealth of nations grow substantially, absolute and relative terms as well.

 

Despite the good historical and promising growth numbers (Clarcksons Research, 2017), there are threats to the industry, as the whole logistics value chain could be a subject to disruption. Based on benchmark data from the European Union, the automotive and the logistics players are the most exposed companies to digital disruption amongst the industrial sectors. These are the sectors where the ICT solutions will have the chance to capture the highest part of the industry value pool (Roland Berger, 2016). Calculated on the current value pool levels – further industry growth and innovation can even elevate this number – ICT solutions could capture approximately $100 billion dollars of value in the US logistic sector. Put it another way: if the current incumbents are not ready to upgrade their ICT based value offering, newcomers will capture these dollars in terms of the revenue and profit of the sector.

 

When we look at the freight forwards in the logistics value chain, we see an extra layer of risk:  many of their value sources are at risk. The risk is coming from various directions: start-ups, incumbents from other logistics value chain parts, technology giants or the actual (port) infrastructure providers (McKinsey, 2018). For example, Port of Antwerp came up with a strategic initiative to provide information on status and arrival time of the goods that are transhipped or flown through Belgium. This is happening in a strategic partnership with the air cargo part of Brussels’ airport. Another example is Freightos – a Hong-Kong based start-up – that is aiming at disrupting the volume bundles that were previously handled by the freight forwards as their core service offering.

 

However, there are few good historical examples. As we saw the industry fixed its business challenges in the last 40-50 years and created value from those, now we can also see the possible solutions. Logistics companies used containerization and warehousing for subcontracting challenges in the ‘60s. Later hubs and logistics platforms were invented for better serving the needs from accelerated globalization. In the last couple decades, cross-docking, SCM and lean management seemed to work and now we see that data, automation and advanced pooling could be the next answer (Christopher, 2016). To conclude logistics companies – and not just the freight forwarders – have to turn back to their core innovation resources and utilize those to be able to provide a fully omnichannel solution for their clientele to meet the challenges.

 

 

Although the stakes are high, there is another good sign for certain freight forwards and for other logistics players. I believe differentiated players like A-1 are standing in a promising competitive position at the moment. Companies and service providers with higher value-added services are more indispensable in the shorter run. For example, automation and further robotization of the logistics processes bear high promises for the industry players. Cost reduction from these strategic projects could reduce the handling cost between 20-40% (Roland Berger, 2016). However, when we think about the transportation and handling of luxury and antique cars, robotics only will not solve the problem. The higher value comes from the extremely safe handling process, therefore human workforce as back-up will still be essential. Nonetheless, we also know from the history that everything can be further improved, thus innovation will remain important for the higher-value-added services as well.

 

I believe three different innovation levers can contribute the most to the individual companies’ and to the whole industry’s competitiveness. Firstly, the organizational innovation is essential, as the most micro level of advancements. Companies have to learn how to innovate in a swift manner even in situations of unproven business models or inchoate markets. Effective logistics start-ups obtained the capability, in the last couple of years, to launch a prototype in 100 days and build the market feedback into their products. The incumbents have two different trajectories. They can either build these solutions in-house with new, independent spin-offs and incubator programs. Or they can acquire these new solutions outside of the market with an active venturing strategy.

 

Innovation potential of the co-opeting industry players is crucial as well. To be precise, innovation can come from the collaboration of the different players. Maybe these companies are fierce competitors in one market, but their needs could meet somewhere in space and time. If these companies can work in spatial or non-spatial clusters, they could realize vast innovation benefits. Silicon Valley or textile clusters in Italy could mean not only close competition but also knowledge-sharing and co-invention of the participating firms. There are several real-life examples that maritime and logistics clusters can elevate innovation potential for the local firms, although sometimes cluster formation has to be aided by external forces (City of London, 2014).

 

Last but not least, the high quality of the innovation supporting infra- and infostructure of the industry is necessary. McKinsey (2016) estimated that a, skyrocketing amount of money, $0.9 trillion needs to be invested into ports until 2030 to keep up the quality of world infrastructures. Port and other logistics services will be highly dependent on these investments. We know that private and public collaboration could represent the model for grand infrastructure projects, but up until today, public initiatives have provided the common model. Aligned with the clusterization direction, for better infrastructure, the industry players need to team up to influence the decision makers.

 

I believe there several ways to sway the centre of power. Brewers Association for Small and Independent Craft Brewers in the US serves as a good benchmark from a different – but in many ways comparable – industry. The craft beer industry is rather small and niche but highly-value added just like automotive transportation. Under one umbrella organization, the industry players try to influence the public, educate decision makers how important their activities are for the local economy. Additionally, automobile transporters could argue for more trade- supporting initiates and further investments into the supporting infrastructure. Although the government will most likely not solve every challenge of the industry, it could help set the framework around the borders and let the industry players figure out how to innovate for an an even better local and global performance.

Submitted by Marcell Bozsik
on 03/08/18

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