Disrupting Logistics [1ª ed.] 9783030610920, 9783030610937

Table of contents :
Front Matter
Introduction: Logistics at the Brink of Change
Driving Forces of Digital Disruption
Digitizing and Automating Processes in Logistics
How Utilization of Assets is Impacted by Digitalization and Automation
Toward Logistics Pricing Transparency
Supply Chain Visibility and Exception Management
Business Models Disrupting the Existing Logistics Solutions
Rate Comparison and Marketplaces—The Platform Era and Global Freight
The Last Mile Problem and Its Innovative Challengers
E-commerce Order Fulfillment Supply Chain—How New Entrants Are Changing the Industry
Selection of the Appropriate Asset Tracking Solution
Advanced Analytics and Big Data in Supply Chain Planning
SaaS and Big Data Solutions in the Area of Logistics Related Services
Human–Robot Collaboration: The Future of Smart Warehousing
Digital Freight Forwarders Disrupt Road Freight Space
A Revolution in Value-Delivery Across Air and Sea Freight
Autonomous Vehicles as the Ultimate Efficiency Driver in Logistics
Distributed Ledger Technology: Toward a Decentralized Logistics Ecosystem
Key Players Behind the Disruption
Digital Transformation in Airfreight
How Freight Forwarders Are Challenged by and Respond to the Digital Disruption
The Evolution of Supply Chain Startups
Transactions & Valuation in the Global Logistics Market
Financing Disruption—The Role of Venture Capital in the Logistics Industry

Citation preview

Future of Business and Finance The Future of Business and Finance book series features professional works aimed at defining, describing and charting the future trends in these fields. The focus is mainly on strategic directions, technological advances, challenges and solutions which may affect the way we do business tomorrow, including the future of sustainability and governance practices. Mainly written by practitioners, consultants and academic thinkers, the books are intended to spark and inform further discussions and developments. More FREE books at: https://www.textseed.xyz/

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Editors Christian Wurst and Luca Graf

Disrupting Logistics Startups, Technologies, and Investors Building Future Supply Chains 1st ed. 2021

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Editors Christian Wurst Eurofins Scientific SE, Brussels, Germany Luca Graf DSV Panalpina A/S, Zürich, Switzerland ISSN 2662-2467

e-ISSN 2662-2475

Future of Business and Finance ISBN 978-3-030-61092-0 030-61093-7 https://doi.org/10.1007/978-3-030-61093-7 . https://www.textseed.xyz/

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e-ISBN 978-3-

Foreword by Dirk Reich Make the Connection Between Old Economy and New Economy, Be Inspired, Creative and Disrupt!

The Year 2020 will not only make the history books as the year of the COVID-19 crises, but will also be the year when Old and New Economy finally connect into one “New Normal”: Home offices and MS Teams become normal, city offices the exception, robots become the new bosses on the shop-floor, political conventions go virtual, Delivery Hero will climb into the DAX, and the digital platform economy replaces classical industries. The digital infrastructure, measured in speed and capacity of the Internet, the cloud and global communication networks developed exponentially from 2000 to 2020. But in no single year in history was the speed of adoption and acceptance of digital technology as fast as in 2020, when a small almost invisible virus made it clear to old and young that the “New Normal” will be different, that digital disruption is the number one enabler of survival and economic growth and not a threat. Those leaders who already drove the digital disruption during the last two decades and who were at the forefront of technology adaption—be that in start-ups or traditional players—those who were creative and adjusted their business models and supply chains arethe clear winners of the crises. This book wants to inspire, wants to spark your 5

This book wants to inspire, wants to spark your individual creativity and therefore enables you to make the connection between old and new by sharing success stories and forces of digital disruption, new digital business models and introducing some of the key people that are shaping the “New Normal.” I am honored to have been asked by the editors Christian Wurst and Luca Graf to write this Foreword. Christian whom I have got to know since joint studies at the WHU and Luca whom I have met the first time at the Lufthansa Group. They both together drove digital transformation at Panalpina, Christian in his role as regional CEO Europe and Luca as Head of Digital Innovation. This joint experience at Panalpina brought up the great idea to help others facing the digital disruption by sharing insights of practitioners for practitioners. Thanks to their persistence, they have succeeded to motivate a very senior group of people that are reshaping the logistics industry to share their experiences and unique perspectives: Entrepreneurs in logistics-centric start-ups like Instafreight, Sennder, SevenSenders and Zencargo Managers of technology providers related to the logistics industry and its disruptors (such as Freightos, what3words and Log-hub) VC Investors who have the biggest exposure to the logistics sphere (Plug and Play and Holtzbrinck Ventures) 6

Financial analysts and advisors specializing in the logistics industry (KPMG) Digital and senior leaders in the logistics industry (Lufthansa Cargo, DSV Panalpina). I hope you enjoy the reading as much as I did and that you shall also be inspired to further invest into the logistics industry, the only truly global industry and one in which I truly enjoy driving innovation since now 40 years. Dirk Reich Zurich, Switzerland

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Contents Introduction:​ Logistics at the Brink of Change Luca Graf and Christian Wurst Driving Forces of Digital Disruption Digitizing and Automating Processes in Logistics Wolfgang Lehmacher How Utilization of Assets is Impacted by Digitalization and Automation Christian Wurst Toward Logistics Pricing Transparency Zvi Schreiber Supply Chain Visibility and Exception Management David Nothacker Business Models Disrupting the Existing Logistics Solutions Rate Comparison and Marketplaces—The Platform Era and Global Freight Eytan Buchman The Last Mile Problem and Its Innovative Challengers Aike Festini and David Roth E-commerce Order Fulfillment Supply Chain—How New Entrants Are Changing the Industry Johannes Plehn Selection of the Appropriate Asset Tracking Solution Andreas Giessler Advanced Analytics and Big Data in Supply Chain Planning Jan Sigmund SaaS and Big Data Solutions in the Area of Logistics Related Services Pierre Francois 8

Human–Robot Collaboration:​ The Future of Smart Warehousing Raffaello D’Andrea Digital Freight Forwarders Disrupt Road Freight Space Philip Ortwein and Jennifer Kuchinke A Revolution in Value-Delivery Across Air and Sea Freight Richard Fattal Autonomous Vehicles as the Ultimate Efficiency Driver in Logistics Luca Graf and Fabrizio Anner Distributed Ledger Technology:​ Toward a Decentralized Logistics Ecosystem Frank Kottler and Konstantin Graf Key Players Behind the Disruption Digital Transformation in Airfreight Boris Hueske How Freight Forwarders Are Challenged by and Respond to the Digital Disruption Christian Wurst The Evolution of Supply Chain Startups Anya Klyukanova Transactions &​ Valuation in the Global Logistics Market Steffen Wagner and David Klein Financing Disruption—The Role of Venture Capital in the Logistics Industry Christian Saller and Felix Klühr

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© Springer Nature Switzerland AG 2021 C. Wurst, L. Graf (eds.), Disrupting Logistics, Future of Business and Finance https://doi.org/10.1007/978-3-030-61093-7_1

Introduction: Logistics at the Brink of Change Luca Graf1 and Christian Wurst2 (1) DSV Panalpina, Zurich, Switzerland (2) Eurofins, Brussels, Belgium Luca Graf (Corresponding author) Email: [email protected] Christian Wurst Email: [email protected] Abstract Numerous indicators show that the logistics industry is undergoing significant change. Technology is more than ever used to automate processes, drive efficiencies and improve the customer experience. The accelerating use of different technologies also leads to changing business models. Shippers become forwarders, carriers sell directly to shippers, largely automated digital forwarders and logistics platforms arise. This chapter introduces the reader to the ongoing changes in the logistics industry and explains the rationale for this book and its content structure. Luca Graf is a digital expert and experienced leader with high competence in e-commerce, digital transformation and innovation. He is passionate for digital innovations, data-driven business models and digital marketing with many best practices in the mobility and transportation industry. Currently, Luca leads the global innovation practice at DSV Panalpina. He holds a PhD in economics from the University of St. Gallen and a diploma in Industrial Engineering and Management from the Technical University of Berlin. Christian Wurst key interests are technology and innovation around operations and supply chains as well as the changes that brings to our businesses, education and daily life. His current role is Chief Operating Officer Food & 10

Environment at Eurofins, the world market leader in Food & Environment Testing. Previously, he has worked in senior roles at the logistics providers Panalpina, Ceva Logistics, Wincanton and DB Schenker. In each of these roles, digital disruption has had a big influence on the way competition intensified. He is a board member and advisor to logistics-related startups like Nexxiot and Instafreight and sits in the board of trustees of the International School of Management, Germany’s largest private university. He graduated from WHUOtto Beisheim School of Management, one of the Europe’s leading business schools for startups. He holds a PhD in operations research and an AMP degree of Harvard Business School.

1 Significant Disruption Ahead How innovative is the logistics industry? When did the last major invention happen when it comes to moving goods around the world? We often hear that the biggest revolution in our industry roots back to 1960 when the ocean container was invented to consolidate and move goods in a more efficient way. Since then, the global economy has grown, logistics services outsourced, 4PL services developed and E-commerce fulfillment, financial and order-to-cash services introduced. Technology has been used to ease the communication between shippers, forwarders and carriers and automate the movements of goods. Still, the productivity has not really changed since the turn of the millennium. In many areas, processes and interfaces are being used that were created during the nineties. More recently, this is not true anymore. Numerous indicators show that the industry is in store for dramatic change. A tsunami is coming up which is difficult to interpret from the beginning. The ones who recognize these indicators early enough will be ahead of the game. But what is it exactly where we take these signals of disruption from. And what has changed to the times before?

2 Following the Megatrends Everything starts with the customer. Logistics is a service industry and always tried to meet customer demand and expectations. And these are dramatically changing. Modern comforts from the B2C world swap over to B2B. 11

Convenience, control, automation, transparency and a personalized experience are things consumers have learned to appreciate. Technology is used to ease our life. On a daily base, we browse on online shops and social media, make use of digital banking and video on demand. Generation Y and Z born in the nineties and afterward have grown up with a superior digital experience and behave differently. What they started to appreciate in their private life, they expect to be offered also in their professional life. In 2020, 50% of the workforce on the job market will be represented by the generation Y and Z (LSP Digital 2018). It is clear that expectations with regards to the customer experience and the tools we use in our professional life must change accordingly. Replying to a request for quotations after five days—the industry’s average—is not good enough anymore. Low-touch service is now as influential in the buying decision as price (Freightos 2019). In addition, one can see that those companies which are building and focusing their value proposition on technology have grown significantly and have outpaced incumbents in market capitalization. Tesla proofs that point, by having become within only 10 years the most valuable automotive manufacturer in the world with a market cap of above 200 billion USD surpassing the new number two, Toyota (Korosec 2020). The most valuable companies of the world are not anymore the traditional ones we know from before but are replaced by tech companies. At the same time, with low interest rates worldwide, a lot of cheap money is available on the financial market to be invested into technology-driven startups. Venture capitalists (VCs) have recently invested around $28 billion in logistics startups, nearly all of it since 2015 (Hausmann et al. 2020). The most significant funding round ever in our industry has been closed last year by the digital forwarder Flexport with a 1 billion USD round led by the Vision Fund of Japanese Softbank. Rappi, a last-mile startup from Columbia also turned into a so-called unicorn by achieving a valuation above 1 billion USD last year. The number of unicorns offering solutions to the logistics and supply chain industry is steadily increasing. What do the startups do with all this money? They invest heavily into technology to drive efficiencies and further improve the customer experience. In addition, they buy market share with aggressive pricing, hoping to eventually dominate the respective market segment with superior productivity and customer value. No matter whether they will ever reach profitability, one remains for sure: 12

a customer with increased expectations toward its supplier when it comes to efficiencies and customer experience. It is not only the startups who invest heavily into technology. In fact, all big incumbents have been heavily investing into technology since around 2000, first to avoid the “millennium bug,” than to participate in the race for e-commerce, although with the burden of legacy systems and old technology stacks. Recently, both DHL and C. H. Robinson again announced tremendous investments into technology to change the way they do business today. They follow other industries which are ahead of the logistics world. For instance, the media industry was affected the first and went through a significant transformation. Many players have left the market, but the ones who have adopted the change early enough and changed their business models entirely have gone out of this transformation stronger than ever. Other industries ahead on the digitalization journey include the telecom, insurance and banking, retail and automotive industry (BCG 2017).

3 Changing Markets and Business Models What can be noted in other industries can be transferred to logistics as well. It starts with the growing importance of digital platforms and increasing numbers of transactions made on digital distribution channels. Digital challengers with better efficiencies and a better customer experience gain market shares. Usually, they gain traction in evolving and smaller customer segments, with new shippers and SME clients being attracted first. Consequently, churn rates at traditional suppliers not realizing the trend and not replying to the new offer increase and margins erode. As margins are usually higher with the smaller customers, this development is even more alarming. On top of the new players, others change their business models and move into the logistics industry. This can be particularly noted for the tech companies like Amazon and Alibaba. In order to ship their e-commerce parcels, they started to make use of the incumbent players of this industry. Step by step, they manage their warehouses alone, introduce their own linehauls, air freighters and even last-mile networks. The last piece of their logistics strategy they already introduce in certain markets like the USA, UK and Germany: offering spare capacity on their network to the market. The whole industry landscape and business models of the key players are 13

changing. Carriers are striving for direct sales and direct customer contact, forwarders are establishing digital sales channels and shippers are insourcing and becoming logistics operators, startups introduce digital business models, technology players become booking channels and some players develop into software as a service (SaaS) or analytics as a service (AaaS) providers. Figure 1 illustrates this change.

Fig. 1 Changing logistics industry landscape. Source Authors

4 The Structure of This Book The book is structured into three parts, highlighting the driving forces behind the digital disruption, the new business models emerging as a consequence and lastly various players driving these changes. Part one focuses on the influence of automation, increased asset utilization, better pricing transparency and better visibility. The second part takes the perspective of the drivers of this change: business models disrupting the existing logistics solutions on the market. These are: Last-mile delivery services E-commerce logistics Rate comparison and marketplaces 14

Asset tracking, software as a service and big data Warehousing automation Digital forwarding (road, air and sea) Autonomous driving vehicles Transport management systems and blockchain In the third part, we describe the main groups of movers and shakers behind the disruption. Carriers and truckers that need to defend their direct customer access and leverage the digital sales channel as a way to improve their pricing leverage Freight forwarders and other third-party logistics providers, the “middlemen” who need to fight against being cut out by digital markets directly connecting carriers and customers Technology providers and startups that are both challenger and enable to the existing logistics providers Venture capital investors that provide the seed capital to the new business models and compete with the large incumbent players for the best ideas and minds. In all parts of the book, we let those speak who are driving this change. The contributing authors are experienced practitioners of logistics as well as members of the logistics startups and venture capital firms around the world. May this contribution enlighten the interested reader and support them in reshaping the way how we run supply chains.

References BCG. (2017). Digital Logistics. Working paper. Freightos. (2019). Mystery shopping, If you build it they will click—The state of online freight sales 2019. Hausmann, L., Wölfel, T., Stoffels, J., Fleck, O. (2020). Startup funding in logistics. McKinsey Report. https://​www.​mckinsey.​com/​industries/​travel-logistics-and-transportinfrastructure/​our-insights/​startup-funding-in-logistics. Accessed 20 Jun 2020 Korosec, K. (2020). Tesla blows past Toyota to become most valuable automaker in the world. https://​techcrunch.​com/​2020/​07/​01/​tesla-blows-past-toyota-to-become-mostvaluable-automaker-in-the-world/​?​utm_​medium=​TCnewsletter&​tpcc=​TCdailynewslette​

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r&​guccounter=​1. Accessed 1 Jul 2020 LSP Digital. (2018). Customer: By 2020 Digital Natives will dominate the B2B customer base. Working paper.

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Driving Forces of Digital Disruption

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© Springer Nature Switzerland AG 2021 C. Wurst, L. Graf (eds.), Disrupting Logistics, Future of Business and Finance https://doi.org/10.1007/978-3-030-61093-7_2

Digitizing and Automating Processes in Logistics Wolfgang Lehmacher1 (1) Former Head of Supply Chain and Transport Industries at the World Economic Forum, Geneva, Switzerland Wolfgang Lehmacher Email: [email protected] Abstract Shippers, carriers and logistics companies have started to digitalize and automate processes by deploying relatively new technologies. Digital processes consist of data, rules or algorithms. Process automation is any workflow that controls itself by use of computers and software. Enabling technologies include robotic process automation (RPA), artificial intelligence (AI) and distributed ledger technology (DLT), to name a few. Such technologies do not work in isolation. Instead, they come usually as bundled in solutions. There are many use cases for the digitization and automation of processes in the logistics industry—in the area of logistics corridors and trade hubs, trade facilitation, consumer touch points and interaction, circular services, digital platforms and marketplaces, supply chain monitoring, risk management, trade and supply chain finance, and talent search and training, and decision making. Estimates indicate that logistics technologies could cut shipping and customs processing times by 16 to 28%. Collaboration is essential to extract the value. Wolfgang Lehmacher is a board member, executive advisor and business angel. He is Chairman of the Board of Directors, Logen, South Korea, Operating Partner, Industrial Innovation Partners, Anchor Group, Switzerland, and Lead Global Expansion and Growth Strategy, Topan AG, Switzerland. He was Director, Head of Supply Chain and Transport Industries at the World Economic Forum, Partner and Managing Director (China and India) at CVA, and President and CEO of GeoPost Intercontinental at France’s La Poste. Prior to La Poste, he was Head of Eastern European and Mediterranean Regions, and Country 18

General Manager Switzerland at TNT. The thought leader and practitioner in supply chain and logistics is member of the Logistikweisen, a logistics expert committee and think tank under the patronage of the German Federal Ministry BMVI and founding member of the Centre of Excellence for Global Emerging Supply Chain Technologies, Singapore. He is also Member of the Board of the Logistics & Supply Chain Management Society, Singapore. Lehmacher is book author and FT, Forbes, Fortune, BI, Nikkei contributor.

1 Introduction The future of logistics is digital, connected and autonomous. “From cloud computing in supply chain management to smartphones ever-present in shoppers’ hands, the supply and demand equation is under constant pressure. Businesses now need to be able to make things happen at a far more accelerated rate”, we can read in From Chaos to Control—Optimizing Global Trade with Data (Flexport 2018). Much of this burden lies on the shoulders of the logistics industry. Logistics is the backbone of the supply chain and the enabler of commerce and the economy. Logistics and supply chains are intertwined and cut across all businesses. The planning and managing of the processes from design to repurposing of goods and services stretch from the anticipation of products to prototyping, to manufacturing, to distribution, and—ideally—the continuous utilization of products, parts and particles in endless use cycles. The design of products impacts the subsequent processes along the chain—down to the delivery of goods and services to the customer, including maintenance and repair. Design determines also the ability to use the products and their parts in loops—from use cycle to use cycle. The ideal supply chain is circular and without waste; the chain of subsequent transformations of different resources, materials, parts and products—with the minimum energy use and carbon footprint, water and land utilization. Digitization helps planning and managing logistics and the supply chain. The more the process is digitized and automated, the lower the cost and the risk of error and disruption. Logistics stands for the handling, storage and transport of goods. Logistics is the enabler of the world of commerce. Digitization at its core is the replication of the physical world in the digital space created through technologies, such as 19

optical character recognition (OCR) and the Internet of things (IoT). The digital twins, in turn, impact their underlying physical reality and enable process automation. The hardwares, like OCR and IoT devices, robots and 3D-printers, Internet deep-sea cables and satellites, are enabling technologies of the digital transformation process. In the digitized world, processes are driven by data. Digital processes consist of data, rules or algorithms. Process automation is any workflow that controls itself by use of computers and software. Process automation requires digitization, i.e. that assets, goods, including their locations and conditions, products and services are converted into data, rules and algorithms. Enabling technologies are robotic process automation (RPA), artificial intelligence (AI), distributed ledger technology (DLT) and smart contracts, to name a few. In the Fourth Industrial Revolution, such technologies do not work in isolation, but come usually as bundled in solutions such as platforms. Platforms are digital architectures, marketplaces, spaces of data aggregation. They function on the basis of data, like digital identities (DIs) of suppliers, customers and products, service and pricing data, historic transaction data, the location of trucks, containers and shipments; data produced by IoT devices like sensors and telematics, or pulled in from the information systems of different stakeholder involved in the process. The resulting data volumes or lakes are so overwhelming that AI tools are needed to analyse the data sets and select the most relevant and critical ones. The algorithms are the “secret sauce” of the platform business models—like the one automating the ranking of products at Amazon. Over time, close to everything in the universe will be digitized. The surface of the Earth, oceans, forests with their biological diversity, and the stars. We can digitize identities through Facebook and LinkedIn. While sensors help to digitize the conditions of physical goods. They allow to record the temperature of sensitive drugs or food, and the humidity level and shocks, for example, electronics are exposed to during transport. AI-powered tools like Alexa digitize voice and help humans to easier interact with the digitized world. Chatbots digitize customer service communication and processes and a device dubbed ‘AlterEgo’ digitizes our thoughts by picking up neuromuscular signals triggered by internal verbalizations; in order to speak, the brain needs to send impulses to our muscles which the system picks up, analyses and decodes. Facebook is building brain–computer interfaces (BCI) that turn thoughts into data by 20

intercepting brain signals instead of nerve signals. Also Elon Musk’s Neuralink is developing brain–machine interfaces and plans to implant devices in paralyzed humans, allowing them to control phones or computers (Lopatto 2019). Yuval Noah Harari, historian and the author of Sapiens, believes that we will be able to download, change and again upload the content of our brains. Data can be captured, generated, analysed, shared and utilized in many ways. Intelligent cameras help to raise security at the gate. Facial recognition ensures that only authorized personnel can enter. Cameras feed cognitive operating systems with information taken off number plates that help monitoring movements at logistical sites. They can track people in office buildings and warehouses. OCR in combination with AI can help to populate fields with text extracted from documents. OCR minimizes data entry work and errors. It assists AI tools in checking the content of documents, validating and remediating data by cross-referencing. Technology reduces risks, for example, through scraping documents for anti-money laundry keywords. Cognitive operating systems crawl internal enterprise resource planning (ERP) systems to find and filter out data. Powerful data mining tools can extract data from hundreds of thousands of places in the digital world, which allows slicing and dicing the social media and website data according to specific needs. There are 2.5 quintillion bytes of data generated each day at our current pace, but that pace is only accelerating with the growth of the IoT (Domo 2019). By 2026, the newest generation aircraft by then will create between five and eight terabytes per flight, up to 80 times what older planes today generate (Maire and Spafford 2017). Small and big data aggregated on platforms combined with immense computing power and algorithms allows predictive and prescriptive analytics. Predictive analytics help to detect failures before they occur. This enables maintenance before a part becomes hazardous—leading to cost reductions, high reliability of components, lower inventory and shorter maintenance turn times. Thanks to data and IoT, advanced analytics (AA) and AI inform operations in near real time. More precisely, descriptive analytics can identify that an event occurred, and diagnostic analytics determine the reason of the event (Proponent 2018). Then, prescriptive analytics applies machine learning (ML), a subset of AI, to offer specific and actionable steps that prevent the failure brought up in the predictive data analysis from occurring. Data creates value through connectivity. Connectivity is a part of digitization. Communication networks connect things, like fixed and mobile 21

assets, transport data (small/operational and big data) and distribute intelligence. Intelligence can sit close to devices (edge) or in the cloud. Software tools connect operating systems across the digitized world through application program interfaces (APIs). APIs are a set of functions and procedures enabling the creation of applications that access the features or data of an operating system, application, or other service. It is connectivity and the digitization of documents, identities, locations, behaviours, etc., that enable us to automate logistics processes. Digitization brings a broad range of possibilities to consumers, companies and governments. Within businesses, digital architectures allow to form a deeper understanding of our doing and establish a baseline of our business processes as the starting point for further improvements. Digital replicas provide data and analytics which show how, for example, different cranes are performing. AI helps optimizing demand forecasting and the procurement and sourcing processes. Chatbots support customer service processes. Smart contracts automate transactions. Smart contracts are pieces of software that execute payments without human intervention, for example, once pre-agreed and predefined conditions are met, such as reaching a certain geographical location. The complexity of tasks to be solved by technology is increasing. OpenAI, a technology company co-founded by Elon Musk, Greg Brockman, Ilya Sutskever and Sam Altman, the company’s CEO, aims at building artificial general intelligence (AGI) in partnership with Microsoft that can tackle highly complex tasks (Feiner 2019). “Modern AI systems work well for the specific problem on which they’ve been trained, but getting AI systems to help address some of the hardest problems facing the world today will require generalization and deep mastery of multiple AI technologies”, the partnering companies explained in a press release. “OpenAI and Microsoft’s vision is for artificial general intelligence to work with people to help solve currently intractable multidisciplinary problems, including global challenges such as climate change, more personalized healthcare and education”.

2 The Benefits of Digitization and Automation The McKinsey Global Institute estimates that new logistics technologies could cut shipping and customs processing times by 16 to 28% (McKinsey 2019). As part of the World Economic Forum’s work on enabling trade, Bain and 22

Company estimated several years ago that if countries could reduce just two supply chain barriers—border administration and telecom/transport infrastructure—to half of global best-practice levels, global gross domestic product (GDP) could rise by nearly 5%, while trade could improve by almost 15%. By comparison, eliminating all import tariffs could increase global GDP just 0.7%, while boosting trade by 10%. The estimate still holds true today. Digitizing objects and locations, for instance, allows shippers, logisticians, transport companies, consumers and government agencies to monitor the position of assets, goods and people—where they come from and possibly where they head towards. Thanks to digital identities, sensors, communication networks and digital maps. This way, disruptions can be avoided, cost reduced and the level of security and safety increased. The United Nations Economic and Social Commission for Asia and the Pacific adopted the Framework Agreement on Facilitation of Cross-Border Paperless Trade in Asia and the Pacific in 2016 to advance regional coherence (ESCAP 2016). The agreement is designed to encourage adoption of digital tools that will facilitate trade. Some estimates suggest full implementation could boost Asia Pacific exports by as much as $257 billion annually, while the time required to export could fall by 44%, according to the United Nations Economic Commission for Europe (UNECE) (United Nations 2018). Alone the argument for efficiency—that is, the reduction of waste, fraud, delays and transportation costs, among others—would carry the day. In addition, like no other effort before, digitization has enabled to think in business ecosystems. The idea is to tap into an entire system of assets and resources in a specific business area or space. This allows to better manage the resources available to increase capacity utilization, reduce cost and the carbon footprint. The ecosystem is a powerful concept that drove the development of platforms, operationalizing the idea. Platforms have changed business and large parts of the economy over the last decade. In fact, platforms have become the new champions of the economy, namely Uber and Airbnb, but also Apple. Platforms eliminate inefficiencies und provided new offers. Digital platforms like eBay, Alibaba and Tencent allow smaller players to participate in global commerce and trade without the need to heavily invest in their own global supply chains.

3 The State of the Logistics Industry 23

Structural inefficiencies in logistics and the supply chains, which are fragmented in nature, and the heavy reliance on paper have prevented a broad and deep transformation of the industry. Even today, remains a massive volume of paper required for communication among customs brokers, freight forwarders, transportation carriers, and government agencies. Paper-based manual processes, some created centuries ago, lead to complexity and delays, introduce errors and risks, and stand in the way of reliable, real-time information gathering and tracking required for efficient logistics management. Countless nonstandard documents are in circulation, different format for commercial invoices in use. Data is redundant and transmitted multiple times. Spreadsheets and emails are still common. Communication by email makes sharing, storage and analyses of information difficult. Hughley varying customs regimes add to the complexity. The logistics and supply chain processes are labour intense and error prone. Hence, shippers of goods have been unwilling to invest in integrating with freight forwarders, government bodies and document preparers, and many banks have been reluctant to invest as long as corporate adoption remains low. However, the tide may have turned. Firms have started to digitalize and automate their supply chain processes by deploying relatively new technologies. Logistics, transport and freight forwarding companies are now investing in digitalizing their operations. Millions of sensors, tags and badges allow the collection of small operational data about the status and changes in each part of the system. Real-time locating systems (RTLS) identify and track the location of assets, individuals and objects, such as trucks, rubber tyred gantry (RTG) cranes and reefer containers. Express companies push status information to smartphones. Logistics service providers have started to develop digital portals which provide customers with access to services, prices and information. With startups like FreightHub and Zuum the first digital freight forwarders have emerged and with Flexport the logistics industry got its first unicorn. The Protiviti and ESI ThoughtLab study Taking RPA to the next level, which is based on a global survey of 450 executives finds that in average companies plan to spend USD 5 million on robotics process automation (RPA) software in 2019 (Protiviti 2019). Using automation to enhance commercial value. Cost reduction ranks as the lowest potential benefit of RPA, only mentioned by just 3 percent of the respondents of the survey. Intergovernmental organizations, such as the United Nations (UN) and the World Trade Organization (WTO), have been encouraging investment in new 24

technologies to help promote economic growth. Governments are pushing to digitally connect the logistics and trade ecosystem. Initiatives such as the Singapore National Trade Platform and the Trade Receivables e-Discounting System in India aim to bring together the major stakeholders. Particularly in the Asia–Pacific region, governments see expanded trade and seamless supply chains as a way of attracting investment in manufacturing that will create jobs. They embrace technologies that increase efficiency of customs clearance processes, reduce corruption and chokepoints, and funnel trade flows through a single digital platform.

4 Advanced Logistics Use Cases There are plenty of use cases for the digitization and automation of processes in logistics. The cases demonstrate that the change is real and show that the logistics industry has shifted gear to get ready for the Fourth Industrial Revolution.

4.1 Logistics Corridors and Trade Hubs Parag Khanna, specialist in international relations, writes “Data, and its transfer on the internet, is the newest layer of global connectivity infrastructure, and that's really the point of departure (Gomersall 2019). The purpose of it is to carry all different kinds of data. It represents the highest value-added new dimension of world trade”. In the Fourth Industrial Revolution, the digital layer is as important as hard infrastructure like highway and railway systems, ports and airports. Digitization enables logistics corridors to increase their level of utilization and trade hubs to find new sources of business in times of shifting trade flows by reinventing themselves as hubs of digital trade. 3D-print, robotics, AI and the IoT are driving distributed manufacturing which shortens supply chains (World Economic Forum 2017). Geopolitics, economic development and distributed manufacturing divert trade flows. “With physical trade possibly declining, Singapore can expand and license its digital trade platform to global users. It can become a free data port as well”, write Tan Chin Hwee and Sangeet Paul Choudary in an article for The Straits Times (Hwee and Choudary 2018). Singapore might be able to capture trade flows that shift away from political countries by building a trade platform, for instance to serve small and medium-sized enterprises (SMEs) in the city state and countries 25

that lack the resources and do not wish to become over reliant on platforms like Tencent and Alibaba. The new Silk Road, also called the belt and road initiative (BRI), has also its digital layer: the digital or information Silk Road. This cyber Silk Road is a network of Internet deep-sea cables connecting the belt and road globally. Satellites are helping to navigate any kind of machinery from aircraft to trains, to ships, to submarines. With the introduction of this digital layer, China turns the BRI into a powerful system of hyper connectivity, with a land, a sea and a space dimension. Companies could achieve real-time end-to-end supply chain visibility by deploying low-cost satellites accessible by smartphone or other mobile devices. Companies like Amazon have pioneered the use of such satellites and the commercial satellite supply chain to democratize access to satellites (Holmes 2019). This helps to optimize the flow of goods and the use of capacity, for example, through speed, routing and dynamic pricing. DLT, like blockchain provides real-time shared asset transparency between market participants and reduces information asymmetry. Imagine available space in container cars travelling across a Central Asia desert advertising their readiness to take loads—potentially at a discount—and connecting with shippers en route looking for a cost effective and efficient way of transport (Gottfredson et al. 2017).

4.2 Trade Facilitation Border processes can be a burden for international commerce and trade. Many countries are developing single windows that serve as one point of exit and entry for submitting regulatory documents and other supporting evidence when merchandise is imported or exported. The single window is an electronic process, usually enabled by a Web-based interface, through which trade and transport companies and other stakeholder can provide standardized information and documents. Without such an option, companies must separately submit information and documentation to participating agencies, which typically operate different systems and procedures. Moreover, some agencies still maintain manual systems. In Senegal, for instance, the electronic single window reduced border preclearance and clearance processing time by 90 percent, from an average of two weeks to just one day, according to Paperless Trading: How Does It Impact the Trade System?, a White Paper by the World Economic Forum and the 26

UNECE (World Economic Forum 2018). The cost of border processes has decreased by 60 percent, while the streamlined system has allowed the border agencies to reassign staff to other priority areas.

4.3 Consumer Touch Points and Interaction One who has a smartphone hardly leaves home without it. Twenty-first century consumers wish to access the world of commerce through their fixed and mobile devices. They find it hard to accept that a merchandise or capacity cannot just be ordered like a Lyft or Uber or booked like a room with Airbnb. They expect options and user experience (UX) offered by logistics companies to be same. These are the kind of spill-over effects, also known as the Amazon effect faced by industries today, which need to increasingly learn from each other. New systems like smart lockers and boxes have been developed to smoothen the delivery and collection of goods. The system hardware is integrated in (digital) processes that generate valuable customer information—for example, when an order has been delivered or a return shipment was picked up by the courier. Digitization triggers new ways of consumer engagement. Also, couriers interact differently with delivery and pick-up places. Smart digital systems allow them to open spaces, dispose or collect goods. Events are digitally recorded and shared with receivers and senders, forwarders and carriers across the logistics chain. The transparency of what is happening and what has occurred allows to trace back when something went wrong, for example, when an order got lost. Consumers expect full and instant access to information. They are disappointed by drivers that do not show up and frustrated when products are sold out before Thanksgiving or Christmas. The upfront provision of information can help. While AI tools are very powerful in gathering and analysing data, chatbots lack empathy and problem-solving capability. But technology shortens waiting times and improves the quality of information provided to consumers. AI enhances customer-agent conversations without replacing staff (Newlands 2017). Digitization is also improving the communication through digital voiceactivated assistants. Just imagine you ask,” “Contact UPS and find out when yesterday’s order will arrive” and your digital assistant connects to a chatbot, finds the information and gets it back to you—by voice. The voice revolution gains traction. With a 90% awareness and an above 70% adoption rate, the usage 27

of voice assistants is turning into a consumer trend (PWC 2018).

4.4 Circular Services Daily, we receive news about the degradation of nature, oceans and the climate. We need to think like nature, we need to think circular. “The circular economy aims to enable effective flows of materials, energy, labor and information so that natural and social capital can be rebuilt”, we can read in the World Economic Forum white paper Intelligent Assets—Unlocking the Circular Economy Potential (World Economic Forum 2015). The circular economy is an appealing and viable alternative to the linear “take, make, dispose” model and offers clear opportunities to create value (Lehmacher 2017). The Ellen MacArthur Foundation has identified “a $1 trillion opportunity for businesses worldwide in adopting a circular economy”. The redesign of the economy requires new skills in design, material science, manufacturing and logistics. Capturing the value at the end of a use-cycle is a challenge. Reverse logistics processes are required. They feed end-of-use products into the next cycle—from wherever they may come. The next cycle can be a reuse, a remake or a recycling process. One way to capture products is to simply ask consumers to bring or send them to a collection point, for example a shop or warehouse, or place them into a box or locker. Another, however, costlier option is to collect the goods at the consumer. Digitization brings new possibilities in design and supply chain management. Digital identities (DIs) of consumers combined with product and usage data, for example, stored in a distributed ledger helps communication with consumers and the repurposing of the merchandise. IoT devices can help to localize products or determine their residual value, for example, for a re-sale. Considering the volume of data, making use of this information requires computing power and artificial intelligence (AI). Hence, IoT, AI and cloud computing are critical enabling technologies to realize the circular economy.

4.5 Digital Platforms The 2019 Global Freight Forwarding report published by Transport Intelligence (Ti), found that 49% of shippers taking part in the survey have used an online forwarding platform. The report predicts that 18.7% of volumes will be booked/shipped online by 2023 (Manners-Bell et al. 2019). One of the key challenges of logistics is capacity, precisely the lack or surplus thereof. An 28

estimated 25% of all freight vehicles in Europe run empty and over 50% run with only partial load (Sheffi 2012). Uber Freight, Amazon and many other trucking platforms aim at replicating what successfully worked in the taxi, retail and travel industries. The goal of these marketplaces is to reduce inefficiencies and increase vehicle capacity utilization. In trucking, for instance, platforms exist for long distance freight movements, i.e. the full truck load (FTL) and less than full truck load (FTL) segments, as well as for first and last mile transport. Marketplaces assist shippers and carriers but also the freight forwarders to find capacity on trucks, planes, trains, barges and ships but also cargo for empty capacity. The same is valid for warehouse space. Companies can improve their business analysis and planning, and automate operating processes thanks to the data captured and structured within these platforms. Freight forwarders often see platforms as a threat. On the other hand, some platforms like Zuum and Quicargo, consider themselves as partners that offer digital tools to ease the lives of brokers and dispatchers. The jury is still out. However, freight forwarders may find it hard to compete without digitizing their processes over the mid run. Forwarders can benefit and leverage each other’s own capacity or access thereto, assets and infrastructure within and outside their own coverage area to fill gaps or expand their reach. Companies can build their own platforms or leverage other platforms through their transport management systems (TMSs) and warehouse management systems (WMSs). Platforms are a mean to digitize a business, by connecting with the available marketplaces and using services offered through them. These include document management services, and route optimization and tracking tools. In 2018, APM Terminals launched an online platform (apmterminals.com) offering services, like booking of appointments and slots as well as the processing of payments and invoices. This platform was launched at Khalifa Bin Salman Port (KBSP) in Bahrain. The Port of Rotterdam offers PRONTO, an application that shipping companies, terminal operators and other port stakeholders can use to manage their tasks during a port call based on standardized data exchange. As an example, PRONTO links into the Hamburg Vessel Coordination Center (HVCC) to exchange port call information. Antwerp invested in NxtPort, a data platform offering a range of port services, for example around container weight data and customs information. Singapore launched Calista, an open supply chain platform that invites other ports and 29

logistics players to join, going beyond the port to capture the value of an end-toend logistics process. Flexport, a digital forwarder, connect within its platform importers, exporters, trucking companies, ocean carriers, airlines, customs agencies, and port terminals. Customers can access up-to-the-minute updates and alerts allowing for near real-time adjustments to keep logistics, commercial, and customer expectations on track. Tradeshift, an open supplier collaboration platform with third-party apps, allows companies to manage direct and indirect spend. Platforms allow companies to gain increased control over some of the most critical business processes—from procurement, inventory, cash flow and customer relations, to compliance and tax planning. Chief Financial Officers can reconcile what is in-transit with what’s on the balance sheet.

4.6 Supply Chain Monitoring Many shippers do not know where their merchandise is, when it will arrive or whether it has arrived, for example, at a dealer or retailer. Knowing the position and condition of goods is a pre-requisite for hands-on supply chain management, particularly when dealing with vaccines, flowers and cooled and frozen food. Position and condition data is also the basis for process automation. Lack of transparency makes it hard for shippers to check logistics invoices. Today’s consumers also wish to know what they buy, from whom and how it was produced. They request information about materials, ingredients and want to be sure that no child labour was involved, and trades were fair. Maersk, the world’s largest container shipping line has introduced a remote container management (RCM) system that permits monitoring cargo and its moves (Marle 2016). This is particularly relevant for sensitive, higher value refrigerated container freight, where equipment can be knocked-off, for example, by rough weather. Over close to three years, Maersk has installed Internet of things (IoT) devices and sets to track roughly 270,000 reefer containers. Deploying IoT sets in all containers moving on the world’s oceans might require collaborating with IoT platform providers that deliver the sensors where they are needed and pick them up where their use-cycle ends. IoT specialists, like Arviem and Roambee are providing services on a pay-as-you-go basis that spares customers the upfront investment and optimizes the use of the IoT sets across various customers. 30

Food companies must ensure the origin of organic crops and more mining companies want to confirm fair-trade practices for their entire supply chain. Many retailers seek to track fair-trade and sustainable practices for the goods they sell. Platforms that offer information and stories around the producers and the produce, like the solution offered by Producers Market are emerging. Three large banks have teamed up with supermarket chain Sainsbury’s and consumer goods group Unilever to launch a distributed ledger system that rewards Malawian tea farmers who use sustainable methods with cheaper finance. The system collects data from the farmers based on social and environmental questions ranging from water usage to compliance with anti-slavery laws. This data will help Sainsbury’s and Unilever to achieve their objective of ensuring their supply chain is socially and environmentally sustainable. Visibility also increases security. Information about provenance and the treatment of products is important in case of recalls of defective or toxic goods. Often, the provenance is lost once the product has left the factory. But a unique digital product identity ensures traceability from supply to manufacturing to distribution and consumers. Monitoring also allows to establish risk profiles to help with supply chain and trade finance, and to manage risks.

4.7 Risk Management There are many factors that cause challenges or disrupt the supply chain, starting with a failure of an automated terminal to adverse weather conditions, a labour strike and criminal acts. The FBI estimates the costs of cargo theft to US-based businesses north of $30 billion each year (Lewis 2017). In Shanghai, the pass cards of the staff and visitors taking the elevators that service floors 23 and 25 of Yitu Technology’s headquarters read automatically, no swipe required, and each passenger is deposited at their specified floor, and only there. Cameras record everyone entering the building and track them inside. “Our machines can very easily recognize you among at least 2 billion people in a matter of seconds”, says chief executive and Yitu co-founder Zhu Long (Aldama 2017). Yitu’s generic portrait platform already contains 1.8 billion photographs of those logged in the national database plus everyone who visited China recently. Three hundred and twenty million of the photos have come from China’s borders, where pictures are taken of everyone who enters and leaves the country. This is today’s cutting-edge technology to protect any kind of asset, from stores, to warehouses, to vehicles, to airports and entire cities. In Boston, 31

intelligent security cameras are even anticipating crime (Del Prado 2015). The security system monitors feeds in real time and alerts authorities the moment it identifies unusual activity. Tel Aviv maritime data provider Windward claims that it wields AI to predict accidents for whole world fleet. The Israeli startup signed a deal with London-based insurance market Lloyd’s in November 2017. Windward will supply “Lloyd’s member companies with software that forecasts accidents and dangerous conditions like maritime hostilities breaking out in a specific area” (Orbach 2017). Flex, with Apple, Microsoft and Ford Motor as customers, “designed realtime collaboration software called Flex Pulse that can send supply chain data to large interactive touch-screen displays in factories, computers, tablets or mobile devices” (King 2015). The AI-based system helps to predict actual and potential disrupters, such as supplier delays, strikes, earthquakes or tsunamis and allows the teams to make informed decisions to keep inventory moving and consumers happy.

4.8 Trade and Supply Chain Finance Financing is a key enabler of commerce; particularly, for SMEs that often seeing their requests rejected. Letters of credit and guarantees are particularly unattractive for small-ticket transactions and SMEs because of the relatively high operational costs (World Economic Forum 2018). Banks have tried for decades to reduce inefficiencies by transforming trade and supply chain finance. The typical cost-to-income ratio in traditional trade finance is 50–60%, meaning that more than half of the price charged to clients for trade finance needs to cover operational expenses even before covering the costs of risk, liquidity and capital. Digitization helps to automate processes and safe time and paperwork to bring costs significantly down. Bringing SMEs on finance platforms will reduce cost but even more importantly create records that contribute to know your customer (KYC) requirements and increase the chances of SMEs benefitting from low-cost financing. Banco Bilbao Vizcaya Argentaria (BBVA) has applied a distributed ledger technology (DLT)-based system to reduce the time for submitting, verifying and authorizing an international trade transaction from over a week to just 2.5 h. The 32

pilot was run on a transaction in which Spain-based FRIME bought 25 tons of frozen tuna from Pinsa Congelados of Mexico; payment was made using a letter of credit issued by BBVA in Spain and processed by Bancomer in Mexico. An application combining several technologies was used by the Australian cotton trader Brighann Cotton Marketing for a shipment of 88 bales of cotton from Texas (USA) to the Chinese port of Qingdao. The shipment represents the first time two separate banks—in this case, the Commonwealth Bank of Australia and Wells Fargo—have used a combination of distributed ledger, smart contracts and IoT technology to facilitate a trade transaction. IoT sensors allowed the banks to monitor the shipment’s route, triggering the smart contract to release payment for the cotton once it crossed a predefined location. Some governments accelerate adoption of digital technologies for trade processes, which will help companies, especially small businesses, become more competitive exporters. To reduce fraud and errors, the de facto central banks of Hong Kong and Singapore announced plans to link trade finance platforms they are developing with distributed ledger technology. Linking the two platforms is part of a broader plan between the Hong Kong Monetary Authority and the Monetary Authority of Singapore to collaborate on distributed ledger and other financial technology.

4.9 Talent Search and Training Trained talent is in high demand. Younger generations seek work–life balance and prefer to work in flat dynamic structures and startups instead of the traditional corporates. They wish to learn fast and work with technology. Smartphones, apps and even emojis appeal to workers raised on mobile technologies. Digital natives, i.e. people that grew up with the Internet and the broad range of digital technologies and service are intuitive digital learners. According to the technology market advisory firm ABI Research, the global Warehouse Management System (WMS) market will be worth US$5 billion by 2025, growing at a CAGR of 13.9%. The continuous success of e-commerce and the trend towards delivering the orders increasingly faster puts pressure on warehouse operators to process the online purchases more rapidly. This is driving investment in warehouse facilities, automation technologies and warehouse management systems. Luring and training staff that need to work with the systems in the warehouses is expensive. A user-friendly application can 33

cut training time in half for new hires (Phillips 2018). “If you know how to use a smartphone and you know how to use an app, you can do about any operation that we have in our facility”, explains Bert Hooper, head of global fulfillment at the online retailer TechStyle’s who designed five e-commerce warehouses with such user-friendly systems. Digital freight forwarder Flexport developed a cargo-handling system based on emojis, helping planners to decide on plane and position and guiding handler throughout the loading process through the emojis printed on the labels placed on each piece of freight. As this modern way of working is based on equipment that organizations can buy in almost every town and electronics shop, they are less vulnerable to supply shortages of specially designed devices.

4.10 Decision Making While the magnitude and complexity of today’s supply chain networks are driving the need for in-depth analysis of huge amounts of data, the rising dynamics of the business environment is shortening the time for decision making. Poor decisions can be highly costly. Delays in delivery result in returns and out-of-stock items cause revenue losses. The decision to release a huge volume of merchandise before the end of the quarter—to make the budget— cause major bottlenecks in ports and customer frustration in the mid run. Merchants need to make choices for next season’s fashion early on and worry that their goods will not be bought. Consumers wonder whether they can get what they want. Supply demand mismatches are costly and inefficient for all participants. Nike is integrating AI tools into their mobile apps and website that help to better predict what styles of sneakers and apparel customer want (Thomas 2019). AI also enables a new approach dubbed optimised line planning, a solution which integrates data from multiple sources, such as internal sales and customer records, competitive intelligence, trend analysis, and social media to create a customer profile also called persona (Petro 2017). This customer segmentation allows to determine the groups of product attributes which will resonate best with each persona. It enables to create design placeholders for the next season, and even allows to calculate the expected revenues as the starting point for a line plan for designers and merchants. Optimised line planning provides confidence that the sales targets will be met, and consumers get what they wish.

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When companies know who buys what and when, they can purchase or produce to demand or preposition goods for future delivery, i.e. send goods towards us before we even know that we will buy them (Bensinger 2014). Amazon has been using machine learning for years to realize such a vision and automate the related decision-making process. But also, other companies are using AI. Otto, a German e-commerce merchant has created a system which analyses around 3 billion transactions and 200 variables, such as sales data, website searches and weather information (The Economist 2017). With 90% accuracy, the AI system predicts the sale in the next 30 days. Without human intervention and based on the decisions made by the system, the company purchases around 200,000 items a month. The result: surplus stock declined by a fifth, product returns by more than two million items a year. While customers get their orders faster, the planet benefits too—as fewer packages get shipped and sent back. Table 1 summarizes the advanced logistics use cases. Table 1 Advanced logistics use cases Use case

Challenge

Solution

Examples/Enablers

Logistics corridors

Limitation in usage and cost of building new infrastructure

Better utilization of existing capacity, through end-to-end visibility along corridors and effective marketplaces

· Digital Silk Road

Trade hubs

Geopolitics and distributed manufacturing shorten supply chains and divert trade, reducing volumes in traditional trade hubs

Hub of digital trade to capture trade flows that shift away through digital platforms, advanced services and ease of access and processing

· Singapore National Trade Platform

Trade facilitation

Separate submission of documents Single window, which is an to agencies - which may operate electronic process usually different systems and procedures— enabled by a Web-interface driving cost

Consumer touch points and interaction

Consumers become increasingly digital and expect similar digital services and convenience across sectors, including government (Amazon effect)

· Digital marketplace

· Countries that ratified the WTO trade facilitation agreement

Digitization of supply chain and · Digital portals logistics processes - improving · Apps the UX and cross-industry · Smart lockers and learning boxes · Chatbots

Circular services

Nature, oceans and the climate are degrading; this causes increasing

Circular economy and society, based on sustainable processes,

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· Reverse logistics

services

Digital platforms

degrading; this causes increasing risks for assets and humanity

Undersupply or surplus of logistics capacity, on vehicles in warehouses, etc., resulting in waste of space, unnecessary carbon emissions and high costs

based on sustainable processes, applied from the design to the

· Upcycling

repurposing of goods

· Stakeholder and product data

Platforms, i.e. marketplaces that help shippers, forwarders and carriers to close gaps, i.e. to easily and quickly find capacity or cargo

· Trucking platforms, like Uber Freight · Port platforms, like PRONTO and NxtPort · TMS/WMS that link platforms · Flexport, Tradeshift

Supply chain monitoring

Lack of visibility and transparency is a challenge with negative impact on performance and compliance, which leads to complaints, damages and legal risks

IoT devices and platforms to gather and analyse data to drive corrective action and automate supply chain processes to avoid human error and delays

·Sensors and AI

Risk The supply chain is exposed to management many disruption risks, including natural disasters, pandemics and crime

Intelligent AI-based systems that detect and anticipate risks

· Building, site and asset protection

Trade and Lack of KYC and high cost of supply chain financing resulting in a global trade finance and supply chain finance gap of approx. USD 1.5 trillion, faced largely by SMEs in Asia Pacific

Blockchain-based finance platforms to replace paperheavy letter of credit (L/C) process

· Finance platforms, based on IoT, DLT and smart contracts

Talent search and training

Operational systems based on smartphones, apps and even emojis that appeal to digital natives

· TechStyle’s userfriendly application in e-commerce warehouse

Shortage of talent and the “digital” expectations of younger generations force companies to offer advanced workplace technology

·IoT-equipped reefers ·Platforms collecting data from farmers to improve sales and ease finance

· Anticipating accidents, crime (Boston) and risks (Flex Pulse)

· Link of Hong Kong/Singapore trade finance platforms

· Flexport’s cargohandling system based on emojis

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based on emojis Decision making

Decision making is a resource intense process; wrong decisions can be very costly, even disastrous

Automating the decisionmaking process

· Amazon preposition patent · Otto’s demand forecasting · Nike AI tools · Optimized line planning

Source Author

5 The Dark Side of the Digital Age The digitization and automation benefits do not come without cyber-risk. The estimates for the 2019 information security spending are well above USD 100 billion (Moore and Keen 2018). This should not hold us back. With the world’s growing population and the resulting increase in needs there remains little choice. What we need is a new quality of risk management. Cybersecurity is the responsibility of the leadership team and cannot be delegated to the information technology (IT) department. The cross-cutting complexity and the magnitude of the potential damage, in form of losses of goods and hits to reputation, require a holistic analysis and permanent attention from the leadership. The good news is that cyber-risk can largely be mitigated with traditional risk management tools. Though, some digital tools need to be added and AI will play a key role in the ‘battle of bots’. In cyber-risk management, the exchange of information about identified risks and successful mitigation practices across industries and the economy is paramount. So is the creation of cyber risk resilience networks. As an example, the shipping industry has started working in this direction. The International Maritime Organization (IMO), the Baltic and International Maritime Council (BIMCO), Maritime and Coastguard Agency (MCA), United States Coast Guard (USCG) and many other industry stakeholders issued guidance and shared best practices to address cyber threats.

6 Steps Towards Digitization and Process Automation There are a number of steps a company can take to advance digitization and 37

automation of processes: 1—make digital transformation a strategic priority, 2— break the data silos and analyse what is available to understand the pain points and data gaps to be closed, 3—define an advanced technology roadmap, and prioritize use cases for proof of concept (PoC), specific workflows and cost– benefit analysis, 4—invest selectively in new technologies, such as OCR and robotic process automation (RPA), to harness near-term benefits and prepare teams and the organization for developing longer term solutions, 5—explore partnerships with other logistics ecosystem participants and technology companies, 6—upgrade legacy IT systems and shift to a modular, more adaptable architecture that uses middleware and application programming interfaces (APIs), and 7—design a next-stage operating model, including new governance and effective ways of working in the digital, connected and automated era. The digitization and automation of processes in logistics are critical to making the supply chain and logistics smarter, and hence, more efficient, reliable, resilient and sustainable. Sustainability is paramount as it is the economic, social and ecological viability of any organisation. As logistics cuts across the core of every company, this is an important step towards creating a digital enterprise. Orchestrating the change required demands strong leadership. Transformation roadmaps and digitization programs are needed to back up the push from the top. Usually, digital programs start with experimentation. The successful experiments are selected to be taken to scale them throughout the organization, with all the challenges and obstacles, including securing funding and changing the thinking and behaviour of people. The digitization and automation of processes in logistics require collaboration along the chain. The industry has understood this. An example is the Digital Container Shipping Association (DCSA), established in Amsterdam by four container shipping companies, A.P. Moller-Maersk, MSC, Hapag-Lloyd and Ocean Network Express (ONE) on 10 April 2019 (World Maritime News 2019). After only one year in existence, the DCSA membership represented 70 percent of the global container shipping market. The joint effort of digitizing and automating processes in logistics can help to transform what many outside the industry consider to be a simple process of moving merchandise from one location to another into an even more competent and potent contributor to the well-being of our economy and society.

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neuralink-brain-reading-thread-robot. Accessed October 23, 2019 Maire, S., Spafford, C. (2017). The data science revolution that's transforming aviation. https://​www.​forbes.​com/​sites/​oliverwyman/​2017/​06/​16/​the-data-science-revolutiontransforming-aviation/​#4951a2767f6c. Accessed October 20, 2019 Manners-Bell, J., Lyon, K., Cullen, T., Bailey, N., Keckarovska, V., Ralls, A. (2019). Global Freight Forwarding 2019. Transport Intelligence Marle, V. (2016). Maersk Line introduces remote container management “gamechanger”. https://​theloadstar.​com/​coolstar/​maersk-line-introduces-remote-containermanagement-game-changer/​. Accessed October 18, 2019 McKinsey. (2019). Globalization in transition: The future of trade and value chains. McKinsey and Company Moore, S., Keen, E. (2018). Gartner forecasts worldwide information security spending to exceed $124 Billion in 2019. https://​www.​gartner.​com/​en/​newsroom/​press-releases/​ 2018-08-15-gartner-forecasts-worldwide-information-security-spending-to-exceed-124billion-in-2019. Accessed October 23, 2019 Newlands, M. (2017). These 5 experts share their predictions for Chatbots in 2018. https://​www.​forbes.​com/​sites/​mnewlands/​2017/​12/​27/​these-5-experts-share-theirpredictions-for-chatbots-in-2018/​#c7ce2fa15300. Accessed October 10, 2019 Orbach, M. (2017). Lloyd’s signs deal with maritime data startup windward. https://​ www.​calcalistech.​com/​ctech/​articles/​0,7340,L-3725781,00.​html. Accessed October 18, 2019 Petro, G. (2017). Amazon knows what your customer wants next season. Do you? https://​ www.​forbes.​com/​sites/​gregpetro/​2017/​09/​07/​amazon-knows-what-your-customer-wantsnext-season-do-you/​2/​#1952f8bf653d. Accessed October 17, 2019 Phillips, E. E. (2018). For warehouse workers, technology starts to look more like home. https://​www.​wsj.​com/​articles/​for-warehouse-workers-technology-starts-to-look-morelike-home-1524475790. Accessed October 18, 2019 Proponent. (2018). Prescriptive analytics versus predictive analytics: What is the difference? https://​www.​cnbc.​com/​2019/​07/​22/​microsoft-invests-1-billion-in-elon-musksopenai.​html. Accessed October 17, 2019 Protiviti. (2019). Taking RPA to the next level. https://​www.​protiviti.​com/​sites/​default/​ files/​2019-global-rpa-survey-protiviti.​pdf. Accessed October 10, 2019 PWC. (2018). Prepare for the voice revolution. https://​www.​pwc.​com/​us/​en/​services/​ consulting/​library/​consumer-intelligence-series/​voice-assistants.​html. Accessed October 27, 2019 Sheffi, Y. (2012). Logistics clusters—delivering value and driving growth. The MIT Press The Economist. (2017). How Germany’s Otto uses artificial intelligence. https://​www.​ economist.​com/​business/​2017/​04/​12/​how-germanys-otto-uses-artificial-intelligence.​ Accessed October 18, 2019 Thomas, L. (2019). Nike acquires A.I. platform Celect, hoping to better predict shopping behavior. https://​www.​cnbc.​com/​2019/​08/​06/​nike-acquires-ai-platform-celect-hoping-to-

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predict-shopping-behavior.​html. Accessed October 23, 2019 United Nations. (2018). Paperless trade white paper. https://​www.​unece.​org/​fileadmin/​ DAM/​cefact/​cf_​plenary/​2018_​plenary/​ECE_​TRADE_​C_​CEFACT_​2018_​6E.​pdf. Accessed October 10, 2019 World Economic Forum. (2015). Intelligent assets unlocking the circular economy potential. https://​www3.​weforum.​org/​docs/​WEF_​Intelligent_​Assets_​Unlocking_​the_​ Cricular_​Economy.​pdf Accessed October 23, 2019 World Economic Forum. (2017). Impact of the fourth industrial revolution on supply chains. https://​www3.​weforum.​org/​docs/​WEF_​Impact_​of_​the_​Fourth_​Industrial_​ Revolution_​on_​Supply_​Chains_​.​pdf. Accessed October 17, 2019 World Economic Forum. (2018). Trade tech—a new age for trade and supply chain finance. https://​www3.​weforum.​org/​docs/​White_​Paper_​Trade_​Tech_​report_​2018.​pdf. Accessed October 23, 2019 World Maritime News. (2019). Liner giants form digital container shipping association. https://​worldmaritimenew​s.​com/​archives/​275156/​liner-giants-form-digital-containershipping-association/​. Accessed October 23, 2019

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How Utilization of Assets is Impacted by Digitalization and Automation Christian Wurst1 (1) Eurofins, Brussels, Belgium Christian Wurst Email: [email protected] Abstract Mobile assets traditionally have been the center of utilization initiatives like pooling, improving dispatching algorithms or tracking assets over time and space. Mobile assets include vehicles, rolling stock and storage equipment like containers and pallets. Each mode of transport (rail, road, air and ocean to name the major ones) and each asset category have their own unique utilization challenge. To improve asset utilization, companies have three basic levers. They can firstly minimize the transport time by improved trip scheduling or minimize waiting time by optimally tracking and tracing an assets availability for the next trip. Additionally, the pooling of assets allows to minimize empty trips and utilizes an assets maximum capacity. There are emerging digital business models around each of these levers. They all rely on active and passive identification of an assets location and other sensor data collected by the asset in question. Christian Wurst key interests are technology and innovation around operations and supply chains as well as the changes that brings to our businesses, education and daily life. His current role is Chief Operating Officer Food & Environment at Eurofins, the world market leader in Food & Environment Testing. Previously, he has worked in senior roles at the logistics providers Panalpina, Ceva Logistics, Wincanton and DB Schenker. In each of these roles, digital disruption has had a big influence on the way competition intensified. He is a board member and advisor to logistics-related startups like Nexxiot and Instafreight and sits in the board of trustees of the International School of Management, Germany’s largest private university. He graduated from WHU42

Otto Beisheim School of Management, one of the Europe’s leading business schools for startups. He holds a PhD in operations research and an AMP degree of Harvard business school.

1 Major Types of Assets and Their Utilization Challenges The world of logistics is made up of assets too numerous to include all here. While immobile logistics assets like infrastructure, warehouses and racking pose as many or more utilization challenges as mobile assets, mobile assets traditionally have been the center of utilization initiatives like pooling, improving dispatching algorithms or tracking assets over time and space. Mobile assets include vehicles, rolling stock and storage equipment like containers and pallets. Vehicles for land transport include trucks, locomotives, but also forklifts. Rolling stock is the umbrella word for all vehicles without own propulsion, like trailers, railcars or lighters (cargo boats without engine). Mobile storage equipment includes all types of containers as well as pallets. We will outline the main utilization challenges by mode of transport.

1.1 Rail Transport Assets Rail moving assets are either locomotives or railcars. Locomotives, as the tractor units for railcars, usually have a better utilization but suffer from the same restrictions as trucks (see below). Railcars are where the biggest rail-specific utilization issue lies. Based on a study by Oliver Wyman on the US railroad market, railcars are in transit (on a trip, including standing times) only on 44% of days. In the US market, there are just over 1.6 million railroad freight cars in the US market. In Europe, in-depth studies of individual fleets similarly point to an average time spend “in transit” between origin and destination (including the standing times in between) is only about 32% of the total available time. Given the high investment cost of usually above 50 k Euros per new railcar, this underutilization poses a big challenge to the industry. Different to other modes of transport, rail transportation is in almost all markets to most consolidated form of transport, with state carriers still dominating the picture in most markets outside the USA. This means that one of the biggest levers of utilization, the pooling of equipment among the different providers, is already implemented. In Europe, all public carriers participate in a railcar exchange 43

program that allows the railcars to be freely moved and used by all carriers, with annual balance payments compensating the actual asset owners. One other lever to better utilization is clearly linked to digitalization and automation. The large majority of today’s railcars in use are not equipped with active or passive equipment to give regular location or status updates. The prevailing method still is the manual follow up by railroad operators. This is straightforward, if full blocktrains of railcars are moved full or empty and are tracked in operating systems. But in single car traffic, this mode of tracking is not only highly cost-inefficient but also leads to very slow response time in operations. The chapter on asset tracking will highlight some of the emerging business models around this business need.

1.2 Trucking Trucks, like passenger cars, are likely the least utilized transportation assets. Official statistics in the EU point to an average distance travelled of 24 k p.a. for all trucks and 100 k p.a. for interchangeable tractor units. At 80 km/h, this points to only about 0,8–3,4 h a day in actual use. Even when in use, the trucks are not running at full capacity. A recent study of the European overland market by BCG estimates that 40% of the carrying capacity in transit is unused, equaling 1/3rd of total revenues of the industry. Figure 1 displays the findings of this study.

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Fig. 1 Overview of the asset utilization challenge in Western Europe’s trucking market. Source Riedl et al. (2018)

Different to rail transport, the carrier landscape is highly fragmented with hundreds of thousands of small trackers in each of the regional markets (Europe, North America, China, etc.). The share of the largest players is still below 5% within Europe and below 10% in North America. While outsourcing allows for larger pooling of trucks between users, the outsourced trucking market is still not realizing this potential benefit due several structural problems: There are still many competing and dedicated networks for groupage (less than truckload shipments that need to be combined on one truck for economic transportation). Few markets (like in the UK) are dominated by “neutral” groupage networks that are open for all logistics companies. The “market clearing mechanisms” of trucking demand and supply are inefficient: – Lack of transparency impedes a digital ‘exchange’ solution. Customers having only limited insight into rates, capacity and the quality and reliability of carriers. – Limited automation and digitization of core processes have typically resulted in a significant loss of information. – Outdated customer interfaces impeded seamless, efficient and fast transactions with customers. Hours-of-service regulations, which limit the time a driver spends behind the wheel. Several of the new business models described in part two of our book help to tackle these problems. The problems of dedicated/not shared transport capacity and inefficient clearing mechanisms are resolved by the following business models: – Last mile delivery services develop new approaches to combine the thousands of individual delivery drivers through shared platforms as opposed to today’s company-led networks of the big industry players (UPS, Fedex and DHL) – Rate comparison and marketplaces (Chapter X) provide the tools and clearing mechanisms to match demand and supply for trucking capacity in a faster and 45

less costly way. – Asset tracking provides real-time status and location data of trucks as well as predictive analytics to be used for market clearing. – Big data/AI for predicting flows of transports that allow for better round trip planning – Digital forwarding finally offers the promise of a more efficient company-led intermediation of demand and supply than today’s legacy forwarders can offer. The last topic can be tackled by the autonomous vehicles. One main driver is that ATs are not subject to hours-of-service regulations, which limit the time a driver spends behind the wheel. By increasing driving hours from 11 h per day to 20, ATs will be able to move freight faster and more flexibly, which will also allow shippers’ supply chains to run faster. In a 2018 study of the management consultancy McKinsey, they predict two waves of autonomous vehicles: – Constrained autonomy (SAE International calls this Level-4 autonomy) until 2027. Unmanned trucks will operate throughout the interstate-highway system and other “geofenced” areas without a platoon, subject to weather and visibility conditions, and developments in infrastructure such as the ability to communicate with traffic lights. Drivers will meet the trucks at the interstate exit and drive them to the ultimate destination, navigating city streets, local and pedestrian traffic, parking lots and loading docks. This constrained autonomy will produce total savings of about 20 percent. – Fully autonomous trucks, operating at scale without drivers from loading to delivery (Level 5 in the SAE International framework) are hard to predict. These ATs will reduce today’s total cost of operation by 45 percent.

1.3 Airfreight The utilization of air cargo operations is measured by the freight load factor: The freight and mail ton-kilometers flown, divided by the available freight tonkilometers flown in the same period. The cargo transporting airlines and their revenue can be grouped into three categories, as shown also in Fig. 2:

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Fig. 2 Mix of air cargo’s carriers (freighters versus passenger aircraft). Source Boeing (2017)

– Express carriers (43% of industry revenue) like the airfreight operations of UPS, Fedex and DHL that focus on the transport of parcels. Express carriers that can optimize their millions of parcels very well and have the highest freight load factors in the industry. – Pureplay cargo carriers (9% of industry revenue). In 2019, they had a freight load factor of 67%. – Passenger airlines (49%) that transport freight (as opposed to passenger cargo), either by only transporting it in the plane’s belly or by adding dedicated freighter planes where needed. The belly freight load factor was of these airlines was 38% in 2019. The overall freight load factor was 49.3% in 2019 outside the express sector. Since 2000, the best achieved annual load factor was 53%. This shows the amount of challenge (or opportunity) that exists within the industry. The later chapter on carrier’s response to the digital disruption explains the digital challenges and opportunities of an airfreight carrier (Lufthansa Cargo) in depth. The challenge to optimally loading freighter and belly capacity falls into two categories: Best possible matching in supply with demand for airfreight capacity— particularly, in the space of belly freight. This business need is addressed by the digital business models of rate comparison and marketplaces, big data/AI 47

and digital forwarders. How to optimally load the plane so that existing capacity can be best filled. This is a challenge for big data/AI applications. At first, loading cargo into an aircraft might seem to be a simple task. But, in reality, the loading must be carefully planned. For each single flight, an airline that transports cargo has to answer a set of delicate planning questions to operate safely and profitably: – Selecting the containers to load, – Solving three-dimensional packing problems, – Balancing the aircraft for fuel efficiency. Last but not least, the airfreight industry uses a large number of airfreight pallets used for faster loading/unloading of the planes and thus better load factors. These airfreight pallets, in turn, have very low utilization rates. Particularly, specialized cooled boxes for perishable goods pose a challenge due to their more narrow use. Asset tracking offers big promise here as today’s tracking at the airports is done manually with high rates of loss and idle time.

1.4 Ocean Carriers The utilization of ocean carrier’s main assets of container vessels and container boxes has three large leverage points: – Decreased dwell-times in port, – Better average load factor through capacity management, – Avoidance of empty repositioning of containers. These utilization levers can all be tackled by digital tools and business models.

1.4.1 Port Operations Today, up to 30% of a vessel’s voyage time can be spent in port. Digital technology can significantly reduce this time. Connectivity solutions can enable the seamless flow of information and documents among all stakeholders, including shippers, carriers, terminals, forwarders and port authorities. For instance, ports can optimize the docking sequence and equipment availability, and forwarders can improve pickup scheduling. Crews can access such information while a vessel is en route, enabling them to improve coordination 48

and schedule adherence, minimize wasted time and reduce fuel consumption.

1.4.2 Capacity Management Using historical booking data, current booking data and cargo demand indicators, carriers can apply advanced analytics to dynamically reallocate a vessel’s capacity across ports. Analyzing this data, a carrier can identify booking patterns and accurately predict demand at each port of a voyage. The predictions improve as the voyage date approaches, reaching an accuracy of plus or minus 10% one week prior to departure. This level of accuracy allows a carrier to increase the total volumes handled by more than 5% and to select the most profitable cargo across all ports in cases of excessive demand. Machine learning can continually test the accuracy of predictions against actual bookings, and the forecasting algorithm can improve itself after each voyage.

1.4.3 Container Repositioning When a container is emptied, it usually does not find its next loading customer at the same location. The average savings is $200 to $400 per interchanged container, arising mainly from the avoidance of expenses related to land transportation and the use of terminals. For large, vessel-owning carriers, the handling fees that they pay to terminals, depots and intermodal operators generally represent 60 to 75 percent of total repositioning costs. Their remaining repositioning costs relate to intermodal transport provided by rail, truck and barge operators. – Approximately, two-thirds of all movements of empty containers arise from structural imbalances. Some countries, such as China, export more than they import; as a result, carriers must inevitably transport empty containers to these countries. – Roughly one-third of repositioning moves result from company-specific imbalances. A carrier whose customers are scattered among port and inland destinations within a given country or whose portfolio of export and import business within the country is imbalanced will likely end up having to move empty containers. Issues within a carrier’s network, such as delays and the absence of direct vessel-or inland-network links between locations served and can also promote imbalances and make them harder to correct. Moreover, most carriers are not able to forecast their positioning needs with sufficient accuracy to fully optimize flows before imbalances arise. 49

There are two ways in which digital business models can decrease container repositioning costs: – Carriers can avoid repositioning costs by deploying big data/AI solutions to optimize flow forecasting and planning and by improving the dispatching algorithm used to direct containers to export customers’ sites from locations where imports are unloaded. – Container interchange platform is also a means of cost avoidance. Digital container marketplaces can offer a substantial improvement in utilization. Carriers must reposition empty containers because equipment flows typically are not balanced in opposing directions.

1.5 Contract Logistics/Warehousing The utilization of warehousing facilities is mostly measured in the volume of goods that can be moved through a warehouse. The actual storage fill grade is less relevant, as this is mostly fixed by fire safety standards. As with the other logistics assets, there are several ways of increasing its utilization, and only some are impacted by automation or digitalization: – Extending the operating time—this is purely operational and does not rely on automation. – Partial automation of physical warehouse operations like automatic forklifts or automatic dispensing equipment for small parts. This is also outside the changes that are described by digital disruption. – Digitalization of information flows in the warehouse: There are many established methods to digitalize information transmission: Barcode scanning, vision picking with smart glasses or the reading of storage positions with the help of drones. – Full automation of the main warehousing functions of inbound storage and outbound commissioning. The utilization of warehousing facilities is mostly measured in the volume of goods that can be moved through a warehouse. The actual storage fill grade is less relevant, as this is mostly fixed by fire safety standards. Within non automatized warehouse operations, people costs are by far the largest cost component, up to 80% of total cost. Of these people costs, roughly 50% are incurred through moving within the warehouse. These costs—and the time needed to pick an item stored—are the main target of digitalization and 50

automation. They can be reduced by – Minimizing the amount of time spend by looking up and entering data. This happens at each stage of receiving, processing and putting away goods as well as in the process of picking, commissioning and shipping. – Minimizing the amount of time spend moving within the warehouse. This time can be minimized by optimizing the storage positions (dynamic storage location) and the picking routes. A fully automated warehouse is achieving this through constant, optimized moves at machine-speeds that mostly an operator cannot match. Capacity in warehouse and cross-dock throughput capacity is a key element of the B2B e-commerce offer. The e-commerce boom of the last 10 years would not have been possible without a huge expansion of warehousing capacity. Most critical is the ability to achieve fast turnaround times in order to allow for shortest delivery times to online customers. With same-day delivery becoming more and more the gold standard, the time between release of a picking order and shipment is the critical component for customer satisfaction. Besides 24–7 operating hours, the use of maximum automation is the key way to assure rapid response times. In the parcel sector, the cross-dock facilities have been fully automated for a while already. What is new is that conventional warehouse facilities have been adjusted more and more to meet e-commerce/faster delivery time standards.

2 How Digital Business Models Help to Increase Utilization While all the digital business models facilitating greater asset utilization will be explained in greater depth in part two of this book, two of them will be explained in more detail as they are critical to explain the opportunity at hand.

2.1 Asset Tracking Tracking the above described mobile assets can be classified either as passive (the most frequent method) or active.

2.1.1 Passive Tracking Passive tracking means all ways of observing the asset other than receiving signals from the asset itself. In its simplest and most frequent form, it is a manual process of tracking an assets position and condition in a list. The 51

observation can be visual (with camera or human eye), through a scanning process (e.g., barcodes) or by a passive transponder (e.g., a RFID tag) that, upon receiving a signal, emits a different signal in response. The big advantage of passive tracking is its cost-efficiency and speed. The disadvantage is that it does not work on long distances. Visual observation, scanning and signaling a transponder requires ‘getting within reach’ of the asset. Depending on the technology involved, this means a couple of meters up to a max of 2 km—under optimal conditions. In heavily built areas like most transport infrastructure, the effective range is just a couple of meters.

2.1.2 Active Tracking Active tracking means that the assets itself sends messages about its location and or other sensory data collected on site. The most frequent solutions combine the GPS system and mobile phone and/or satellite phone technology. Such devices are known as GPS asset trackers and are different from other GPS tracking units in that they rely on an internal battery for power rather than being hard-wired to a vehicle's battery. Figure 3 shows the various components in GPS-based tracking.

Fig. 3 Principle of geolocation via GPS.

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Source Chassaing (2009)

The translation of positional data into positions on maps and updates on a trip plan requires geofencing. Geofencing allows to set up a virtual boundary around a particular location using mapping technology. It also enables users to establish action triggers, such that when an asset enters or leaves the pre-defined boundaries, users receive an alert—either via text messages, emails or push notifications. It is common for GPS-based asset tracking devices to fail due to Faraday cage effects as a huge proportion of the world’s assets are moved via intermodal containers. However, the modern tracking technology has now seen advances in signal transmission that allows enough signal strength reception from the GPS satellite system which can then be reported via GPRS to terrestrial networks. Generally speaking, passive tracking is the cheaper solution within its given geographical limits. The active equipment installed on the assets (essentially a mobile phone) is more expensive than the passive RFID tag or barcode label. The communication costs of scanning, Bluetooth or other transmission technology still is a fraction of the mobile communication cost. The application of active and passive tracking is a trade-off between cost of solution and the value of the data generated.

2.2 Business Models Around Asset Data There is a multitude of beneficial applications of asset tracking to improve the assets utilization. The major categories can be described as follows: – Trip scheduling, – Track & trace, – Pooling of assets, – Pooling of shipments. Trip scheduling, also called journey planning or route planning, etc., is an algorithm used to find an optimal means of traveling between two or more given locations. Optimization criteria can vary between minimum distance and many other criteria like cost, time and quality considerations. The mathematical models underlying these algorithms, like the ‘traveling salesman problem’ are among the most widely researched mathematical problems. Trip scheduling allows to minimize the trip time as well as to maximize the asset utilization by 53

choosing the right asset (at the right location) for a particular transport task. Big data analytics also allow to predict future demand and to preposition assets in the optimal locations to meet this demand. Track & trace allows to determine the current location of an asset as well as its most likely arrival at the planned final destination. It enables the transport planners to decide on alternative actions to the old transport plan. Track & trace not only requires the correct location of an asset but to combine this data with a transport plan to deduct its arrival. Track & trace allows to predict the availability of an assets for it next trip and thus increases asset utilization. Pooling of assets means that each asset within a pool can be chosen for a particular task, independent of ownership in this particular asset. This allows for a much higher utilization of assets. Pooling assets requires a formal agreement between the parties involved and—usually—comparable asset types like Europallets or a particular type of railcars. Digital marketplaces like BCGs container pooling platform XChange allow the pooling of assets by establishing such a shared agreement between competing parties. Pooling of shipments means to combine individual shipments by unrelated parties in one vehicle for transport. This activity traditionally falls into the domain of forwarders, who combine many small shipments and pool this demand versus the carriers to get better rates and a higher asset utilization. The digital counterpart of this activity is the one hand the digital marketplace in which unrelated shippers can book transports directly with carriers, disintermediating the forwarder. On the other hand, digital forwarders offer the same service as their offline counterparts, but on a purely automated process way. Both business models help to combine shipments to trips that fully utilize the vehicle’s capacity.

References Boeing. (2017). Air Cargo Report. Boeing Chassaing, E. (2009). Geolocalisation. https://​de.​wikipedia.​org/​wiki/​Datei:​ Geolocalisation.​png. Accessed January 10, 2020 Riedl, J., Jentzsch, A., Melcher, N. C., Gildemeister, J., Schellong, D., Höfer, C., Wiedenhoff, P. (2018). Why road freight needs to go digital fast. BCG working paper

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© Springer Nature Switzerland AG 2021 C. Wurst, L. Graf (eds.), Disrupting Logistics, Future of Business and Finance https://doi.org/10.1007/978-3-030-61093-7_4

Toward Logistics Pricing Transparency Zvi Schreiber1 (1) Freightos, Hong Kong, China Zvi Schreiber Email: [email protected] Abstract The freight industry used to thrive on secret price negotiations. More recently, in line with trends across all industries, pricing is becoming more transparent, creating new opportunities and putting pressure on traditional business models. Zvi Schreiber (pronounced “tsveeshryber”) is the Founder and CEO of Freightos. Freightos is the digital platform of the international freight industry, connecting carriers, forwarders and shippers digitally, for air and ocean pricing and booking and offering a public marketplace for spot shipments at freightos.com. Freightos is pioneering digital air cargo (DAC) with more than 30% of the world air cargo market already on the WebCargo by Freightos platform. Previously, Zvi was CEO of Lightech (acquired by GE), and Founder & CEO of Unicorn (acquired by IBM) and other tech startups. Zvi has spoken widely and written many articles and patents. He has a PhD in computer science and is author of Fizz which tells the history of physics as a novel.

1 The Current State of logistics Pricing Transparency Our industry has a reputation for pricing opacity. In fact, many logistics service providers consider the lack of pricing transparency to be an important feature of their business model, allowing them to extract a higher price from ill-informed shippers. They may do this without contemplating the fact that they themselves may also be poorly informed and may be overpaying upstream providers. Within the Freightos rate database, we have often measured anonymously a 20% discrepancy in what big sophisticated forwarders pay the same carriers. Any mention of freight tenders negotiations conjures up images of suited 55

Any mention of freight tenders negotiations conjures up images of suited men negotiating prices behind closed door, leaning on years long relationships. “Bob, I really need you to come through to me on this lane here, how about I let you make a bit of extra profit on that lane.” or “William, I stuck with your tender two years ago when the spot market was cheaper, now I really need you to …”. Not, of course, that tenders are always negotiated in that way (and certainly not saying that the participants are always men), but this is the reputation they have and many negotiations are true to this stereotype. In the meantime, small shippers are mostly buying spot and will often naively accept inflated spot quotes without any knowledge of market rates. Most logistics providers call these “high-margin” or “retail” rates. Of course, it is legitimate to give big volume buyers a sharper price than small buyers, but the knowledge-gap tax is much bigger than simple volume discounts, and it is not a sustainable business practice. That is the reputation of the industry, but we live in an era of data. What does the data teach us? Every year we at Freightos publish the State of Digital Freight mystery shopping survey. Using a legitimate small importer, usually in the USA, we request spot quotes from top 20 freight forwarders and from carriers. To make things easier for the service providers, the spot quotes are for straightforward dry cargo traveling on a major trade lane, China to USA. The data in our survey confirms the industry’s reputation for pricing opacity. Every year we see spot quotes varying by 30% and sometimes by as much as 200%. Yes, one naive small shipper is paying 3X more than another to ship the same load, for no reason other than it is difficult for them to ascertain the market rate. Interestingly enough, that same opacity impacts larger shippers as well. In benchmarking a Fortune 500 retailer’s tender, we were surprised to learn that many of the more obscure lanes were very uncompetitive when compared to even a tiny shipper. So small shippers tend to be ill-informed across the board, while large shippers will typically know the market on their major lanes well, but may still be taken to the cleaners on the more obscure lanes. In a unique twist of the freight industry, pricing opacity continues even after prices are quoted. That is because quoted prices are often not honored. For spot shipments, it is extremely common for the final invoice to include general rate increases (GRIs) or other surcharges that were not mentioned in the original 56

price quote. There is actually a mini-industry dedicated to checking carrier and forwarder invoices, typically paid as a percentage of the errors they find. Maersk Line recently published a fun video showing how chaotic a restaurant experience would be if the prices on the check did not match the prices on the menu. On freightos.com, we have always promised that the quoted price is the invoiced price, but enforcing this has been an uphill struggle. We have a team dedicated to coaching logistics service providers to quote, sell and invoice in a transparent way. We are pleased to see a few other industry players committing to simple binding price quotes like Maersk Line Spot and airline BSAs. The annual tenders (RFQs) have their own problems. A Freightos survey confirmed that when there is a capacity crunch, some carriers may not honor the prices in a tender or may honor the prices but not honor service level agreements, rolling cargo from one sailing or flight to the next. And some shippers are equally guilty, simply going off tender when the spot market is soft. In 2016, as the ocean industry struggled with overcapacity and low rates, many shippers simply ripped up their tenders and paid the soft spot price. This is another example of lack of transparency in the reverse direction—carriers believe they have a volume commitment from the shippers, but at crunch time, it is not worth the paper it is written on. Then the industry has some strange false transparencies. An example of false transparency is the IATA TACT rates. These rates are collected by industry association IATA from airlines and then sold on CDs. However, they are imaginary high rates that no forwarder ever pays, unless they are remarkably ignorant of the industry. Why this charade is continued is a mystery to many. Some initial transparency for container shipping prices came with the publication of the Shanghai Container Freight Index (SCFI) by the Chinese government in 2005. However, SCFI is limited to routes out of Shanghai. The less well-known China Container Freight Index (CCFI) is slightly broader but still limited to China. These indexes are only used by the more sophisticated shippers. A significant limitation of SCFI and CCFI is that they only cover the port to port segment of the shipment. For shipments out of China, many forwarders simply switched to making money by marking up port handling, trucking legs and various other surcharges which still have less transparency. While some surcharges may of course be legitimate, we have also seen 57

forwarders literally making up surcharges. As one extreme example, we came across a major forwarder consistently adding both a Suez and Panama surcharge to the same shipping quote. Really. (And no, the ship was not sailing through both). Another more fundamental issue is that these indexes are polled indexes that rely on the market knowledge of just a small number of providers and shippers. The rates are self-reported leaving room for abuse as has occurred infamously in the LIBOR index scandal. In summary though, although it is imperfect, SCFI was certainly a first significant step toward transparency in the container shipping part of the industry.

2 Transparency in Other Industries Even before the Internet, many industries gained some level of pricing transparency. For example, in 1978 the Rapaport “Rap Sheet” report brought transparency to the previously secretive and relationship-based diamond industry. Old timer diamond traders still lament this transparency. Closer to our industry, the Baltic Exchange has since 1985 published indexes of charter pricing for bulk shipping. And of course in financial services and commodities, there are indexes for everything, updated by the second. Since the invention and spread of the web, transparency has accelerated in many industries. Zillow tells you how much your friend’s house is worth. Expedia, booking.com, etc. bring transparency to the prices of hotels and flights. Price comparison is available for retail, financial services and virtually every other consumer service. And it is starting to impact the business-to-business world too, with the success of Amazon Business, Alibaba, SAP Ariba and others. Fundamentally, there are two primary drivers to the transparency—an explosion in data and the Internet’s impact on empowering consumer research. A further aspect is the advent of cloud computing making Big Data tools accessible to every company without the need for a data center. (At Freightos, e.g., we handle massive datasets and massive transaction volumes, but do not own a single server.) With new tools come better data aggregation capabilities. So, for example, a business that once struggled to synthesize data from all business 58

operations can now use any number of off the shelf tools to improve data collection, aggregation and analysis. Customers have been exposed to this information for well over twenty years. The experience of seeing available flights on Expedia or products on Amazon, both tapping into fully digitized datasets, is transformative and encourages consumer research. Google recently assessed that a consumer can go through 900+ digital touchpoints when researching a car. This, in turn, has trained B2B buyers to research relentlessly online as well on Alibaba.com and other sites. And still international freight has been an outlier laggard in adopting such transparency.

3 Forces For Transparency In Freight Transparency, of course, is a double-edged sword. If you have the most efficient operation, the best prices and great service, transparency is a wonderful thing. Your five-star rating, good service features and competitive prices will drive you to the top of every service comparison site. Then again if you have a bloated back office, high prices and poor service, transparency is not going to be kind to you. In most industries, the early adopters who embraced transparency first fared best in the longer term. Those who shunned the light of transparency lost out when eventually the light of transparency found them and bared to all their poor prices and service. In freight, several forces are driving the industry, at last, toward pricing transparency. As Jochen Thewes, CEO of DB Schenker, said at Journal of Commerce’s TPM event in 2018, “[The] industry basically exists because of complexities in the supply chain, because there are so many players, and because of a lack of transparency... we need to find a way to make money with, and through, transparency.” The first force may be that companies—especially global forwarders—are implementing global rate management systems. Until recently, most forwarders did not know their own prices! Each country and even each office had its own spreadsheets with its local buy rates and its own local lore for calculating sell rates. Even carriers often determined prices office by office. You can get a 59

different price for the very same shipment from the same airline or ocean liner by calling up in two different countries. Freightos surveys have shown that two offices of the same forwarder, or even two individuals in the same office, will often quote a different price for the very same shipment. At Freightos, our business unit WebCargo has been rolling out global rate management for many forwarders, as have our competitors Catapult, Portrix and CargoSphere. Today more and more forwarders finally have a clear view of their costs, routing and sell prices. In more advanced cases, these are fed directly by carriers (we just announced a real-time feed of rates from Maersk Line as well as a dozen airlines, to forwarders). This leads to real-time visibility of rates to at least some parts of the sector. Clearly, this transparency internally to a company is an important prerequisite for external transparency. As data aggregation has improved, the Shanghai Index is not alone anymore. For container spot rates, we have launched the Freightos Baltic Index (FBX) which is the first and only daily index for container shipping prices, this frequency reflecting the growing volatility of the industry. FBX covers many worldwide trade lanes and is based on a huge pool of actual commercial rates, not relying on self-reporting which is open to abuse (as in the LIBOR scandal). It is the first index to have full transparent governance. Our partner, the Baltic Exchange, has a 200-year history of bringing transparency to other parts of the marine world. And they are owned by SGX, the Singapore Exchange, one of the world’s great commodity exchanges. The methodology of FBX represents an important shift toward using realbusiness data, such as actual transactions or search activity, to drive pricing, thus aligning better with live market conditions. FBX and SCFI are not alone. The Drewery World Container Index (WCI) is also gaining traction. In air, there is the TAC index, and we are in the process of launching the Freightos Air Index (FAX). In the meantime, another LogTech startup Xeneta are clear leaders in benchmarking longer-term tender rates for containers, and they have recently started benchmarking ocean spot and air rates too. Indexes are not purely informational anymore. There is a growing interest in index-linked tenders both in ocean and more recently in air, where leading air carrier Qatar Airlines has thrown their weight behind index linking. 60

Our investor, SGX, with its extensive experience of financial services, has a vision of bringing not only transparency, but then layering on top of the transparent price indexes, the kind of derivatives which allow risk hedging. In the future, more air and more ocean contracts will be index-linked instead of fixed price, and carriers will be able to swap their risk of a price drop with the shippers’ risk of a price increase, using financial services type hedging. Many carriers are already familiar with such derivative tools as they already use futures, swaps and options to hedge their exposure to the price of fuel and to changes on foreign exchange rates. In the meantime, pricing is becoming more automated. More and more service providers want to keep humans focused on what they do best and let computers calculate and communicate prices. As examples, Maersk Line has a big push around their Spot product which promises dynamic electronic prices which come with a simple two-way commitment. Khuene + Nagel are promoting their Pledge product. Airlines, such as IAG (British Airways, Iberia) and Air France KLM, have adopted revenue management solutions and moved to dynamic electronic pricing. We will return to dynamic pricing below. Freightos and our airline and forwarder partners are leading the digital air cargo (DAC) revolution. DAC enables airlines, GSAs and forwarders to communicate prices and capacity transparently and instantly to each other and to shippers. This also enables shippers to electronically book their cargo onto a specific airline and flight through WebCargo by Freightos, which is by far the world’s largest air cargo eBooking platform. The certainty of booking air cargo onto a specific flight is a good example of the advantages of transparency and digitization.

4 Omnichannel: Where Transparency Is Reflected There is more than one way to sell freight services. And service providers must now aim for consistency across those channels. The traditional channels are direct sales—in person, by phone and by email—and sales through intermediaries, for example, carriers selling through forwarders. But recently, an increasing number of service providers are selling freight services on their Web sites. Noticeable examples of service providers who sell publicly are Maersk 61

Line (Spot product), Hapag Lloyd, CMA CGM and Khuene + Nagel as well as the new surge in digital forwarders like Flexport, FreightHub, iContainers and ZenCargo. Other airlines such as IAG and Air France KLM sell on their Web sites to registered forwarder customers only. An interesting aspect of these offerings is that more carriers are selling direct to shippers online, without any forwarder, GSA or co-loader, creating greater transparency and sometimes lower prices. When it comes to direct carrier sales, there is a difference between modes. Ocean container steam liners have always sold direct to shippers or as they call them, BCOs. However, in the past direct ocean carrier sales were typically limited to the annual tenders selling big volumes to large shippers. The spot market was typically dominated by freight forwarders. This has changed now with Maersk Line, Hapag Lloyd and CMA CGM offering even single container shipments direct to shippers on their Web site. Although volumes are probably not huge, direct carrier sales are clearly a threat to intermediaries. However, it should be noted that despite some people predicting the demise of freight forwarders, the sector has so far retained stable market share, with the proportion of ocean shipments handled by NVOCCs even increasing in 2017. In air cargo, the situation is a bit different. The forwarders have managed to maintain a near-universal taboo on airlines selling direct. The last time an airline tried to sell international cargo services directly, which was KLM some twenty years ago, they were boycotted by the forwarders and forced to retract. The industry has a long collective memory, and so far, the taboo has held. Airlines have often tried to keep their rates secret, although 10,000+ IATA member forwarders have access to airline rates, so this is not a very safe secret. A curious aspect of pricing arrangements is that the airlines have created incentives for forwarders to delay cargo. Airlines offer substantial discounts for larger shipments, with price breaks for say 100 kilograms, 250 kg, 1,000 kg, etc. Airlines also create incentives for forwarders to mix dense and light cargo. These policies actually give forwarders an incentive to handle air cargo slowly. If you give 150 kg to a forwarder, they will hold on to it for a couple of days or more hoping to receive another 150 kg on the same flight and save cost. If one shipment is dense and the other is fluffy, they will make even more. In the meantime, the shipper has no transparency on when her cargo will fly and how 62

much the actual carrier cost is. This situation in air cargo will be challenged in the coming years. In the old days of selling by having dinner and playing golf, airlines were not inclined to maintain expensive field sales backed up by expensive call centers. But now the Internet has made direct sales, by self-service Web sites, too attractive for airlines to ignore. It is likely that in coming years, air forwarders will have to rely on positive value-add to be included in air cargo transactions, rather than relying on the negative threat of a boycott. This will bring further transparency to the industry.

5 Dynamic Pricing Dynamic pricing is a well-known business model from other industries. The world’s most dynamic markets are financial services where prices of shares and commodities change millisecond by millisecond based on dynamic supply and demand. Freight is a physical service which has a different market structure. Supply is not dynamic. Rather in the short term, supply is fixed by the number of vessels operating. And demand is not all that elastic either—supply chains are limited in how much they can adjust from one day to the next when prices fluctuate. However, demand can shift between competitors relatively quickly, especially with the advent of online platforms such as our freightos.com. Even so, most of us are familiar with dynamic pricing from the low-cost airlines. Passenger flights have a similar dynamic to freight. Capacity in the short term is fixed. The airlines have one goal—to fill the plane with the greatest revenue they can garner. The marginal cost of filling a seat on a plane that is flying anyway is low, so airlines may be willing to sell seats for just a few dollars if they do not think they can sell them for more. (Although interestingly every extra kilogram on a plane does affect fuel consumption, so the marginal cost of filling a seat is not zero.) There are many levels of sophistication possible in dynamic pricing. The most basic algorithm looks only at capacity versus time and adjusts price. If it is a week before sailing/flying and the ship is usually half booked a week before, but this time it is 60% booked, the carrier will increase the price hoping to fill the vessel at a higher price. If on the other hand, it is just 40% booked, the 63

algorithm will lower the price in an effort to maintain utilization and fill the vessel. However, the algorithm should not lower the price so much that revenue is reduced. For example, it is still better to have a 90% full vessel than a 100% full vessel at a 20% lower unit price. Measuring the carrier’s own capacity is only the most basic criterion for revenue management. A more sophisticated algorithm will take into account the season and route to determine if 50% is the expected load factor a week before departure. The system will look not only at the current load factor but also at the rate at which the bookings are coming in. And a still more sophisticated revenue management system will tap into live data feeds to take into account competitors’ dynamic pricing and short-term changes in trade patterns day by day, hour by hour. Sophisticated dynamic pricing can definitely move the needle on carrier utilization, revenue and profit. Air cargo pricing is more complex than container pricing. Aircraft have both weight and volume limitations. In traditional pricing, airlines simply take the average ratio of 6 cubic meters of volume capacity per ton of weight capacity. The chargeable weight is whatever is greater, the actual weight or the equivalent volume. So you pay the same whether your cargo is taking up 1% of the aircraft’s weight allowance or 1% of the volume allowance. You always pay the same for 1 ton of weight or 6 cubic meters of volume. In dynamic pricing, this all changes to reflect the reality on a specific flight. If an airline receives a booking for some dense cargo which has considerable weight but occupies little space, the dynamic price can instantly change to encourage fluffy cargo since there is volume to spare on the aircraft. So from one moment to the next, the density ratio changes, and now the price on the specific voyage for 6 cubic meters is equivalent to just half a ton of weight. Air cargo offers an interesting case study in digitization (or the lack thereof). Since the upper decks were digitized, passenger load factors have grown from 50 to 70%. The lower deck remains analog in almost all cases, and the utilization of cargo space remains stuck at an anemic 50%. We mentioned above the dawn of digital air cargo (DAC). Look out for improvements in the air cargo load factor. In the end, dynamic pricing is about transparency. It gives the shipper insight into the real cost on a specific carrier and voyage. Just like in a window, transparency is two-sided. Dynamic prices also give the shippers and the 64

industry more transparency into how the carrier is doing in terms of both price level and utilization. Pricing transparency is going to spill over to Wall Street with stock analysts and traders getting glimpses of real-time information on the performance of carriers by the prices they are charging.

6 Shipper Automation The holy grail of digital freight services is not selling freight services selfservice to humans on the web, but rather going a step further and selling freight services computer-to-computer, much like courier shipping has achieved. Ideally, freight services should be procured together with the import/export orders, not added as an afterthought. For a large enterprise, an ERP system which decides to send a purchase order for an import should also be procuring the freight services, automatically, computer-to-computer. Similarly, as cross-border B2B e-commerce starts to become a reality, the customer buying B2B supplies on the web should be adding international freight services into the checkout, just as easily as a consumer adds shipping to their domestic e-commerce shopping. Freightos is currently running a pilot with the world’s leading B2B portal, Alibaba.com, where importers can source products, parts and materials from around the world (usually from Asia) and then buy the freight services at the same time.

7 Transparency is Not Commoditization—It Is Not All About Price Transparency is sometimes confused with commoditization. In true commoditization, competition becomes about price only. The ultimate example is the stock market where the traded shares are perfectly fungible, and all demand will shift instantly to the seller with the lowest price. However, transparency does not necessarily imply that competition is only about price. When you shop on Amazon, you have great transparency into millions of vendors and hundreds of millions of products. But you do not always choose on price. You may choose based on product features, delivery times and vendor reputation. 65

It is the same in freight. Admittedly, the industry became partly commoditized when containers were standardized at 20 and 40 foot. But still, there are product differentiations in transit time, customer service and valueadded services like refrigeration, dangerous goods handling, door delivery, track and trace, etc. Transparency will actually highlight rather than obscure these product differentiations. True, transparency will threaten inflated prices that do not come with extra service, and therefore, logistics service providers have to focus on efficient low-cost back offices. But transparency will also help to highlight superior customer service as well as fair higher prices for extra services. Transparency spans other parameters where the industry has been obscure, sometimes intentionally. Carriers and forwarders will often quote an unrealistic transit time. On freightos.com, we have long displayed transparent transit time estimates based on actual historic transit time data, rather than the transit times quoted by vendors, which, as the data shows, are not reliable. Finally, an ever more important industry metric is CO2 footprint. The demand for carbon footprint transparency is starting to come from all angles. From the shipper, from the shipper’s end customer who wants to know the carbon footprint of the product they buy, including its supply chain, and from government regulation. An interesting example of carbon footprint considerations is in air cargo. The marginal carbon footprint of cargo added to the lower deck of a passenger plane, which is flying anyway, is just one-tenth of the carbon footprint of air cargo on the main deck of a freighter. And, of course, there are differences of up to 20% in the fuel efficiency of modern versus older aircraft. Today, shippers who buy an air cargo service from a freight forwarder have no visibility into whether it will fly on a freighter or passenger aircraft, much less the specific aircraft model. CO2 is a transparent gas, and the industry is going to have to make its use more transparent too. This will allow fuel-efficient carriers to claim an advantage and in some cases perhaps charge a premium price for their fuel efficiency, as well as saving fuel cost. And CO2 transparency may drive carbon efficiency and play a small role in saving our planet.

8 Summary 66

Whether we like it or not, freight services are a near commodity. Certainly, some shipments may require important value-added services such as special handling. But most shipments involve transporting 40-foot metal boxes, or cubic meters, or kilograms, from A to B. And needless to say all the 40 foot containers are, well, 40 foot long. That is pretty close to a commodity. Even refrigerated containers and some types of hazardous goods are standardized, and their shipment is a fairly commoditized service. And yet it is not a perfect commodity. Factors such as customer service, transit time, carbon footprint and value-added services are also significant. All of these lend themselves to greater transparency. Admittedly, no one is expecting the entire industry to be perfectly transparent anytime soon. There will always be shippers who have unusually high volumes or special requirements and have their own unique pricing. But, as in other industries, the move toward transparency seems irreversible. For service providers, now is probably a great time to embrace transparency and ensure that the offered freight services stack up well in terms of price and other parameters when compared transparently side by side with competition.

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© Springer Nature Switzerland AG 2021 C. Wurst, L. Graf (eds.), Disrupting Logistics, Future of Business and Finance https://doi.org/10.1007/978-3-030-61093-7_5

Supply Chain Visibility and Exception Management David Nothacker1 (1) Sennder, Berlin, Germany David Nothacker Email: [email protected] Abstract Supply chain visibility is a commonly strived after ideal which recently has gained significant attention in times of globalization and digitalization. Historically, the complexity of supply chains as well as their operational inefficiency in the absence of digital capabilities resulted in a lack of visibility. Recently, novel technologies around the topics of data gathering, processing, and output have emerged which will lead to new opportunities in the future. In addition to providing transparency for all stakeholders, visibility of supply chains can optimize operational efficiency and minimize risks. However, despite technological advancements, supply chain visibility is not a standard which can be easily achieved as many different parties are involved in global supply chains. Now is the time for all stakeholders to work jointly toward their common goal of a transparent supply chain network with a single source of truth. David Nothacker is a Co-Founder and Managing Director of sennder, Europe’s largest digital freight forwarder connecting large enterprise shippers with small family owned trucking companies. Prior to launching sennder, David founded and exited a last mile delivery startup and worked at a leading management consultancy for five years. David holds an MBA from INSEAD and double M.Sc. from the London School of Economics (LSE) and ESADE.

1 Introduction When it comes to supply chain visibility, one can think of a simple example: 68

From the moment when goods are manufactured in China to the time they arrive in Germany, numerous stakeholders are involved, including exporters (also referred to as sellers or shippers) who are selling goods, importers (also referred to as buyers) who are purchasing goods, freight forwarders who plan and coordinate the transports, customs agents who are responsible for the clearance of goods, as well as shipping companies who own the vessels transporting them. In addition to that, forwarders or other parties may work with several subcontractors to perform the job of moving goods across the globe. Those might include shipping agents who represent the shipping companies at the port, consolidators who bundle small volumes form different exporters, carriers who transport goods to the destination, and insurance companies who cover possible incidents during the transport. What could possibly go wrong? In such a complex network that relies on the communication and collaboration of different stakeholders, one can think of many incidents such as freight which gets lost or damaged, containers which arrive at the wrong destination, or time delays which cause significant losses and hinder further operations. Surprisingly, the industry is still mostly relying on pen and paper as well as telephone and fax communication. In order to achieve visibility throughout the supply chain, a lot of manual work time and fluid communication are required. In recent times, however, numerous technologies to streamline visibility across supply chains and involved parties have emerged. This chapter aims at discussing the development of supply chain visibility and exception management, their impact on industry in general and the operations of stakeholders as well as the impact of emerging technologies and their implications for the future.

1.1 Definition of Terms: Visibility and Exception Management Before diving deeper into the pain points and potential value of supply chain visibility, let us get a common understanding of the terms “visibility” and “exception management” and why their importance is continuously increasing in global supply chain management. The term supply chain visibility is widely used and various, not always consistent, definitions have arisen. Rather simple, it can be described as “the sharing of all relevant information between supply chain partners” (Kaipia and 69

Hartiala 2006). Others define it as the “the extent to which actors within a supply chain have access to or share information which they consider as key or useful to their operations and which they consider will be of mutual benefit” (Barratt and Oke 2007). Based on those definitions, one might argue that relevant or useful information largely depends on the use case. This in fact is the reason why it is difficult to establish a common understanding across industries. Other definitions of supply chain visibility focus on the trackability and traceability of shipments (be it in containers, airplanes, or trucks) from end to end. In more detail, the ability to track amongst others parts, components, products, containers in transit from the point of origin to the final destination. As Vitasak (2005) outlines, visibility is the “ability to access or view pertinent data or information as it relates to logistics and the supply chain, regardless of the point in the supply chain where the data exists.” All seem to agree that the main goal of supply chain visibility is the ability to make data available and easily accessible not only to the largest but to all stakeholders. This information might be used for monitoring, controlling, or strategy formation, and thus, operations along the entire supply chain of goods can be enhanced by boosting efficiency leading to significant value gains as well as risk minimization. McCrea mentions exception management as part of supply chain visibility and defines it as “the ability to be alerted to exceptions in supply chain execution (sense) and enable action based on this information (respond)” (McCrea 2005). Exception management can be described as stakeholders defining ways on how to deal with exceptional situations occurring along the supply chain. In recent times, the need of management to react quickly to deviations from the norm due to unpredictable incidents has evolved for companies in the logistics sector. This stems from logistics being a highly complex environment which will sooner or later lead to exception handling becoming necessary. Therefore, it is essential for companies to have access to data visibility and to be able to monitor real-time information efficiently. Management by exception is going one step further and enables organizations to move from reactive to proactive exception management beyond visibility.

1.2 Why Does it Matter—Value at Stake Apart from the threat of a general economic downturn, supply chains might bear 70

the greatest risk for companies doing business around the globe. According to the KPMG International 2016. Global Manufacturing Outlook survey, manufacturers are highly concerned about breakdowns in their supply chain but most do not have meaningful visibility into their suppliers and goods movement. The report states that only 13% of respondents have complete visibility (Tier 1, 2 and beyond) of supply and information capacity across suppliers and logistics partners, less than 40% have enhanced visibility (Tier 1 and some Tier 2), and more than 40% have no or only some visibility (Limited Tier 1 and not Tier 2 or beyond). In recent times, several factors have led to an increased importance of visibility along the supply chain. One of the main causes is the geographic extension of supply chain activities. Globalization and the connected increase in cross-border movement of goods and services is leading to a growing need of supply chain visibility. Companies rely on more contractors as they have outsourced parts of or their entire supply chain with the aim to reduce costs to stay competitive. As a consequence, the geographic reach of supply chains has increased, making them more unstable. Another factor which has led to the involvement of more volatile geographies and the formation of multi-layered ecosystems is the mere fact of resource scarcity. Those developments have led to companies losing control as well as visibility over their own operations. Another key factor is market volatility which is caused by a more intense competitive environment, industry-affecting regulation, and standards being introduced, and shifts in consumer behavior which increase demand unpredictability. Additionally, unstable market environments are caused by insecurity about geopolitical developments or speculation in trading which leads to less foreseeable commodity prices and supply in general. Lastly, a more globalized supply chain also increases the probability of being affected by force majeure. Recently, consumer demands are increasing as online business has led to increased transparency and selection for customers. They are demanding unique and omnichannel buying experiences as well as personalized and tailored products. Manufacturers will have to fasten up the product development process and decrease the time from planning to delivering to customers. Apart from that, companies are affected by the need to be more environmentally friendly to avoid losing customers. All of those factors further increase the complexity to make supply chains work efficiently. But if the companies themselves do not know what is happening in their supply chain, how can they sell it to the customer who expects transparency? 71

Simply put, lack of visibility restricts the ability to react flexibly to events and increases the risk of supply chain disruption, possibly having major negative impact on a company’s business. Erich L. Gampenrieder, Head of Global Operations Advisory at KPMG, argues that “[t]he best way to reduce the risk of supply chain failure is by achieving greater visibility, and managing it crossfunctionally deeper into the end-to-end supply chain” (KPMG1 2016).

2 Present Situation/Where Do We Stand? While companies strive for visibility across their entire supply chain, it is not a standard which is easily reached despite technological advancements. In fact, most logistics professionals would argue that there is only small progress and their current supply chain visibility is not satisfactory as it still includes major “black holes in information flow” for goods transported in Asia or South America as well as major information lags instead of real-time updates. In a recent global survey among supply chain professionals, 77% of respondents declared that they have no or only restricted visibility while only 6% stated they have full visibility. This begs the question which factors hinder the establishment of real-time end-to-end visibility in practice.

2.1 Pain Points 2.1.1 Complexity As outlined before, global supply chains are highly complex with many parties and different stakeholders involved. This in turn makes lack of transparency inevitable. Subcontracting is commonly embedded deeply in multi-layered supply chain structures which prevents end-to-end transparency. Even between only two parties directly working together, the main barrier is to get everyone on board to set the same standards and agree on common technologies. One example of high complexity in logistics is the EU road freight market for full truckloads (FTL) where extensive subcontracting leads to a major lack in visibility. Despite the fact that 95% of EU trucks are equipped with GPS devices, only 8% of FTL transports in EU road freight are GPS tracked from end to end. This is due to the high number of subcontractors that are involved in the process. In total, 87% of freight is subcontracted. 72

2.1.2 Inefficiency Another paint point in achieving visibility is inefficient operations. Historically, logistics is a very operational, people-intensive business driven by manual tasks. A lot of processes are still paper-based and communication is done via email, phone, or even fax. In addition, major inefficiencies are caused by organizational silos, either functional or geographic, which lead to lack of information flow and missing out on performance potential. Getting back to the example EU road freight, the inefficient authorization process to allow the tracking and transmission of data to third-party users is another main reason for the lack of visibility. Currently, the authorization of data sharing lacks a streamlined process and is very time-consuming including extensive paperwork and lengthy authorization periods. This makes tracking of spot cargo almost impossible for shippers and forwarders dealing with high volumes and changing carrier companies on a daily basis.

2.1.3 Lack of Digital Capabilities Furthermore, the lack of digital capabilities is one of the main reasons for lack of visibility. This can range from moving to a digital supply chain for old-school SMEs or one-man businesses to making use of the large amounts of data generated already nowadays for large enterprises. Once again considering the example EU road freight: Due to widespread subcontracting, at some point, there will be forwarders or carriers involved who are lacking digital capabilities and unwilling to adapt to novel technologies. Even if the will exists, there still remains the difficulty to align and use a common solution. Those factors make end-to-end tracking for shippers and forwarders almost impossible to implement in practice. For large enterprises, it is more about using visibility data in an efficient and impactful manner and measuring the value as a return on investment. Currently, two of the main barriers are information overload and contradiction from several data feeds for the same shipment which decreases the ability to take action accordingly. Additionally, decision makers in organizations are unable to reliably quantify the value of real-time visibility as they are lacking a single source of truth. Investments into ERP or other IT systems have not paid off considering the goal of achieving end-to-end performance visibility for supply chain managers. 73

One the one hand, one single system is unable to provide all necessary information while combining several relates back to the issue of many data sources. On the other hand, companies are lacking the internal capabilities to fully integrate the whole supply chain and evaluate data across layers. “The result is a trove of data but a dearth of actionable insight” (BCG 2018). New technologies around data analytics solutions which will be elaborated later in this chapter are facilitating new ways for firms to empower their employees to make more data-driven solutions.

2.2 How to Realize Value There is no doubt about the fact that removing the main obstacles to gain visibility will result in a significant value-add for businesses. However, realizing real business value from visibility is about much more than just the immediate impact of having access to real-time information. It is about the strategic use of data to improve supply chain management practices in the long haul. Gaining visibility will contribute to the objective of determining and resolving performance gaps, innovating processes as well as disrupting the supply chain. A study by the Boston Consulting Group states that high value cases of digital supply chains include “[b]ringing end-to-end visibility to material flows, enabling performance management, operational interventions, [and] predictive and self-adjusting supply chains” (BCG 2020).

2.2.1 Optimize Operational Efficiency The first thing that comes to mind when thinking about increased efficiency through visibility is increased automation and, therefore, less manual work. While a reduced headcount might be easy to measure for managers, it is by far not the only factor visibility has on reducing operational supply chain costs. Increased transparency makes the supply chain more predictable for all parties. Being informed in real time allows decision makers to react faster to unforeseen events, or even before they occur. This includes both the supply side, to predict material supply for production, and demand side, to adapt to changes in demand and delivering goods to the customer. Volatility and more costly interventions can be reduced, which can lead to manufacturing, warehousing, and distribution cost savings of 7–20% according to a report by the Boston Consulting Group. Such improvements can be achieved 74

by assessing performance and applying continuous improvements techniques. On the other hand, better forecasting and on-time supply chain operations can have a positive impact on product sales. As visibility insights of material flows decrease shortages and delays, the report states that demand fulfillment levels can be increased by 4–6% (BCG 2018). There are numerous levers of operational efficiency in supply chains such as on-time performance or capacity utilization which can be improved substantially with real end-to-end visibility. Some of them will be elaborated in more detail later in this chapter when discussing emerging technologies in the field of supply chain visibility.

2.2.2 Minimize Risk In addition to optimizing operations, possible supply chain risks or failures might be mitigated through increased supply chain visibility. Instead of relying on pure experience and rules of thumb, visibility into supply chain performance enables companies to use data to manage inventory levels. Keeping an overview of supply, demand, and inventory can lead to a significant reduction of working capital needed to run operations. Furthermore, organizations can develop enhanced risk management capabilities through better planning and the ability to intervene when exceptions occur at some point of the supply chain. Responding to supply chain disruptions is both about finding the root causes of the problem and readjusting operations in an efficient and timely manner. Other than that, making visibility data available for all parties throughout the supply chain as well as employees from different levels in the organization can reduce the risk of miscommunication or delays in taking action. Thereby, companies will be able to move from reactive to more proactive exception management and, therefore, significantly increase service and performance levels.

2.2.3 Provide Transparency Another hidden value of supply chain visibility is the ability to provide transparency by keeping the information level of all trading partners on the same level. This affects the interaction of all vertical levels along the supply chain, be it commodity producers, suppliers, manufacturers, or buyers and might include 75

transparent information about shipments, inventory levels, or bottlenecks. In addition to that, business can increase service levels for consumers by providing transparency as well as more accurate information. Nowadays, consumers are used to being able to access all kinds of information in real time and expect so for delivery of goods as well. Apart from that, there is the socially responsible and environmentally friendly aspect of the supply chain with a growing public awareness. As mentioned before, because of subcontracting or lack of visibility into lower-tier suppliers, supply chains are getting more and more out of control and sustainable management is increasingly challenging. Realizing end-to-end visibility would provide the necessary transparency for all parties involved and by acting responsibly based on those insights, companies can increase their value and customer trust.

3 Emerging Technologies and Solutions Global supply chains generate an enormous amount of data points every second for which traditional systems, like enterprise resource planning systems, could not provide the necessary visibility insights in the past. In recent years, however, rising innovative technologies including machine learning, computer vision, or IoT sensors have led to major progress in gaining real-time end-to-end visibility. Investing into new technologies might contribute to lowering the risk and managerial concern about supply chain failures. In the following, new asset tracking, big data and analytics, as well as control tower solutions will be discussed.

3.1 Data gathering—Asset tracking/IoT IoT technology simplifies the process of data collection which in the past relied on manual data collection and entry, and, for the most part, still does today. Information is gathered via sensors, barcodes, or other tracking methods, and transmitted to cloud architectures to be processed further. This is the basis for developing big data and advanced analytics solutions which will be discussed later in this chapter. Apart from providing insights into operations in warehouses for inventory management and workflow optimization, IoT is destined to improve visibility 76

along the entire supply chain by tracking shipments with connected devices. Real-time monitoring of container movements using advanced tracking solutions can streamline operations, for example, when it comes to fuel efficiency and maintenance. New types of sensor data will decrease the reliance on manual work, and, therefore, improve accuracy and decrease information time lags. Erich L. Gampenrieder, Head of Global Operations Advisory at KPMG, argues that “IoT is going to be a critical component of growth for manufacturers, both as a way to improve the value of their products by embedding sensors and connectivity, but also as a way to monitor, manage, and improve the supply chain” (KPMG1 2016). While fleet and warehouse management tools have been used for quite some time already, their adoption and scale as well as their power will be boosted significantly by new technologies during this decade and beyond. In transport management systems, for example, IoT is used to improve tracking, scheduling, and processing of goods flows. The collected data can then be made available to customers and, ultimately, consumers to provide transparency.

3.2 Data Processing—Big Data/Analytics/AI Gathering data is just the stepping stone of gaining value from increased visibility. The real value lies in gaining insights based on processing those large amounts of data into a digestible format. In this regard, the buzz around machine learning and AI in general will also find its application in moving toward supply chain visibility and especially creating business value from it. Big data analytics empower companies to understand and act upon the analysis of their individual business environment and operations. Advanced machine powers are built to handle big data in an intelligent way and not only allow for simply tracking goods, trucks, or containers, but more importantly to optimize routes and capacity utilization as well as to forecast demand. The difference to traditional analytics is the ability of predictive analytics to detect and simulate in areas where managers were not aware of inefficiencies. Thus, companies can unlock potential and empower value-adding decision-making in the organization to improve sales and operations planning. Furthermore, proactive decision-making based on data and predictions generated by algorithms can be implemented not only for day-to-day business and long-term strategy formation but also in the case of failures and exceptions occurring. On a larger scale, it is about being able to analyze the whole supply chains, find 77

efficiency bottlenecks and barriers, and thereupon restructuring the distribution network. More recently, process mining has been developed as a new method to handle big data analytics. It consolidates data points from different legacy systems into a comprehensible and transparent view of processes in an organization. While it has many use cases, the one of supply chain processes is apparent. Based on visualizations, process mining enables managers to analyze the efficiency of every process along the supply chain in real time, unlike traditional analytics. Thus, issues which are per se simple, but before were not visible to decision-makers, can be solved more quickly and efficiently. Another emerging technology which could have an impact on supply chain visibility is blockchain, literally moving from paper ledgers to a distributed ledger. While this could have a significant impact on data transparency and accuracy as data cannot be easily manipulated or changed. But compared to other technologies discussed, this will take more time as implementation is the main challenge for both regulatory and industry-wide alignments.

3.3 Data Output—Control Tower Solutions Control towers for supply chains are helping decision makers to improve operations along key processes, including enabling end-to-end visibility, dealing with supply chain disruptions as well as optimizing predictive decision-making and execution. ORTEC’s dictionary describes control towers as “a central hub with the required technology, organization, and processes to capture and use transportation data to provide enhanced visibility for short-and long-term decision-making aligned with strategic objectives.” (Ortec 2020). In general, control towers leverage the technologies discussed before, including IoT data and machine learning, to gather and process data from news feeds, weather forecasts, or GPS tracking. In this context, supply chain control includes the whole flow from suppliers to manufacturing, customers, and third parties. One of the main functions is to streamline exception management by knowing amongst others which suppliers or materials are involved, which production items are affected, and how this will impact customers and, therefore, revenues. In practice, this might be realized by having predefined measures or using simulations. Overall, visibility on different levels of control might be affected by control 78

tower solutions. On a company level, a central platform for operations visibility can be established. On a supply chain level, suppliers and subcontractors as well as customers can be integrated to provide transparency and work out win–win scenarios. Theoretically, it can also be applied across various supply chains, but alignments on data and profit sharing on a horizontal partnership level hinder practical implementation.

4 Implications for the Future 4.1 Opportunities The time for companies to act is now. New solutions and possibilities driven by novel or advanced technologies bear an enormous potential for improving supply chain operations. The opportunity to gain a competitive edge by being a first mover in this field can be crucial as organizations are just starting and still trying to understand the long-term impact of complete supply chain visibility. Managers from leading organizations in Aerospace and Defense, for example, are planning to invest heavily into demand sensing, analytics tools as well as sensor and IoT technologies. Enhancing visibility and creating transparency will enable companies to regain control over their supply chain and improve collaboration across the supply chain with suppliers, customers, and growing amount of other third parties involved. Therefore, real-time data will become of increased importance to sustainably assessing performance and understanding the risks inside the global supply chain. The technologies and trends discussed bear an enormous potential and will be further developed in the near future, empowering managers to optimize cost and performance while at the same time minimizing risks.

4.2 Challenges In spite of technological advancements and significant investments, companies still lack full visibility. One of the main challenges in this regard is the lack of a “single source of truth” from different visibility software. To some degree, it might be simpler to find a more cost-effective solution than progressive optimization technologies as long as data from different sources can be consolidated and cleaned up reliably as well as presented in a way to be used effectively by the whole workforce and not only technical specialists. Moreover, determining and quantifying business value of gaining visibility 79

in different parts of the supply chain happens to be an issue independent of the size of the company or hierarchy level of a person. An interesting insight shared in an article in The Wall Street Journal even argues “that improving the performance of the 99.5% of shipments that do not generate exceptions can deliver much more value” than optimizing the exception events, at least for some cases. One way or another, real-time information itself does not deliver value, but rather the actions taken based on it. Another challenge is simply the practical implementation of new technologies and solutions. Market and industry-wide standards would need to be established, which is very complex considering there are millions of individual companies, from one-man businesses to large enterprises. While larger businesses are just starting to truly transform digitally, smaller players, as discussed earlier, are lacking digital capabilities. Existing stakeholders and workforce have to be trained and data knowledge has to be developed to put the newly gained visibility insights into practice. The process to gaining end-to-end visibility is destined to be a long and bumpy road as companies today are still struggling to build up basic digital capabilities and lack expertise and alignment regarding advanced analytics. In this regard, the challenge to decide between inhouse development and outsourcing will arise based on the business and industry context. As new technologies and business models start gaining traction, established players cannot afford waiting out while competition moves ahead. Next to adapting technologies, it also makes for incumbents to partner up with startups on initiatives driving performance for both parties.

5 Conclusion Despite the advancements in technology, it will still take time to pave the way for fully digital and transparent supply chains driven by visibility. Enormous business value and opportunities are met by significant underlying challenges which companies have to overcome. In an ideal scenario, end-to-end supply chain information is available in real time for all parties involved. Through digital supply chains with information availability as well as better collaboration reliability, agility, and effectiveness will be enhanced. But for every player to have the same knowledge and insights, there have to be joint efforts and market standards must be established. In such a scenario, the value and risks of 80

accessing and sharing data will be a much-discussed topic. The fear of sharing data with competitors or alleged business partners will have to be weighted with the positive business impact it may have on a firm’s own operations. Relying upon more connected, digital supply chains will open up the opportunity to move toward “networks”, with cooperating parties accessing the same single source of truth, instead of the currently established “chains”.

Literature Accenture (2017) Supply chain for a new age. Barratt, M., & Oke, A. (2007). Antecedents of supply chain visibility in retail supply chains: a resource-based theory perspective. Journal of Operations Management, 25(6), 1217–1233. [Crossref] BCG (2018) Turning visibility into value in digital supply chains. BCG (2020) Digital supply chain. Capgemini Consulting. (2011) Digital transformation of supply chains. Eurostat, EU commission, TI. Geodis. (2017). Geodis supply chain worldwide survey. https://​www.​wsj.​com/​articles/​guest-voices-seeking-the-value-in-supply-chain-visibility1465933188. Accessed 13 Feb 2020. https://​home.​kpmg/​xx/​en/​home/​insights/​2016/​05/​global-manufacturing-outlook-lowvisibility-high-supply-chain-risk.​html. Accessed 13 Feb 2020. https://​home.​kpmg/​xx/​en/​home/​insights/​2016/​07/​need-for-supply-chain-visibility.​html. Accessed 13 Feb 2020. https://​www.​accenture.​com/​t20170206t210529​_​_​w_​_​/​id-en/​_​acnmedia/​pdf-42/​accenturesupply-chain-for-a-new-age-2.​0.​pdf. Accessed 13 Feb 2020. https://​www.​bcg.​com/​capabilities/​operations/​turning-visibility-value-digital-supplychains.​aspx. Accessed 13 Feb 2020. https://​www.​bcg.​com/​capabilities/​operations/​digital-supply-chain.​aspx. Accessed 13 Feb 2020. https://​www.​capgemini.​com/​resources/​digital-transformation-of-supply-chains/​. Accessed 13 Feb 2020. https://​www.​mckinsey.​com/​business-functions/​operations/​our-insights/​the-human-sideof-digital-supply-chains. Accessed 13 Feb 2020. https://​www.​sdcexec.​com/​software-technology/​news/​12357751/​driving-supply-chainvisibility-with-big-data. Accessed 13 Feb 2020. Kaipia, R., & Hartiala, H. (2006). Information-sharing in supply chains: five proposals on how to proceed. The International Journal of Logistics Management, 17(3), 377–393. [Crossref] KPMG1. (2016). Global manufacturing outlook: low visibility, high supply chain risk.

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KPMG2. (2016). The risks of delivering new products and services is driving the need for supply chain visibility. LaBombard, M., McArthur, S., Sankur, A., Shah, K. (2019). The human side of digital supply chains. McCrea, B. (2005). EMS completes the visibility picture. Logistics Management, 44(6), 57–61. Ortec. (2020). Control tower for supply chains. https://​ortec.​com/​en/​dictionary/​controltower-supply-chains. Accessed 13 Feb 2020. Rinke, A. (2017). Driving supply chain visibility with big data. The Wall Street Journal. (2016). Guest voices: seeking the value in supply chain visibility. Vitasak, K. (2005). Supply chain and logistics terms and glossary. Lombard, IL: Council of Supply Chain Management Professionals.

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Business Models Disrupting the Existing Logistics Solutions

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© Springer Nature Switzerland AG 2021 C. Wurst, L. Graf (eds.), Disrupting Logistics, Future of Business and Finance https://doi.org/10.1007/978-3-030-61093-7_6

Rate Comparison and Marketplaces—The Platform Era and Global Freight Eytan Buchman1 (1) Freightos, Hong Kong, China Eytan Buchman Email: [email protected] Email: [email protected] Abstract Platforms, which connect buyers and sellers at scale, have been a mainstay of the consumer Internet ecosystem for decades, led by companies like Amazon, eBay, Uber, and Airbnb. In recent years, they have increasingly permeated the business environment, beginning with Alibaba for procurement and increasingly with companies like SAP Ariba. The prospect of increased efficiency and access for buyers and improved sales and support for providers makes platforms alluring for the logistics space, particularly given fluctuating capacity, the multiple actors involved, varying support capabilities, and the prospect for reduced costs by automating procurement and management. This essay assesses the platform potential in the logistics space, the drivers of change that make it more relevant than ever, and the four major platform business models being adapted. Finally, it concludes with a case study based on the Freightos Group’s experience in the logistics platform space. Eytan Buchman is the Chief Marketing Officer at the Freightos Group, a key player in digitizing global freight for carriers, forwarders, and importers worldwide. He leads Freightos’ research efforts, which have been cited in major newspapers, US government committees, and more. His research and logistics tech educational material are consumed by over one million readers a year on the Freightos Web site. He has a background in strategic communication, public relations, and 84

messaging, is a major (res.) in the Israeli military, and has is an active member of the Israeli startup scene. In addition to running marketing at Freightos, he regularly consults on startup marketing, storytelling, and data-driven marketing, while operating a marketing podcast titled “Marketers in Capes”.

1 Introduction 1.1 A Radically New customer … and a Radically New Solution From the cell phones we use to buy goods to cashier-less grocery stores, the way consumers research and purchase goods has radically shifted over the last twenty years. The sheer quantity of information available, combined with the ability to digitally transact—book a cab, buy cat food, personalize a t-shirt, or buy a car— means unprecedented access to … anything. This is made possible by two other customer empowerment trends—the democratization of vendors who could now provide on-demand service and the underlying framework that makes that connectivity possible. And the missing link—platforms—has been on a tear, growing at a ferocious pace. The Boston Computer Exchange, an online bulletin board for buying used computers, went live in 1982 even before the World Wide Web (Mamis 1991). In 1984, Electronic Mall, a successful e-commerce marketplace was launched by CompuServe. By 1995, this trend led to the launch of eBay, which provided a digital ecosystem where buyers and sellers could “meet” and exchange value. In these new two-sided platforms, companies leveraged digital tooling and massive number of buyers, to attract more suppliers. This, in turn, improved selection, pricing, and buyer experience, while aggregating more data to help improve operations. Together, this created what Jim Collins, the author of “Good to Great”, dubbed a growth flywheel (Collins 2001). This same flywheel displaced the 1980 business leaders. Seven out of the ten largest tech companies in the world are now platform companies (Google, Microsoft, Facebook, Tencent, and Alibaba, while Apple and Amazon also have a significant part of their value in their platform business), relying on a core business of connecting users, businesses, and consumers alike (Schenker 2019).

1.2 From Consumer to B2B … and Logistics 85

These same drivers unleashed a series of B2B platforms, albeit with a lower profile and more niche appeal. Initially, product-centric platforms were the most visible B2B platforms. Alibaba.com remains a dominant force, albeit with Amazon’s fast-growing Amazon Business hot on its tail, as it grew from $1 billion in revenue in 2016 to $10 billion in 2018 (Sheetz 2019). The service industry was not far behind. Companies like SAP Ariba connect multiple players across the supply chain, while others, like Tradeshift, focus on financial cooperation. Still others leverage more complex models, like Zenefits, which provide HR services for small-and medium-sized businesses and then offer a platform for insurance companies to offer apologies to those same companies. Before looking at logistics specifically, it is worth bearing in mind that platforms are uniquely suited to the business environment due to their ability to create a broad ecosystem, rather than merely connect two parties. The platform players in the business environment, like Tradeshift, SAP Ariba, and GT Nexus, tend to focus on multiplayer connectivity instead of linear relationships through a platform. But B2B platforms face two main hurdles: 1. Critical mass: Platforms must attract a minimum number of buyers and sellers to become viable. This becomes a chicken-and-egg issue. It is hard to attract buyers without sellers or sellers without buyers. This is difficult in the consumer environment but more so in the business arena, where both sides are averse to change. 2. Cultural: Technology has ceased to be a tech blocker, as highly regulated businesses like finance have shifted online. Instead, a major blocker for adoption is cultural. Data security, the prospect of “too much” crossdepartment collaboration, and legal red tape can stymie platform innovation.

2 Platforms in Global Freight Baldwin and Woodard, two platform experts, define a platform as a system that includes core components with low variety (i.e., routes or carriers) and a complementary set of peripheral components with high variety (i.e., service levels, providers, and prices) (Gawer 2010). Moreover, the typical forwarder has 86

in essence functioned as a non-digital platform—with two exceptions. First, forwarders typically assume a broad role in each transaction, both in terms of legal responsibility and in terms of the value-added services provided. Second, forwarders, and especially larger ones, tend to purchase large amounts of capacity in advance before reselling it, classifying them as a linear business model, not a platform. But global logistics remains a lucrative platform opportunity. Firstly, it is one of the largest industries in the world. The international freight forwarding business alone is estimated to be worth some $350 billion dollars annually, with many multiples more in direct-carrier relationships, added value services, and trucking (Manners-Bell et al. 2019). Secondly, the structure of global logistics lends itself to platforms. The typical global freight shipment already utilizes multiple tiers of actors, with carriers across all modes selling services to service providers who then resell the service. Not only does this add information entropy in terms of pricing, capacity, and tracking transparency, but also it leads to higher charges passed on to buyers.

2.1 The Changing Global Freight Ecosystem These structural characteristics of global freight are now being further influenced by changes within the market, both in terms of the cadence of global trade and in terms of the demand for transparency. Key changes promoting a platform model include: 1. Agile supply chains: As the pace of globe trade (and consumer expectations) increases, supply chains must improve/increase agility too. A recent McKinsey study found that in the fashion industry, 98% of retailers need to improve go-to-market processes (Berg et al. 2018). With the average production and logistics phase for fashion taking just 17–18 weeks, it is more critical than ever to alleviate any possible bottlenecks. This need for speed can be better serviced with access to broader networks of modes, service providers, and on-demand schedules/capacity to drive improved decisionmaking. 2. New Suppliers—Carriers: The historical multi-tiered market is now being impacted by emerging direct-carrier sales. Ocean liners have traditionally 87

sold about 50% of their volumes directly to large BCOs, while airlines have largely avoided direct sales. However, recent trends point to determination from carriers to tap into direct SMB sales with digital offerings, reeducating the mid-market to expect digital sales and service from their providers, and increasing the cultural openness to digital logistics sourcing (Freightos 2019). In addition, should direct-carrier sales emerge as appealing, the lacking universal coverage for any one carrier lends itself to the emergence of a broader platform. 3. New Suppliers—Digitally Native Forwarders: Legacy forwarders, such as Kuehne + Nagel, Agility, and CH Robinson, and digitally native forwarders, like Flexport or FreightHub, have been hard at work creating digital portals for shipment management. As a result, the industry is increasingly automated and ready for platform integration for digitized sales and tracking. In addition, digital competition means that these forwarders are more likely than ever to explore additional low-cost sales channels, such as those provided by channels. 4.

New long-tail customers: While the logistics industry has changed, so has the market for importers. Small and midsize companies in the USA already represented 97% of all US importers (and 33% of all US import value) in 2016 (International Trade Administration 2019). As e-commerce infrastructure evolves to support small importers—Alibaba for sourcing, Amazon or Shopify for sales, social media for marketing, and a plethora of companies like Amazon FBA, ShipBob, or ShipMonk for fulfillment—so too the small business demand for global logistics will likely grow, increasing the total market size.

5. Specialization: More global supply chains encompassing more diverse buyers and commodities mean that logistics specialization, be it by region, commodity, or mode, will remain critical. While origin service can be provided better in China by a Chinese company, that same forwarder will likely struggle for origin service in India. The supply-side fragmentation of logistics providers means diverse levels of service; this is precisely the arena in which platforms thrive. For example, Freightos has found that the best transactions on freightos.com involve a mix‘n’match of different providers and separate customs brokers and insurance. 88

6. Integration: Courier companies saw a renaissance over the last two decades, as they rode the e-commerce wave. Effectively, for two decades, FedEx and UPS benefitted from every Amazon transaction. As a result, FedEx's market cap grew threefold between 2000 and 2020 (Yahoo Finance 2020a), while UPS's doubled (Yahoo Finance 2020b). As business-to-business platforms continue to play a more prominent role in the global economy, the need to fulfill cross-border business shipments will too. This requires deep integration, global, multimodal coverage, and sufficient reliability metrics reflected back to the B2B e-commerce operator; platforms are uniquely suited for this too.

2.2 The Value of Platforms Through the Logistics Prism The ultimate success of platforms is dependent on driving value to both the producers and the consumers. Given the current state of the logistics industry, there are a number of areas where the value will likely emerge.

2.2.1 Improved Utilization Fluctuating load factors pose a serious logistics challenge, with air cargo famously at a sub-50% load factor. Meanwhile, ocean liners frequently blank sailings due to erratic utilization. Forwarders suffer from the same problems with regard to block agreements. With more granular connections, platforms can improve the utilization of unused supply. This problem is prevalent throughout the entire supply chain. For example, a bevy of on-demand warehousing solutions, much like an Airbnb for warehouses, has emerged in recent years, including Flexe, Ware2Go, and Stord.

2.2.2 Reduced Inefficiencies Freightos research shows three days of waiting time for spot quotes on LCL shipments from leading global forwarders. Platforms can reduce these inefficiencies, lowering underlying service and discovery costs. In addition, logistics is known for added charges, misreporting, and lacking transparency on the service, which platform accountability can help solve.

2.2.3 Cost Reduction 89

Platforms provide buyers with real-time reporting across many vendors in seconds. This comes in a number of shapes, like Uber, which displays aggregated data from user reviews, or Amazon, which uses performance data when determining which companies get recommended. In the logistics space, this data can help logistics providers leverage comparative advantage on lanes, modes, or services. Of course, this encourages stronger competition, which creates additional pressure on the sellers. The advantages for sellers are quite significant as well. While platforms mean reduced direct access to customers, it means a broader reach with reduced sales and marketing.

2.2.4 Radical New Supply Platforms like Uber and Airbnb have seen dramatic success because they created new sources of supply. An apartment room that was previously empty for weeks at a time could now be rented out in seconds. These platforms unlock more supply by creating environments in which new untrusted sellers can now be safely leveraged. Meanwhile, the data collected in the form of reviews and utilization provides the necessary comfort to interact with an unknown vendor. Following this model, there are a bevy of new platforms that offer dynamic capacity procurement for trucking, including Uber Freight.

3 What Does It Mean? For the near future, it is unlikely that one platform will insert itself and “win” the entire market. It is unlikely that a one-stop shop can sufficiently service both a one-off importer, as well as a large multinational whose supply chain is 95% tender-based. The lessons from air travel, in which a number of victors emerged—the Expedia Group, Priceline, C-Trip, and others—indicate that even when global freight does go online, it is unlikely to be a winner takes all environments. In air travel, marketplaces and portals owned by airlines went online together. In freight, portals operated by forwarders already have the edge, relegating platforms to an additional sales channel, at least initially. However, given the tectonic shifts from both logistics providers and logistics buyers, the emergence of platforms to service the small and mid-market, as well 90

as the spot market for enterprise providers, is more than inevitable. It is already underway.

4 An Overview of Logistics Platforms in 2020 The global economy is shifting to platforms, and there are drivers that support a logistics shift toward platforms. To date, this has taken a variety of formats. However, nearly all of them are shaped by the underlying structure of global logistics. First, global logistics is multi-tiered, with carriers typically selling through multiple layers of brokers, co-loaders, and agents. Second, it is a change-averse industry, with legacy systems and high levels of manual expertise that are difficult to codify. Third, not only does underlying logistics frequently require multiple inputs, but also they must “play nice” with accompanying industries, like finance and procurement. Fourth, legal requirements make it difficult to make fundamental model shifts; for example, ocean freight prices must be submitted to the Federal Maritime Committee in advance. Finally, like many industries, incumbents are a serious barrier to entry, because of both their existing global infrastructure, which theoretically improves underlying service levels, and the more competitive prices they manage to negotiate due to access to broader demand. However, competition has emerged. The shift toward platforms within logistics over the past decade has taken a number of shapes: 1.

Direct platform plays

2. Disintermediation 3. SaaS-enabled platforms 4. Pricing-related Each of these models has advantages and disadvantages, as well as different go-to-market strategies. What follows is an overview of these models, followed by leading players across each respective model (Table 1). Table 1 Overview of logistics platform models

Carrier selling to …

Carrier Forwarder Shipper (enterprise)

Shipper (SMB)

N/A

Freightos.com

WebCargo Freightos.com

91

Carrier selling to …

N/A

WebCargo Freightos.com

Freightos.com

Cargo.one

SeaRates (acquired by DP World)

NYSHEX Xenata (nontransactional) Cargobase SimpliShip

Forwarder selling to …

N/A

WebCargo Freightos.com Enterprise Freightos.com Haven

CogoPort Transporteca

4.1 Direct Platform Plays Creating a platform from scratch means bringing both supply (either forwarders or carriers) and demand (either forwarders or BCOs) into direct contact with a platform created for this express purpose. To date, many of these platforms have attempted to bride the challenge of simultaneously addressing supply and demand by limiting their focus to specific niches, either mode (such as Cargobase, which launched by connecting forwarders and shippers for air cargo), geography (such as Transporteca, which launched in a small number of European countries), or even target market (such as cargo.one, which only supports forwarder and airline connectivity in a specific number of countries). This approach has much appeal as a go-to-market strategy, seeing as most logistics providers are themselves stratified across both region and mode. The advantage of this model is that it does not pose a direct competition to the existing logistics ecosystem. It also maintains flexibility that enables a large variety of providers—carriers or brokers—to offer services. By carefully selecting specific types of providers or marketing to specific buyers, platform players gain focus and clarity. However, it is not without disadvantages, both culturally and technologically. From a technological perspective, many logistics providers are themselves not automated. In effect, this creates a load board of types that is not updated regularly. Nor do buyers always have direct access to the provider, which inevitably leads to information entropy and a poor customer experience. On the cultural side, it is helpful to use an insight from Bill Gurley, a marketplace investor, who categories industries by promiscuous—where it is typical to use many vendors—or monogamous—where buyers typically stick 92

with one vendor. Logistics tends to sway toward the latter, which means that once a platform connects a buyer to a good provider, there is generally inventive to cut the platform out of the transaction if it improves communication and reduces costs for either side of the transaction.

4.2 Disintermediation Since global freight is a multi-tiered market, many tech actors immediately gauge the potential to cut freight forwarders out of the middle, connecting carriers directly to shippers. While this is commonplace in ocean cargo for enterprise organizations (some 50% of ocean cargo sold by carriers is directly to BCOs), it is far less common in air cargo and even harder to pull off for multimodal transport. One example is Fleet (initially launched as Shipstr), which launched as a carrier-shipper marketplace in 2014 but since pivoted to operate as a digital forwarder. While difficult, this model may very well become more pervasive as more ocean liners begin to expand their digital direct-to-shipper sales and airlines begin to discuss it as well. The capacity to launch these platforms may likely become easier. Carriers are creating more APIs, which are geared toward making such integrations easier. This will likely take some time, as carriers are typically not set up to provide incredible service at scale to small, uninformed buyers. In addition, the carriers typically have a lower scope of services than a general logistics provider. For example, it is unlikely that a company like Maersk or CMA CGM will be able to invest significant efforts in Amazon FBA services, a core requirement for many small importers. Beyond limited service, there is a more fundamental blocker to this. Assuming that the international leg is the key hurdle for international freight, the concentration of the market, extending to 10–20 relevant ocean carriers and under 400 global airlines, means that a constant battle will emerge between the carriers, who will try to own direct access to the customer, and the platform, much like Expedia and airlines. In addition, as API access becomes easier, it lowers the barrier for existing platforms, whether Amazon or SAP Ariba, to roll out this functionality to their existing user base. Of course, in terms of advantages, removing a middleman from the transaction can be key for reducing costs. Estimates place freight forwarder markups at 10–15%. Assuming dramatically lower service costs and a network 93

effect for acquisition, a platform could likely charge a comfortable 5% margin on frequent repeat transactions while still dramatically reducing costs.

4.3 SaaS-Enabled Marketplaces In other industries, providing software for either supply or demand and later turning that into a marketplace emerged as a successful tactic. For example, OpenDoor, a marketplace for booking seats at a restaurant, started by providing software to restaurants to manage seating. Once a sufficient number of restaurants were automated, they launched a marketplace that was able to access the number of available seats and book them. This is particularly effective for global logistics given that many of the underlying suppliers within the industry —the freight forwarders or carriers—are themselves not automated, which makes automation of their service or sales necessary prior to live connectivity and procurement on a platform. This is a complex approach with some significant blockers upfront. In order to launch with this approach, a company must have a cash runway, as it effectively requires launching two products successfully; both the SaaS and the underlying platform. Depending on whether the SaaS tool is geared toward buyers or sellers, SaaS product creators are likely to find that the market for helpful tools is quite crowded and competitive. However, the core advantage is that if the initial product is successfully launched, it creates a formidable barrier to competition. The access to the combination of data and relationships also helps turbocharge platform growth, while lowering the barrier to provide platform-specific value out of the gate. Finally, having existing traction will typically make it easier to attract the other side of the platform participants, making eventual launch easier.

4.4 Pricing Given the challenge in automating the entire complex process of shipping, some companies have started with specific aspects of the logistics transaction. For example, NYSHEX launched as a platform securing transactions between carriers and their customers, specifically with regard to pricing. By doing so, this reduces the degree of integration or underlying automation required. This approach is likely simpler and has a huge advantage of typically being related to the transaction. By sticking to this, these tools can avoid platform 94

accountability during the course of shipments, which is where the main aspects of customer frustration are likely to surface. In addition, the more focused approach likely makes sales to enterprise organizations on either side of the platform less daunting and more focused, facilitating an easier go-to-market strategy. However, the main obstacle remains; these platforms are ultimately one-trick ponies. Amazon’s success does not stem from only pricing. If a platform emerges that can do pricing, as well as other operational aspects, the platform becomes less defensible. In logistics, a large amount of the personnel investment for both shippers and providers is shipment management, creating a major market for arbitraging efficiency. One interesting type of player that has emerged in this area is nontransactional players. Companies like Xeneta provide market visibility by pooling contracts. Much like traditional platforms, they are driven by a virtuous flywheel of data and customers that helps expand. They also derive credibility from being removed from the actual transaction, reducing incentive for high or low prices. Since they are non-transactional, they are typically used as business intelligence tools. This model is more similar to historical global trade patterns, which revolved primarily on tender procurement, rather than the spot market. Of course, this can lead to lower revenue potential. As a result, platforms in other sectors that took this approach, such as Alibaba.com initially only connecting suppliers and importers without facilitating the actual transaction, eventually made the shift over to a fully transactional platform. Table 1 gives an overview of the different platform models in logistics.

4.5 A Note on Ongoing, Underlying Digitization This approach in particular is driven by the latent wave of rate management and digital e-commerce tools available by companies like WebCargo, Kontainers, and others. In many ways, digitization of pricing and sales for carriers or forwarders is a necessary precursor in order to enable any type of large scale digitization. Even when platforms like these are not using, standardization of pricing, booking, and tracking will become increasingly critical. This is currently being addressed both by commercial solutions, like Chain.io, a company that specializes in platform integration, and by organizations like IATA (air cargo) and DCSA (for ocean freight).

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5 The View from the Inside In early 2012, the Freightos Group launched with the mission of making global trade frictionless by providing an online freight marketplace. The strategy leveraged was, as mentioned above, a SaaS-enabled marketplace. Between 2013 and 2016, Freightos offered cutting edge sales digitization tools to logistics providers by way of software-as-a-service (SaaS)—namely global freight rate management, instant quoting, and sales management for freight forwarders. Following the 2016 acquisition of WebCargo, the freight digitization tools were rolled into WebCargo. In total, this automates freight sales for some 1,900 logistics providers including many of the global ones, while enabling air cargo pricing from some 350 airlines and dozens of ocean liners, with instant capacity, pricing and eBooking for some major airline groups. Freightos has ingested hundreds of thousands of Excel Sheets from around the world turning them into clean structured database data. Together, this sell-side automation enabled the launch of Freightos.com, a freight marketplace that connects both carriers and global logistics providers to small and midsize importers around the world. The following are some key observations that have emerged from the first three years of Freightos.com's operations:

5.1 The Value of a Platform A dominant characteristic of smaller importers is lack of global logistics expertise. This is a key reason why many larger logistics service providers are uninterested in this segment. Another reason is that small businesses are simply too expensive to find and serve through a traditional field sales team. As a result, providing scalable support and a frictionless experience became critical. Freightos.com provides automated in-product quoting and booking, support and self-help, ranging from videos and a 120-page shipping manual to on-demand chat and phone service. As a result of ongoing optimization, some 70% of all users book without speaking to a human being. While these users are increasingly informed, they remain less price sensitive than their larger counterparts, prioritizing reliability based on peer reviews. For larger companies, pricing and transit time transparency, as well as onestop shipment visibility (track-n-trace), and documentation management across 96

multiple vendors, remains more important. Like many platforms, a typical customer will likely start with research over the course of a month or more. The typical user tends to run some 12 searches on freightos.com prior to their first booking, indicating some lingering skepticism or fears around new platforms. For sellers, the dominant appeal of the platform remains twofold: buyer aggregation and buyer management. Nearly 65,000 users registered on Freightos.com in 2019, with thousands of companies buying. This has proven to be a low-touch sales channel for the freights forwarders who use freightos.com as a digital sales platform, with dozens of logistics providers hitting six-figure sales and the leaders of the pack reaching multiple millions of dollars in annual sales through Freightos. The key enabler for these sales is the services provided by the Freighots.com platform including automated price quotes, sales support augmentation, payment collection, buyer vetting, and credit provision, all of which are managed by Freightos.com on behalf of the vendors. Only with these combined are providers able to safely and comfortably sell at scale online.

5.2 Automating the Hard Stuff An early lesson from Freightos.com was that price discovery was just one small component of global logistics. While Expedia can rely on passengers transferring themselves from plane to airport, cargo cannot and the few minutes it takes to book (the fastest 2019 Freightos.com shipment took 173 s from sign up to booking) pale in comparison with the actual shipment management issues that span a few weeks. As a result, logistics marketplaces can only succeed with deep integration into logistics provider TMSs for improved low-time-cost tracking, extensive communication automation, and leveraging data to hold providers accountable can shipment management take place on a platform.

5.3 The Role of Reliability If platforms are about connecting logistics providers with shippers, the core unit of value exchanged is a freight shipment. However, the commercial and regulatory framework to enable this is quite daunting. Service levels need to be eminently clear to logistics vendors. As this is a radical new business model, standard operating procedures (SOP) needed to be created, validated, approved legally, and communicated. Once implemented, the SOP is combined with actual performance to encourage reliability. Before being allowed on to the platform, providers are 97

carefully vetted. Once live, provider performance is regularly measured, with some aspects, like number of reviews and number of shipments, communicated to buyers. Other key metrics, like message response time, are carefully monitored internally. This is not only a stick; providers are given tools to differentiate based on brand, though profile pages. This becomes invaluable; there are small providers on Freightos.com who regularly outsell global providers with huge footprints by dint of their reliability reviews alone. This is an important message—platforms are not just about price—they are about transparency which includes price, service level, and value-add.

6 Conclusion Platforms have already changed other industries. They have reshaped the very fabric of the global economy, beginning with products, like Amazon and eBay, and increasingly in services, like TaskRabbit and Airbnb. More recently, they successfully jumped the chasm to the business space and then the supply chain sector. They show no sign of slowing down, making it all a matter of time before they leave a significant and long-lasting mark on a modern global logistics environment.

References Berg, A., Lobis, M., Hunter, E., Rölkens, F., Simon, P., Yankelevich, H. (2018). Measuring the fashion world. https://​www.​mckinsey.​com/​industries/​retail/​our-insights/​ measuring-the-fashion-world. Accessed 10 Feb 2020. Collins, J. (2001). Good to great. Harper Collins Publ. Freightos. (2019). Digital carrier benchmarking 2019. https://​www.​freightos.​com/​ resources/​digital-carrier-benchmarking-2019/​. Accessed 8 Feb 2020. Gawer, A. (2010). Platforms, markets and innovation. Edward Elgar Publishing. International Trade Administration. (2019). https://​www.​trade.​gov/​mas/​ian/​build/​groups/​ public/​@tg_​ian/​documents/​webcontent/​tg_​ian_​005538.​pdf. Accessed 29 Jan 2020. Mamis, R.A. (1991). The used-computer market—a computer exchange brings used computer buyers and sellers together. https://​www.​inc.​com/​magazine/​19910501/​4613.​ html. Accessed 30 Jan 2020. Manners-Bell, J., Lyon, K., Cullen, T., Bailey, N., Keckarovska, V., Ralls, A. (2019). Global freight forwarding 2019. Transport Intelligence. Schenker, J.L. (2019). The platform economy. https://​innovator.​news/​the-platformeconomy-3c09439b56. Accessed 15 Jan 2020. Sheetz, M. (2019). There’s a business growing within Amazon that could one day be

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worth more than retail or cloud. https://​www.​cnbc.​com/​2019/​03/​19/​amazon-businesscould-be-worth-more-than-core-retaile-commerce.​html. Accessed 8 Feb 2020. Yahoo Finance. (2020a). FedEx Corporation (FDX). https://​finance.​yahoo.​com/​quote/​ FDX/​. Accessed 10 Feb 2020. Yahoo Finance. (2020b). United Parcel Service, Inc. (UPS). https://​finance.​yahoo.​com/​ quote/​UPS?​p=​UPS. Accessed 10 Feb 2020.

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© Springer Nature Switzerland AG 2021 C. Wurst, L. Graf (eds.), Disrupting Logistics, Future of Business and Finance https://doi.org/10.1007/978-3-030-61093-7_7

The Last Mile Problem and Its Innovative Challengers Aike Festini1 and David Roth1 (1) Luckabox Logistics AG, Winterthur, Switzerland Aike Festini Email: [email protected] David Roth (Corresponding author) Email: [email protected] Abstract While the growth of the e-commerce market and the on-demand economy has changed consumer behavior, this change has also directly impacted the logistics sector. Both small and large enterprises are facing difficulties in meeting the demand and expectations that retailers are putting on them. This is especially prevalent for last mile delivery services, as scaling cost and delivery output are not aligned properly. Naturally, start-ups with disrupting and innovative ideas have been founded around the globe to help bridge the gap between customer expectations, retailers demand, and logistics providers’ possibilities. The goal of this chapter is to give an introduction into the last mile problem and introduce small and large players and their ideas on how to solve the last mile problem. Aike Festini is the founder and managing director at LuckaBox Logistics AG, an express logistics company founded in 2017 that connects retailers with local courier companies via a modern and user-friendly platform. She enjoys spending her free time in nature either downhill mountain biking or freeride skiing to recharge for her challenging start-up routine. David Roth joined LuckaBox Logistics AG in 2018 with a great interest in sustainable logistics concepts and logistics technology. Since then, this interest has been focused on the last mile problem and emerging trends and innovators in last mile delivery services to increase his knowledge.

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1 Understanding the Last Mile Problem—An Outlook on Causes and Opportunities The continuous increase in package volume—due to, but not only because of ecommerce—is putting immense pressure on logistics providers and retailers alike. While handling and scaling most of the logistics process in a cost and time efficient manner is not impossible, the last mile poses a huge problem for both small-and medium-sized as well as large logistics providers such as FedEx, dpd, or UPS. But what exactly is the last mile and what are the biggest problems logistics providers must face? While the term itself seems very straightforward, the underlying characteristics are often not clearly defined. What are the differences for last mile delivery and last mile delivery services in business-tobusiness (B2B) or business-to-consumer (B2C) markets? What are the differences across multiple industries? This chapter aims to provide an introduction into underlying characteristics of the last mile while investigating the last mile problem and its causes. Furthermore, the goal is to offer a practical insight into different opportunities for logistics providers which are already being explored by both start-ups and large enterprises.

1.1 The Last Mile Problem The last mile is the last leg of a delivery in the supply chain. While everyone can easily give this short definition of the last mile, it is not as easy to describe the last mile on a more defined level. Accordingly, by offering eight different examples, this view is supported in Brabänder’s (2019) study on the last mile. The common shared key characteristic in his examples is that the final part of a transportation process to its end destination—considered as the last mile—is the delivery of consolidated goods to individual addresses. To put this understanding into a two-step model, a transport process includes the first mile, in which the raw materials are moved and consolidated from individual suppliers to the production site, and the last mile, in which the final products are shipped and deconsolidated to individual customers. With this approach as a definition for the last mile and specifically last mile delivery, both business-to-business and business-to-consumer shipments can be included. Examples of B2B and B2C Last Mile Deliveries B2B—Transport: A nationwide wholesale company has multiple regional warehouses from 101

which they distribute to their business customers. If the company offers delivery to their business customers (e.g. a small grocery store), the transport from a warehouse to business customers is the last mile transport. B2C—Transport: A more common value-added service retailers (e.g., Walmart’s Grocery Pickup and Delivery, Tesco Delivery Saver) have been starting to offer to their customers is home delivery for groceries. In this case, the delivery of the groceries to end customers is the last mile transport. While this sounds like a fairly simple process, the last mile problem is a common issue in the logistics industry. Therefore, it is important to understand which driving factors are responsible for the existence of the last mile problem and the pressure it puts on both logistics providers and retailers. Continuous Rise in Parcel Volume As stated in Pitney Bowes yearly Parcel Shipping Index (2019), in which parcel deliveries of 13 countries including China, Japan, Germany, and the USA are tracked, parcel volume has been doubled for the included countries from 43 bn parcels in 2014 to 87 bn parcels in 2018. Further, Pitney Bowes expects parcel volume to rise to 200 bn by 2025 within the included countries. This continuous rise is facilitated by the rise of e-commerce sales including e-commerce giants such as Amazon or Alibaba offering a wide range of products for home delivery to their customers. As Fig. 1 illustrates, retail e-commerce sales are predicted to keep growing at a steady pace over the next years, which in turn supports the forecast of parcel volume growing rapidly. While an increase in parcel volume means that there is also an increase in workload for logistics providers, this increase is met by demands for better pricing due to economies of scale. However, the increase in parcel volume often does not decrease costs enough to cover for the expected drop in pricing that retailer’s demand.

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Fig. 1 Retail e-commerce sales growth from 2014 to 2023 (Reproduced from e-marketer 2019)

Shift to On-Demand Economy With the on-demand economy becoming more and more prevalent, the logistics sector and therefore last mile delivery services are not exempt. While most commonly streaming services such as Amazon Prime or Netflix would be associated with the on-demand economy, the convenience of consuming goods at any wanted time is shifting consumer behavior. This shift is empowered by the consumer’s desire for minimalizing time spend on any given activity and the evolution of digital applications which can meet the expectations of this desire. In a logistics and last mile scenario, this means that the customer wants to decide not only the destination of his parcel, but also the time frame in which the parcel will arrive. At best, this time frame is as short as possible, and the customer is frequently updated on the status of his delivery. For retailers, it is a massive opportunity to win customers by offering the option for same-day or on-demand delivery as value-added services. However, for logistics providers, scaling on-demand activities is often a complex and expensive task. This increase in price then must be subsidized by the retailer or shifted to the consumer. 103

1.2 Problems Within the Last Mile and Possibilities for Logistics Providers and Retailers Having established these main driving factors, it is important to identify the underlying problems caused by them and opportunities for logistics providers and retailers to capitalize on. As illustrated in Fig. 2, 765 participating retailers, manufacturers, logistics providers, and solution providers picked several difficulties they face within their supply chains and delivery solutions in a survey by eye for transport (2019). While there are nine categories, the overall cost of last mile logistics and the agility and flexibility in adapting to customer demands stand out with each of them at over 20% of received responses. It is no surprise that the two most recognized challenges are directly related to the two main impacting factors laid out in Sect. 7.1.

Fig. 2 Challenges in last mile delivery in 2019 (Reproduced from eft Supply Chain and Logistics Business Intelligence 2019)

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Overall Cost for Last Mile Delivery Services The overall cost for last mile delivery is already high, as the deliveries are deconsolidated and individually delivered. As expected, the small-scale individual deliveries are far from being cost-effective on their own. This not only stems from the single stop deliveries, but also the changing routes which are decided on the available packages for a given day. Retailers can also contract their providers to attempt a second delivery on the same day if the first delivery attempt was unsuccessful, which will incur extra costs. On top of that, end customers are often not willing to pay a price that will equalize or at least subsidize the cost, which pressures delivery and logistics providers even more. While an increase in parcel volume should decrease the cost for single parcels, the expected price drop is often too aggressive for logistics providers to keep up with. Accordingly, the margin is low and especially small service providers cannot compete, while large service providers will subsidize incurred costs, if necessary, to retain their customers. 2.

Agility to Adapt to Customer Demands With rising service level expectations by end customers, it is hard for logistics providers to meet this demand by retailers. As any value-added service such as same-day delivery or evening delivery timeframes are an opportunity for retailers to be ahead of their competition, the need to perform is on the logistics providers. However, traditional delivery chains are not built to perform solely on speed of delivery or plannable down to the last step of the delivery. Furthermore, it is also on retailers to provide the products in decentralized warehouses to even enable deliveries within a time frame as short as 12–16 h.

3. Customer Service, Consistency, and Transparency Another combination of problems mentioned in the study that make up around 20% of responses is customer service, consistency, and missed deliveries. The reason that these belong together is simple: they make up the customer experience. A modern customer wants to receive the parcel at the expected or promised time. The customer wants to consistently have this successful delivery experience. Missing a parcel because of poor delivery process transparency is most often a direct loss of time for the customer, but most importantly a big loss of trust in the retailer. Therefore, logistics providers are expected to frequently provide status updates on the delivery. If that is given, mismatches in expected delivery time and customer availability can be avoided, as the 105

customer can react to the status of his delivery. Consequently, the combination of these challenges is the biggest predicament for last mile delivery services. To fulfill the customer expectations that are continuously rising, higher delivery costs are incurred. However, it is not the end customer or retailer that wants to bear the costs, often the logistics providers are simply delivering at lower margins. The only way for logistics providers to keep up with these requirements is to develop more cost-efficient processes of handling deliveries. Before looking at practical examples, let us have a brief look at possible opportunities for logistics providers and retailers on how to deal with the last mile problem: 1.

City Hubs As stated before, if parcels are consolidated, the cost is reduced. Therefore, an opportunity is to invest in intracity parcel hubs. This means that the final leg of a delivery to the end customer is reduced to its minimum in distance. At best, large storage spaces could be shared between different small to large logistics providers to share costs and make full use of the given space. This is important, as intracity space is scarce and the commercial real estate price can be expected to be high.

2.

Bulk Deliveries While customers start to expect same-day or on-demand delivery, logistics providers and retailers could market or incentivize bulk deliveries. This means that customers receive their packages bundled on a selected day (e.g., Amazon Day Delivery Option)—ondemand—but not as fast as with same-day delivery. Logistics providers could expect higher delivery accuracy and therefore less failed delivery attempts. Bulk deliveries would also reduce the cost of transport and environmental impact for every single package. This can be used by retailers to market bulk deliveries for their end customers.

3.

Logistics 4.0 106

As expected, the digitalization does not make halt for the logistics sector. When thinking about logistics 4.0, there are plenty of opportunities for logistics providers and retailers to improve their last mile delivery performance. This starts with the consistent integration of real-time tracking combined with features that allow customers to respond to the current delivery status. Logistics 4.0 can also mean demand forecasting, and consequently the storage of products where they are expected to be sold to reduce the delivery time on buyout. To introduce demand forecasting and optimized warehouse management, the introduction of big data is necessary and predictive analytics must be automized. Finally, while cost and customer satisfaction play a major part in the last mile problem, the environmental impact that the explosive growth in parcel volume has cannot be disregarded. The logistics sector is facing more criticism as one of the top 4 contributing industries to the global carbon footprint. Therefore, the optimization of last mile delivery processes must include opportunities for logistics providers to reduce their carbon footprint while increasing cost efficiency. The customer expectations that have been developed in part by the ecommerce boom over the past years leave logistics providers in a very difficult situation, which is why the consumer behavior must be questioned and taken into consideration during the search for optimization opportunities.

2 Impact of Digitalization on Last Mile Logistics: An Introduction to Technologies and Frontrunners of Disruption With the vast amount of optimization potential in different areas, it is important to discern the projects that will be introduced in this chapter. While there are start-ups focusing on improvements for the delivery part, other start-ups could be on the forefront of inventory and warehouse management improvement with the development and implementation of superior software. Furthermore, there might be start-ups that tackle multiple areas of the last mile process or have expanded their business due to their success. Another important aspect is understanding of demographical and geographical differences across the world, as the given infrastructure can heavily influence the impact of a solution or disruption. 107

Finally, a look at projects from large logistics companies is necessary to compare how they are trying to solve the last mile problem. One of the more often used ideas within the last mile delivery service startups is the implementation of crowdsourced drivers. Looking at the US market, Postmates was founded in 2011 and has since expanded its reach to over 80% of US households. With the application they developed, local or online shops are connected via API with crowdsourced drivers and end customers. For end customers, Postmates has developed an interface that provides a seamless integration of Google Assistant, Maps, Ordering and Search. This one-in-all solution leads to higher conversions, as everything will happen in one screen. Similarly, Dada Nexus was founded in 2014 in China as a local on-demand logistics platform making use of crowdsourced drivers. After a merge in 2016 with JD Daojia, the logistics branch of e-commerce giant JD.com, the company is now known as Dada-JD Daojia. Covering over 450 major Chinese cities, the daily peak delivery volume can cross 10 million parcels. However, with the cooperation of their parent JD.com, the focus of Dada-JD Daojia is not solely on providing fast, one-hour delivery solutions. They developed the “Helper” platform as an all-in-one solution for retailers to empower their online and offline stores with a fulfillment system that is transparent and enhances customer experience. As their mission, Dada-JD Daojia aims to perfect the omnichannel customer experience by integrating as many offline stores within their online interface, enabling customers to buy any mixture of consumer goods and having them delivered within a short timeframe. Comparing Dada-JD Daojia and Postmates, it is obvious that they are implementing a similar system in different countries. Both are using crowdsourced delivery options with a simple registration and payment model. On the other side, both companies developed an active integration for retailers, which means that they must make active sales efforts to increase the number of retailers that are integrated in their platform. Ultimately, the vision is to blend the offline and online experience of customers seamlessly, so that purchase decisions are not related to the geographical position of the customer or the product, but available wherever and whenever the customer wants to purchase the product. Another company using crowdsourced drivers is the Indonesian decacorn1 start-up Gojek. Gojek was launched in 2010 as a call center to connect customers 108

with motorcycle taxis, called ojek in Indonesia. The idea was to increase efficiency for both drivers and customers by using technology. After initial success, the app was finally launched in 2015 to automate the ride-hailing process. Additionally, the products GoMart and GoSend were added to the portfolio. GoMart functions as an online grocery shop with direct delivery to the customer’s destination using Gojek drivers. Similarly, GoSend is an on-demand courier service that customers can use to send documents or parcels. The main difference between Gojek and Dada-JD Daojia and Postmates is Gojek’s aggressive expansion into the digital finance sector, launching Go-Pay as an ewallet service. With 19 active products in 2019, Gojek has grown into a classic Super App,2 with the purpose of having as many products as possible within their ecosystem. The last mile delivery options offered over the Gojek application are an innovative way of using and empowering the given infrastructure of motorcycle taxis with technology. As a direct competitor within the Southeast Asian market, Grab was founded in Malaysia in 2012 as a taxi booking company. After initial success, multiple other products such as GrabBike (motorcycle taxis; ojeks) and GrabExpress were introduced. GrabExpress is the last mile delivery solution that makes use of Grab’s integrated drivers to deliver documents or parcels from door to door with real-time tracking. Users can simply choose GrabExpress within the GrabApp and enter all necessary information to get their delivery started. Like Gojek, Grab is currently a decacorn company and clearly envisioning to be a Super App as the company has significantly increased their product portfolio including transportation, delivery services and digital payment solutions. Their overall last mile delivery effort is therefore a usage of existing infrastructure with better technology, connecting customers and drivers in real time via their application. Before looking at other business models that do not share the same or very similar ideas, both Glovo and Stuart must be introduced as frontrunners of last mile delivery disruption in Europe. Both use the same crowdsourced courier system, integrating anyone that has their own vehicle. On the business side, both Glovo and Stuart implemented different delivery options for their business partners: They offer first mile and last mile delivery services, deliveries out of retail stores, warehouses, or return options from their customer’s home. However, there are also clear differences between the two business models. Distinct Features of Glovo’s and Stuart’s Business Models For the 109

Spanish start-up Glovo, customers are solely ordering products over the Glovo application, which aims to act as a marketplace with a multitude of product areas to pick from. Upon ordering, the Glovo courier will be assigned with the order and a fixed route to take, for which the distance will be used to charge the customer on top of the product cost and a product management fee. This means that Glovo couriers are actively buying the products and then getting paid for both the products and the service by their customers. For the French start-up Stuart, customers and retailers are enabled to order over multiple different platforms: Customers can directly order a courier over their mobile app. Retailers can either use an all-in-one Web dashboard to order or use the direct e-commerce integration to offer Stuart delivery to their customers during the ordering process. With all these six start-ups operating their business with crowdsourced couriers, this can be deducted as the base of their business model. They are set to use existing infrastructure and utilizing any waiting time with real-time interaction to offer last mile delivery or specifically on-demand and same-day delivery services to their customers. However, it must also be said that crowdsourcing couriers always means that self-employed couriers are used, for which it is very difficult to run profitably unless the delivery pricing is competitive, which goes back to the core of the last mile problem: delivery cost. The key benefits for retailers using the services of either of these startups are the increased amount of delivery options for their customers and the flexibility of delivery. For the companies it is a continuous improvement cycle though to find value besides the delivery options which will make retailers more likely to continue using their services, which is why they are heavily investing in their technological development for optimized courier routing, offering fulfillment solutions or integrating analytics or predictive analytics into their applications. Rather than using crowdsourced delivery partners, another approach is implemented by LuckaBox in Switzerland. Alike the earlier start-ups, LuckaBox also built a platform in which they connect courier partners with business partners. However, instead of crowdsourcing, LuckaBox partners solely with professional courier businesses. The core idea of their business model is using the existing courier infrastructure, with a focus on bike couriers, to offer on-demand and same-day solutions to their business 110

partners. Geographically, the usage of bike couriers limits LuckaBox to business within urban areas—for larger transports, express couriers are partnered. On the technological side, LuckaBox acts as a connecting piece between their partners and does not interfere with either side’s business practices. As part of the LuckaBox suite, a dashboard for invoicing and analytics is offered to partners, enabling real-time control of orders. As a third business model in this list of delivery solution-based ideas, both the swiss start-up Imagine Cargo and the German start-up Liefery offer deliveries for bundled orders in evening time slots. Both companies make active sales efforts to find business partners which then integrate the delivery options into their ecosystem, either directly in their e-commerce stores or in the backend of their operational system. What sets both Imagine Cargo and Liefery apart from their competitors is that instead of using crowdsourced, self-employed couriers, they both employ all their couriers and have their own vehicle fleets. In the case of Imagine Cargo, they operate on bikes, cargo-bikes, and electric vehicles with a strong urge to be more sustainable. Liefery’s strong point is the focus on same-day evening and late-night delivery time windows. With the opportunity to bundle their parcels and using their technology to optimize delivery routes, scaling the business model has been successful to the extent that the German parcel delivery company Hermes took the majority share in a capital increase in March 2017. Liefery aims to improve the Customer Journey by helping their business partners with better delivery options and fulfillment services. Moving away from the hands-on approaches, the Israeli company Bringg has found success with an all-around logistics solution that focuses on the development of a software-as-a-service application. As Bringg calls it, to reach “logistical excellence,” both “operational efficiency and optimal customer experience” must align. This can only be achieved with the development and implementation of a digital orchestration platform. Therefore, Bringg offers seamless integration with existing software of their business customers and courier partners, while offering a multitude of features within their own software, such as virtual warehouses, big data and analytics, payment solutions, and real-time tracking. On the courier partner side, Bringg opts for the most dynamic distribution fleet, making use of crowdsourced couriers, an internal fleet, external fleets or third-party logistics providers based on the demand in each geographical area. With this business 111

model of offering solutions for the entire ecosystem, Bringg can effectively scale either delivery or warehouse operations for business customers, improving the whole supply chain process. In conclusion, the main innovation area for start-ups in last mile delivery services is technology. By building applications or platforms, start-ups want to disrupt the given delivery infrastructure, using either crowdsourced delivery partners or adding professional courier and logistics companies as delivery partners. On the other hand, all these start-ups are actively partnering with businesses to bring volume to their service. This is an interesting point, as the given infrastructure by large CEP service providers should offer opportunities for innovative improvements that could be tackled by disruptors. However, getting an entry with untested products is much more difficult than developing and testing systems first and generating interest afterward, as the acquisitions of Liefery by Hermes in Germany and notime3 by SwissPost in Switzerland show. Consequently, large CEP service providers have also been making efforts to improve their last mile business in the past decade. However, the biggest focus is improving sustainability. Explementary, DPD opened multiple fully electric last mile delivery hubs in London between 2018 and 2019. Similarly, an electric city hub was launched in April 2019 in Dublin. The collaborative project KoMoDo Berlin is another great example of how last mile delivery can evolve with the right approach. In an initial project timeframe of 12 months, five large CEP service providers4 shared a microdepot for parcels in Berlin. From there, parcels within a radius of three kilometers were delivered climate-neutral with cargo-bikes. At the end of the project, the companies had delivered over 160,000 parcels and decided to continue working with the hub for another six months, while searching for more real estate that could be used to create city depots. Compared to the earlier introduced business models, the greatest gain is the shared usage of real estate to reduce delivery distances and enable more efficient deliveries with cargo-bikes. Since parcels are also bundled for a longer period in the delivery chain, costs decrease for the logistics providers. Finally, it can be said that both economic improvement and sustainability are a difficult task for logistics providers and retailers to tackle. However, innovative ideas and disruptive technology can lead the way to remarkable 112

progress, as the business models and respective companies show. With the increasing demands for a higher-quality customer experience, it is safe to assume that neither small nor large logistics providers will be able to rest while solving the last mile problem (Table 1). Table 1 Overview of multiple last mile delivery start-ups Delivery personnel

Technology

Transaction forms

AnnaNow

Crowd, Professional Couriers, Taxi /Cab companies

Delivery and Insurance

B2B (2C)

Dada-JD Daojia

Crowd / Self-employed couriers

Delivery and Omnichannel-Integration

B2B (2C)

Doorman

Crowd / Self-employed couriers

Delivery and Fulfillment

B2B (2C)

Dropoff

Employed Couriers

Delivery

B2B, B2C

Fetchr

Employed Couriers

Delivery

B2B, B2C

Glovo

Crowd / Self-employed couriers

Marketplace with Delivery Option

B2C

Gojek

Crowd, Taxi / Cab companies

Delivery and multiple other business apps (Finance/Insurance)

X2C

Grab

Crowd, Taxi / Cab companies

Delivery and multiple other business apps (Finance/Insurance)

X2C

Liefery

Employed Couriers

Delivery and Fulfillment

B2B (2C)

Loggi

Crowd / Self-employed couriers

Delivery

B2B (2C), C2C

LuckaBox

Professional Couriers

Delivery and Analytics

B2B (2C)

Matternet

Drones

Delivery and Drone Development

B2B

Notime

Employed Couriers

Delivery and Fulfillment

B2B (2C)

ParcelPoint Professional Couriers

Delivery and Consolidation/Route Planning

B2C

Postmates

Delivery and Marketplace

B2C

Shadowfax Crowd/Self-employed couriers

Delivery

B2B (2C)

Stuart

Delivery and Fulfillment

B2B (2C)

Crowd/Self-employed couriers

Crowd/Self-employed couriers

113

Stuart

Crowd/Self-employed couriers

Delivery and Fulfillment

B2B (2C)

Literature References Brabänder, C. (2019). Model-Based Decision Support on the Last Mile of DistributionLogistics. Sc. D Thesis, University of Regensburg. eft Supply Chain & Logistics Business Intelligence. (2019). Biggest challenges for logistics providers in last mile delivery in 2019. Statista. Statista Inc. https://​www.​statista.​ com/​statistics/​816884/​last-mile-delivery-logistics-providers-challenges/​. Accessed November 16, 2019. eMarketer. (2019). Retail e-commerce sales worldwide from 2014 to 2023 (in billion U.S. dollars). Statista. Statista Inc. https://​www.​statista.​com/​statistics/​379046/​worldwideretail-e-commerce-sales/​. Pitney Bowes. (2019). Pitney Bowes Parcel Shipping Index 2018. Pitney Bowes. https://​ www.​pitneybowes.​com/​us/​shipping-index.​html. Accessed November 16, 2019.

Company Web sites used for Information and References Dada-JD Daojia. imdada.cn. Postmates. https://​postmates.​com/​. LuckaBox. https://​www.​luckabox.​com/​. Gojek. https://​www.​gojek.​com/​. Grab. https://​www.​grab.​com/​sg/​. Notime. https://​www.​notime.​ch/​. Stuart. https://​stuart.​com/​. Glovo. https://​glovoapp.​com/​en/​. Liefery. https://​www.​liefery.​com. ImagineCargo. https://​www.​imaginecargo.​com/​. Bringg. https://​www.​bringg.​com/​. DPD. https://​www.​dpd.​com/​. KoMoDo Projekt. https://​www.​komodo.​berlin/​. Fetchr. https://​fetchr.​us/​. Dropoff. https://​www.​dropoff.​com/​. Doorman. https://​www.​doorman.​co/​. Shadowfax. https://​shadowfax.​in/​. Matternet. https://​mttr.​net/​. ParcelPoint. https://​parcelpoint.​com.​au/​. Loggi. https://​www.​loggi.​com/​en/​. Annanow. https://​annanow.​com/​.

Footnotes 114

1 Decacorn: private company with a valuation over $10 billion. 2 Super App: “A closed ecosystem of many apps that people would use every day because they offer such a seamless, integrated, contextualized and efficient experience” (Mike Lazaridis, Founder of BlackBerry Limited, 2010). 3 notime: Swiss last mile delivery start-up developing a platform that automates the complete process from order to delivery of the goods for online retailers. 4 Project partners: DHL, DPD, GLS, Hermes, UPS.

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E-commerce Order Fulfillment Supply Chain— How New Entrants Are Changing the Industry Johannes Plehn1 (1) SEVEN SENDERS, Berlin, Germany Johannes Plehn Email: [email protected] Abstract Brand building and internationalization play a central role in corporate positioning in e-commerce today and can be supported by supply chain management. A number of companies have emerged in this environment in recent years. The content of this article is threefold: (a) The typical processes of an e-commerce supply chain are laid out, (b) a framework is introduced to describe the impact of these processes on customer value and (c) the framework is applied to classify the existing types of companies as well as the new entrants. Johannes Plehn SEVEN SENDERS founder and managing director Dr. Johannes Plehn looks back on many years of experience in e-commerce, supply chain design and delivery. As COO of the Project-A online shop “Wine in Black”, his focus was on the optimization of purchasing, payment, fulfillment processes and customer service, as well as the development of an integrated order management system. During his doctoral thesis at the ETH Zurich, he developed a framework for optimizing the eco-efficiency of manufacturing companies, analyzed the impact of existing free trade agreements on global supply chains and developed an operations strategy for an OEM in the transportation industry.

1 The Rise of E-commerce and the Role of Brand Building and Internationalization Moving Forward E-commerce in Europe can look back on an unprecedented success story. With average growth rates of 14% over the period 2012–2018 (see Fig. 1), online 116

commerce has not only changed the way we shop today, but has also undergone constant change as an industry in itself, in terms of both structure and scope.

Fig. 1 Online retail revenue in main European markets in €bn based on eMarketer2 (2019) and Statista2 (2020)

At the outset of the 2000s, the digitization of existing offline business models was the common approach to market entry for online merchants. Intermediaries were eliminated, and products were suddenly made available everywhere through digital distribution channels. Online marketing was considered the decisive competitive advantage. Since the beginning of the 2010s, a consolidation of the industry has taken place. In addition, a professionalization of online marketing could be observed, whereby the competitive advantage has been leveled as far as possible. In the quest for unique selling propositions, different business models emerged as a result. Figure 2 illustrates the models.

117

Fig. 2 Different business models in e-commerce (Based on Schneider and Graf 2017)

In the years that followed, online merchants were constantly faced with challenges. On the one hand, popular sales channels such as search engines (e.g., Google) and social networks (e.g., Facebook) constantly increased price points, which led to rising costs in customer acquisition. On the other hand, large providers such as Amazon constantly expanded their portfolio and put providers with the same or similar product portfolio under enormous competitive and price pressure. As a result, several trends can be observed today. 1. Brand building: The product as a unique selling proposition has become the key success factor. Where in the past healthy margins were achieved through good marketing practices or sound purchasing processes, the focus today is on diversification through strong brand and product innovation. This allows the price pressure in customer acquisition to be circumvented, since the customer is at best looking directly for the product or finds it directly on a marketplace and therefore does not have to be acquired via channels such as Google and Facebook. On the other hand, a strong brand is less easy to copy and can be distributed exclusively. This is a decisive factor for surviving in the price war with competitors or not exposing oneself to it at all. In the recent past, models in which brands sell directly via their own Web sites or via marketplaces have established themselves. The model is thus in contrast to typical dealer models where the dealer is in possession of the goods (e.g., discounters). In Europe, the share of sales from marketplaces varies from country to country. While 25% of sales in France are generated via marketplaces, the figure in the UK is around 40%. It should be noted that the 118

growth rates of marketplaces, averaging 21.4% (2014–2021e), outpace those of other e-commerce (8.8%) (Roland Berger 2018). Tamebay provides a good overview of the most popular marketplaces (Tamebay 2018). 2. Internationalization: A decisive advantage in online retailing is scalable sales channels. Providers with a good product-market-fit in their home market can usually tap into great potential through internationalization. This trend is also reflected in the market figures. See Fig. 1—While trade in general grew by 14% between 2012 and 2018, international trade recorded an increase of 22%. This growth is now also reflected in the share of international orders. In 2018, almost one in five orders (19% total Europe) came from abroad. In 2015, this figure was still 14% (eMarketer1 2019). A slight slowdown in growth rates is expected in the coming years. For example, analysts expect annual growth rates to flatten out to a single-digit range of approx. 7.4% as a result of the onset of market saturation, although this is still well above the current overall European economic growth rate of 80% over the last ten years. This increases the supplier power for Parcel subcontracted services (see Chap. 6). Higher labor cost. Aging populations have created an imbalance between the 285

overall workforce available for logistics and the demand for logistics services. At the same time, increases in labor regulation, particularly for drivers, have increased the unit labor costs. Whilst one of the fastest growing job segments, jobs in logistics and supply chain have a lack of attractiveness in certain markets. E-commerce logistics, also here, has increased the demand and competition for logistics staff, driving up wages. Carriers have increased their bargaining power through increased size, lower transaction costs and better pricing. Digitalization has played a key role in the latter two developments. Over the last 20 years, the top 20 independent ocean carriers have merged and cooperated into three large alliances dominating the market. In aircargo, the consolidation has been globally much less intensive, but in key markets like North America, it has progressed nearly as much as in container shipping. Only trucking remains fragmented, but here the barriers of entry and exit are so low that general market conditions rather than carrier consolidations drive the pricing. With very low liquidity, truckers simply exit the market if they cannot operate profitably. Lower cost of interaction of carriers with smaller customers allows the carriers to directly engage with customers to a much larger degree than before. Ocean carriers today have a higher share of so-called FOC/freight of all kind rates that are published digitally and service as an official price list for all small customers that will not be able to negotiate a special agreement. The volume threshold for those agreements on the critical Asia–Europe trade lane has increased significantly over the last ten years. Digitalization initiatives of carriers have improved their ability to price better and minimize arbitration potentials by freight forwarders: – Better pricing alignment between the various branches and cooperation partners. With all branches/partners having real-time access to the same pricing and booking platforms, there are less opportunities for shopping around for a better deal within the same organization between central and various local contact points. – Better transparency on available demand: Particularly in trucking, so-called to ‘carrier to forwarder software’ allows the subcontractor to have a better choice of which customer to engage with.

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1.2 Buyer Power Buyer power means the pricing power that the customers of forwarding companies have over them. It is driven by buyer consolidation, increased price transparency as well as standardization and commoditization of the service offer itself. All three have been greatly enhanced by digitalization and the various new business models from part 2 of the book. Consolidation is a key driver of buyer power. Besides the ‘regular’ consolidation of the industry, the growth of e-commerce giants and the arrival of buyer platforms have additionally increased consolidation by grouping the demand of many smaller companies that otherwise would not have been pooled. E-commerce growth consolidates shipment streams in the hand of very large customers, increasing buying power there (Chap. 6). With e-commerce share increasing in both B2C market and B2B markets, it is clear that the buying power they have over even the largest logistics players has increased dramatically. Whilst initially all logistics companies have embraced Amazon as a fast growing customer to surpass their peers in growth, today several large players have cut their ties. The top three parcel providers and smaller players like the Otto Group (Hermes Logistics) have all limited or completely terminated their work for Amazon as Amazon has not only driven down pricing but built their own parcel delivery capabilities. New buying platforms combine many small buyers. As shown in Chap. 7 (price transparency and market platforms), platforms like Timocom for trucking can aggregate the demand of many small players and have a stronger pricing power that those customers would have had individually. Rate comparison and market places increase the buying power of all clients and decrease the arbitrage potential the forwarders traditionally have. The minimum size for competitive tenders (as opposed to spot requests or permanent client relationships based on conventional negotiation) has increased dramatically in recent years. The frequency of tenders (annual, sometimes within-year rate reviews) as well as the frequency of provider changes following tenders has likewise gone up. Leading the way is ocean freight forwarding, followed by air freight forwarding. Contract Logistics remains a market segment where lower commoditization and higher cost of change lead to lower impact of price transparency. In land transport, the structural trend over the last years has been a price increase (at least in North America and Western Europe), which has 287

led to customers preferring longer contracts with options to prolong.

1.3 Substitutes Substitution means that the combination of service offered by 3PLs is replaced, but not 1:1 by another 3PL competing in the same strategic space. This substitution takes the form of – unbundling the directly provided service portfolio of the 3PL and the – cutting out of the forwarder as the middle man between carrier and customer, also called disintermediation – Avoidance of the physical transport altogether by 3D printing. Unbundling or replacing individual services along the supply chain with a different solution is the most common form of substitution. 3PL companies generally aim to integrate all activities around the transport as a ‘on stop’ provider for their customers. Certain value-add services like customs clearance, supply chain visibility and exception management services are often left to more focused providers who have a specialization advantage (Chap. 8). These valueadd services have been a key area of growth for new digital business models as they pose less risk for the buyer to disrupt the supply chain and are easily reversed. The disintermediation can take various forms: – Directly negotiating the rates with the carrier, but leaving the actual transaction to the 3PL. This is particularly frequent in ocean freight forwarding where the end customers consolidate many of their inbound deliveries under one freight contract that they negotiate directly with the carrier. This is called Buyers-Consol and makes up a significant share of the Asia outbound flows for key industries like textiles or automotive. The 3PL is executing the actual transactions and gets a fixed fee rather than a ‘trading profit’ that fluctuates with the ups/downs of the market price. The margin potential as well as the downside risk is limited – Completely cutting out the 3PL. This can be done by managing all aspects of the subcontracting relationship themselves. Clients contract directly with the carriers, using the power of rate comparison and market places (Chap. 7). In ocean freight customers with a demand of more than 30 k, TEUs p.a. have traditionally procured directly through individual contracts. This has been lowered as consequence of lower transaction costs. An alternative approach is 288

to procure from the carrier through a market platform. This is most frequent in the trucking market where the large number of carriers makes a direct approach futile.

1.4 New Entrants There are several new entrants into the strategic space traditionally occupied by the 3PLs Large e-commerce providers enter the 3PL market, either by insourcing the forwarding part (disintermediation) or by directly provide these services to third parties Large carriers are entering the 3PL/forwarding space (example CMA CGM, Maersk or NYK), usually by buying large forwarders Digital forwarders. As explained in the previous chapter on e-commerce and above under ‘customer buying power’, the large e-commerce companies like Amazon, Alibaba and Ebay can be liked to ‘logistics companies with a online trading presence’. As both the customer experience and the total cost of service are highly dependent on the logistics cost and quality, this is a core competency of all successful e-commerce companies. Their size and financial power allows them to easily invest in the transport infrastructure and carrier capacities needed for their business. Whilst all of them still procure logistics services, they insource the baseload services. This is the biggest driver of competitive pressure by new entrants. The diversification of ocean carriers has fluctuated a lot over the last decades. Whilst most carriers were initially highly diversified (P&O as one of the larger logistics providers), most ocean carriers have concentrated on their core business over the last decades. With the consolidation endgame largely played out and low margin potential, several carriers have moved strategically into the forwarding space: – CMA CGM through its acquisition of Ceva Logistics – Maersk via Damco – NYK acquiring 100% of Yusen logistics. The debate if digital forwarders are a (low frills) substitute for a part of the current 3PLs services or rather a new entrant into the same market space is still 289

going on. As digital forwarders grow in scale, their customers will demand more and more service, intervention on their behalf as well as longer-term contracts exposing the digital forwarders to classical forwarders trading risks. Therefore, we see them rather as new entrants as opposed to just a partial substitute. With the largest digital forwarder, Flexport still performing 17 companies since 2012, the largest 3PD (2013), Pacer (2014), New Breed (2014), Dentressangle (2015) and Con-

298

Dentressangle (2015) and Conway (2015)

Source Author – ¾ of the companies have used large scale M&A transactions – More than half of them use Cargowise, which has become the most frequent external forwarding software – More than half have publicly commented on partnerships with/investment in startups to enhance their digital transformation.

3 Conclusion The large 3PLs are in the ‘eye of the storm’ when it comes to digital disruption. All elements of the industry forces as described by Porter are impacted by the technological changes described above. This means the margin pressure will further increase and consolidation of 3Pls is an inevitable consequence. Besides this, the investments done by traditional 3PL players and startups into technology will most likely lead to a gradual narrowing of differences between the ‘legacy’ analog and the ‘startup’ digital forwarders, with other tech startups catering to them as well as to each group of Porter’s five forces model. 3PLs are going to resemble more the startups as they will enact their version of ‘Goliath’s revenge: – Better IT – Stronger differentiation between ‘digital’ and ‘analog’ components – In some areas, trading and servicing might become separated (e.g. uncontrolled Ocean Forwarding) – Stronger focus on 4PL and analytical value-add services. As digital forwards grow, they will become more ‘conventional’ companies with more of the ‘conventional problems’ – Whilst digital forwards will be able to select a customer portfolio of companies willing to adjust to their ‘no frills’ concept, future growth might be impacted by the fact that these companies are still limited in number and size. – Large customers will over time requiring full service, including Key Account Management, life interaction and options to consult in the problem solving process. – Even the best and newest software will require updates and—at a later stage— 299

replacement by newer software architectures. – Large companies are ‘born in garages, but die in palaces’—startups will evolve into conventional corporations with their own inertia and legacy issues. Lastly, the top forwarders will continue to forge partnership with companies like JDA, Zebraxx. GT Nexus. Transporeon and Cargosphere which provide services that complement rather than directly compete.

References Dichter, A., Rothkopf, M., Bauer, F., Bäuml, M., Rösch, J.-F., Bärwind, C., Schuster, M., Lommer, M., & Friedrich, H. (2018). Travel and logistics: Data drives the race for customers. McKinsey working paper Hewlin, T., & Snyder, S. A. (2019). Goliath’s revenge—How established companies turn the tables on digital disruptors. Hoboken: Wiley. Porter, M. E. (1980). Competitive strategy. New York: Free Press.

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The Evolution of Supply Chain Startups Anya Klyukanova1 (1) Plug and Play Tech Center, Berlin, Germany Anya Klyukanova Email: [email protected] Abstract Until recently, the field of supply chain and logistics has held a reputation for adopting startup-fueled technologies comparatively slowly while being outdated and paper driven. However, this has been changing rapidly due to a sense of urgency from the largest players in the supply chain space and an increase of investments in new technologies and business models. The aim of this chapter is to showcase new startup developments in the industry and highlight from where the most successful startup founders are emerging. The last aim of the chapter is to show that a strong partnership between the incumbents and startups is essential for investments to perform well and for new technologies to effectively serve the needs of the long-established companies. Anya Klyukanova is Director of Corporate Innovation for Supply Chain and Logistics at Plug and Play. Plug and Play is the ultimate innovation platform, bringing together the best startups, investors, and the world’s largest corporations. Headquartered in Silicon Valley, Plug and Play has built accelerator programs, corporate innovation services, and an in-house VC to make technological advancement progress faster than ever before. To give startups the necessary resources to succeed in Silicon Valley and beyond, Plug and Play is active in 30+ locations globally, including the USA, China, France, Germany, The Netherlands, Singapore, and Indonesia.

1 Supply Chain and Logistics Market Supply chain and logistics incumbents have been relatively slow in adopting new business models and adapting to the intense competition driven by young 301

new business models and adapting to the intense competition driven by young startups. Deemed boring and old-school by many, supply chain and logistics startups have long been neglected by the venture capital and entrepreneurship community, with investment figures growing only in mid-2012 with a major spike taking place in 2016. Now, the new reality is that every five days, a new logistics startup is founded and VCs from all over the world are stepping up to the plate. Moreover, corporates are quickly beginning to understand the importance of working alongside startups and investing in their technologies, both with time and money. UPS, for example, has their Strategic Enterprise Fund with $600 million being dispersed across 24 investments, and C. H. Robinson Worldwide is intending to double its investments toward technological advancements by spending $1 billion toward technologies over the next five years. As a whole, the supply chain and logistics industry is highly fragmented and startups are flowing in to close the gaps. Significant venture capital money is being allocated to these young companies, with almost $19.3 billion being distributed across 534 deals in 2018. Seed/angel and Series A investments made up over 60% of deal share, with Series B and C stage funding accounting for 10%. Almost 41% of these deals took place in the USA, but companies in India and China are gaining shares of overall funding. Specifically, the e-commerce market in India is expected to grow to $200 billion by 2026 as retailers promise faster delivery times and logistics providers continue to deal with larger numbers of orders. This means that investors and corporations alike will have to expand their sourcing and investment strategies in the following years. Figure 1 shows the funding growth in the supply chain and logistics industry.

302

Fig. 1 Supply chain and logistics funding growth (Plug and Play Tech Center, 2019; Matt Leonard, CB Insights)

While venture capital investments are indeed growing globally, they are still highly concentrated in the Bay Area and major East Coast cities, leading to an influx of founders in these areas. Enticed by the promise of funding, a high quality of life, and access to talent, founders flock to big cities with a high density of venture capital firms as well as large corporations that could benefit from optimized supply chains. Plug and Play works with many of these large corporations and has been able to gather interesting data based off the needs and focus areas of these corporations. Anecdotally, there are three subsections of founders: the first-time founder; the industry veteran; and the serial entrepreneur.

2 Startup Founders We see that the lore of the kid in a garage starting his or her first company is a fringe case, although not entirely unseen. These founders normally have a strong engineering background and already a bit of work experience. In general, the majority of supply chain and logistics founders come from a corporate background. During their tenure at the corporation, the future founder notices a pain point and decides to go solve it by creating a tech-driven product. This is exemplified in many of our portfolio companies: the founder of Einride used to be an executive at Volvo; the cofounder of Gideon Brothers was working 303

for years in high level positions at Airbus subsidiaries; the founder of Zuum was a manager at JB Hunt. Serial entrepreneurs in the field of supply chain and logistics are also fringe cases, with most founders focusing their efforts solely on building their company. The industry itself is so complex, generally requiring a level of background and dedication to ensure startup success and robust funding. Of course, most founders are highly educated, with many boasting a graduate degree in a technical field. Moreover, it is been shown that the most successful founders are over the age of 35, and we do see that investment success correlates to age. Most startups in the supply chain and logistics space tend to have two to three cofounders and they generally always have a strong supply chain background. Lastly, we see that in general within the startup world, the most successful startup founders are already on their second or third company, and we find the same trend in the supply chain and logistics space. Figure 2 illustrates this distribution.

Fig. 2 CEO total years of work experience by percentage (Ali Tamaseb)

3 New Digital Business Models 304

As outlined earlier in this book, there are several business models disrupting the existing logistics solutions: last mile delivery services; e-commerce logistics; rate comparison and marketplaces; software as a service and big data; warehousing; digital forwarding; autonomous driving vehicles; transport management systems and blockchain. Many follow technology trends in the supply chain and logistics industry illustrated in Fig. 3.

Fig. 3 Supply chain technology trends (Plug and Play Tech Center Focus Area Survey, 2019)

Supply chain and logistics startups are using revenue business models that have worked in other tech-enabled industries (SaaS, pay-per-use, etc.), only tweaking them slightly to fit their market. The money flows differently to each subset of the industry and is largely dictated by the needs of the corporations and evolving consumer demands, and finding a revenue model that is properly tiered to accommodate massive scale continues to be a challenge.

3.1 Last Mile Delivery Services Last mile delivery services are explicitly being driven by the shifting consumer mindset (the “Amazon effect”) and account for around 20% of the total supply chain cost, making this a crucial area of investment for VC and corporations alike. 305

Since 2012, more than $6 billion has been poured into the parcel and express sector, with around 30% of this money going directly to last mile delivery startups. The value proposition of last mile delivery services is the ability to tap into a workforce that can run micro-routes and be instinctively agile. However, the majority of these startups are unable to scale to the needs of large corporations and ultimately become one of many, or, more positively, as complements to each other. For example, Walmart is now working with the startups Point Pickup, Skipcart, AxleHire and Roadie for online grocery delivery, adding to its current roster that already includes DoorDash, Postmates, and Deliv. While the success of these startups is inherently predicated on gig economy workers, the future potential for autonomous delivery will begin to replace gig workers in the next 5-10 years. Autonomous delivery, whether via vehicles or drones, will not be limited by labor cost, work availability, or poor scalability, and will account for around 80% of delivery. Kroger, a grocery retailer, partnered with autonomous vehicle startup Nuro to test driverless last mile grocery delivery and has now raised $940 million. Ducktrain, a German startup, is shaping the future of last mile delivery with an electric vehicle that follows pedestrians and cyclists with no physical tethers. The ultimate goal is for humans to not be involved at all.

3.2 E-Commerce Logistics E-commerce logistics is everything that happens before the actual last mile delivery. One example is MileZero, which develops a cloud-based software allowing retailers and carriers to optimize large-scale logistics networks and delivery fleets. Started by former Amazon VP of Transportation Technology, MileZero got acquired by Capstone Logistics to power the actual last mile deliveries. MileZero was bound to be a success having an ex-Amazon VP as the founder, as the entire standard of e-commerce logistics is being set by Amazon, with most players being forced to keep up with ever-changing consumer demands. This leads to an interesting phenomenon in the industry, as many of the customers of e-commerce logistics startups are other startups wanting to keep up with the Amazon standard. Given the high mortality rate among startups, the foundation of many of the e-commerce logistics startups is on shaky grounds. There is much hope being put in this market, with India finding favor with more than $1 billion in startup funding. In general, there has been a 24.4% annual growth in total 306

investments in the e-commerce logistics space from 2014 to 2018, with the sector growing more every year.

3.3 Rate Comparison and Marketplaces Rate comparison and marketplaces offer a digital way to benchmark rates, match shippers with available capacity, and bid on loads. These companies are asset-less (or asset-light) and are steeped in transparency and agility. Customers are able to be more agile by having access to more quotes, carriers, and, ultimately, choices.This sector is attracting some massive investments, as seen by the $97 million Series C funding of NEXT, the Sequoia-backed startup which connects shippers and carriers through an online marketplace. NEXT was founded by husband and wife duo Lidia Yan and Elton Chung; Yan studied Dante and Italian at the Shanghai International Studies University while Chung’s family operated Southern California warehouses, and it is together that they were struck with the idea of NEXT. Thankfully, younger startups are not deterred by the success of these relative newcomers, with startups like Zuumadvancing in their undertaking of connecting shippers with local truckers.

3.4 Software as a Service (SaaS) and Big Data Software as a service (SaaS) and big data startups are what constitute “algorithmic supply chain planning,” as Gartner calls it, whereby half of global supply chain companies will use AI and advanced analytics in their operations by 2023. In the supply chain and logistics market, AI is predicted to grow at a CAGR of 42.9% over 2017-2023 to reach $6.5 billion by 2023. The immensity and complexity of the data being generated by supply chains call for more transparency and innovation to connect all the moving parts; and in order to derive true value from these huge data, corporations are turning to startups like LogiNext, Transmetrics, and ClearMetal to properly predict, respond and adapt. Investors in the private and public space are interested in the multitude of startups in this area, with ClearMetal raising a $12 million Series A round, LogiNext with $10 million to date and over 200 clients, and Transmetrics, a startup based in Sofia, Bulgaria, raising millions in government grants and competitions. 307

3.5 Warehousing Warehousing startups fall into many categories: warehouse and inventory management software, packing technology, worker wearables, indoor asset tracking, outsourced warehousing and fulfillment, robotics, and on-demand warehouse space. As consumer demands continue to change and retailers increasingly merge their online and offline fulfillment process, investors are continuing to back this space with huge sums. FLEXE, the “Airbnb for warehousing” startup, secured a $43 million Series B round and is used by companies such as Staples, Walmart and P&G.A growing field of interest within the warehousing space is digital twin startups, as many corporations want to develop a digital model of their warehouse where they can play around with variables without shutting down or disrupting it. These digital twin startups can be used to visualize the warehouse, analyze and optimize the performance of the warehouse, and predict the most likely future issues while proposing the best solution. Sensefinity is a Berlinbased startup focused on bringing IoT to the masses and turning warehouses into smartwarehouses. The startup, just like the technology itself, is still quite young but already has garnered interest from large corporations interested in harnessing data from its warehouses. Robotics warehousing startups are also part of a fast-growing space, with an 18% year-over-year increase in the testing of warehouse robotics. Within this subsection, there are startups focused on materials handling, autonomous mobile robots (AMRs), automated guided vehicles (AGVs), and yard automation, and investors are pouring money into these spaces. Seegrid, a startup which makes AGVs, has raised $59.5 million in funding over 12 rounds and has BMW, Volvo, USPS, Honeywell and more as its clients. Hans Moravec, the founder of Seegrid, worked for decades at the Robotics Institute of Carnegie Mellon perfecting vision technology and used his research as the basis of Seegrid’s technology. Gideon Brothers is a startup out of Croatia building AMRs with a 40-person team of deep learning and robotics experts, including 5 PhDs and 27 Masters of Hardware and Software Engineering. Just starting out, they have raised $765 k in a round led by TransferWise cofounder Taavet Hinrikus and are operating with a global roster of clients. Material handling startups are the next frontier for smart warehouses, essentially eliminating the need for human labor in handling materials and 308

packages; key use cases include pick and pack, depalletizing, and loading/unloading. Investors understand the importance of this space, with money pouring in from investors from all over the globe: RightHand Robotics is a spin-off from Harvard Biorobotics Laboratory and the Yale Grab Laboratory and has secured $34 million in funding; Locus Robotics has developed a robot with over six feet of vertical reach and has $26 million in funding; IAM Robotics develops a touchless technology allowing machines to see and pick up items within a warehouse and is backed with $21 million. The list goes on, as there are 160 warehouse automation startups globally, each attracting significant funding as the optimization of warehousing takes on new levels of importance in the digital age.

3.6 Digital Forwarding Digital forwarding startups are seeing a massive rise in the industry as they support firms with tracking the location of shipments, reducing and digitalizing booking times, finding the best rates with instant quotes, and digitalizing the documentation process. The size of the global freight forwarding market is around $166 billion and startups are rising to the challenge of digitalizing it. Flexport, a software-focused freight forwarder helping businesses transport their goods, secured a total of $1.3 billion in funding, proving the need for digital forwarding startups. Flexport’s cofounder, Ryan Petersen, understood just how primitive the freight industry was after cofounding ImportGenius, which scanned and sold shipping data about imports. Berlin-based FreightHub was founded by a team of serial entrepreneurs with an exit to Google and now boast over $23 million in funding.Investors will continue to back startups in the digital forwarding space as all traditional forwarders will have to digitalize in order to stay relevant and keep market share.

3.7 Autonomous Driving Vehicles Autonomous driving vehicles are developing autonomous drones and trucks for end-to-end automated shipping and logistics services.The trucking sector is largely dependent on manual drivers and operations while struggling to overcome inefficiencies, making it the perfect industry for startups to address these challenges. In 2018, the autonomous vehicle vertical brought in $10.3 billion worth of financing across 146 deals worldwide, with the global market for self-driving 309

trucks expected to exceed $1 billion for the first time in 2020. Einride is at the forefront of intelligent trucking, developing an all-electric truck capable of SAE level 4 self-driving, with no driver’s pod but the ability to be remotely controlled by a human operator if needed. In Einride’s headquarters of Sweden, DB Schenker has launched an installation of the very first commercial use of Einride’s product to huge success. Unlike many startup solutions, autonomous driving vehicles are of great interest to both investors and corporations alike, with many truck manufacturers heavily investing in the technology. With all the money flowing into the space, it is easy to imagine autonomous driving vehicles being commonplace in the supply chain and logistics industry within the next decade.

3.8 Transport Management Systems and Blockchain One of the most famous and highly funded blockchain startups in the industry is ShipChain, a tech solution providing blockchain contracts. ShipChain is an interesting case as it raised around $30 million in funding after running a utility token sale with token prices at $0.34 per token, which is now being deployed by CEO John Monarch, who is also the founder and CEO of Direct Outbound, one of the fastest-growing fulfillment/3PL companies in the USA. Ultimately, transport management systems have the potential to greatly benefit from the use of blockchain technology, but progress would not happen quickly. Companies need to digitize and standardize their data, but only after an industry-wide standard has been set. Companies must then form an ecosystem of partners to use the standard in a shared blockchain environment, only after which the payoffs will be reaped.

4 Conclusion Established legacy companies in the supply chain and logistics space have a window to capitalize on the growth and agility of young startups—lest they become competitors in the future. The only way for these legacy players to remain relevant is to partake in genuine collaboration with startups and forgo the zero-sum mentality that so often pervades the competitive market. At Plug and Play, we support corporations in their mission to innovate and learn by connecting them with the best startups from around the world. Our partners are the corporations ready to investigate new technological innovations and put in 310

the hard work to support and partner with startups. While we have many case studies proving the necessity and significance of working with startups, the collaboration between DB Schenker and Einride has garnered worldwide attention and is widely accepted to be a model for corporate-startup partnerships. The speed of the collaboration was particularly astounding, with the partnership becoming a fully fledged pilot in about half a year. In April 2018, Einride and DB Schenker entered into a commercial agreement that included the pilot in Jönköping and an option for additional pilots internally. In November 2018, the first installation of the autonomous, all-electric truck (“T-Pod”), was initiated at a DB Schenker facility; this was the first commercial installation of its kind in the world. Already in March of 2019, the Swedish Transport Agency had deemed the T-Pod safe to operate in accordance with Swedish traffic regulations. Already in May, Einride’s T-Pod drove on a public road, transporting goods between a warehouse and a terminal at a facility; the route was just 300 meters long, but included five right-angle turns and a 100-meter stretch of road used by other trucks and vehicles. While the partnership between DB Schenker and Einride is well-known, there are many other startup-corporate collaborations that are highly successful that choose to fly under the radar. Every organization looks different and there is no perfect method for collaboration, but there are several best practices that consistently lead to a successful outcome for both the startup and the corporation. First and foremost, a clear problem statement must be established. This aids the corporation in defining their own pain points within the various business units, helps the startup understand how to provide the best solution, and ultimately sets the tone for a productive and goal-oriented partnership. Ideally the problem statement would be addressed before the startup and corporation meet for the first time, as this helps the startup tailor their pitch to directly address the corporation’s goals and needs. Second, the corporation must determine themselves whether they are ready to allocate the necessary resources to work with the startup. While there may be one executive championing the startup internally, there must be buy-in from the business units and relevant decisionmakers who will be working directly with the startup. Corporations may neglect to get buy-in throughout the organization and rush into a startup partnership for a variety of reasons: overhead pressure; perceived competition; external optics; “innovation” for the sake of innovation; the list goes on but until every internal stakeholder is willing and ready to 311

collaborate, neither party should continue the relationship. On a related note, the startup must be provided with the right connections within the corporation, as navigating the hierarchies and bureaucracies within organizations is confusing and time-consuming. At Plug and Play, we always ask for a dedicated champion who is empowered internally and knows how to open the right doors. They are the ones responsible for putting the startup in front of the relevant decisionmaker and navigating the relationship from start to finish. Once all parties come to an agreement, they must then discuss what happens after the pilot. Although this seems a bit counterintuitive, there needs to be a general consensus on what constitutes a successful pilot and how they see a mutually beneficial, long-term partnership. The definition of success between the two parties must be defined by clearly established KPIs and metrics and the corporation needs to decide for themselves what happens in the event of a successful pilot. Establishing a framework for post-pilot success is crucial to keeping the momentum going; it is inevitable that there will be unexpected challenges and bumps along the way, but having a light at the end of the tunnel can keep both parties confident and on track. Finally, startups have limited resources and move fast so it is important to remember that for startups, the second-best answer is no. If a corporation knows that the startup would not add enough value or the procurement processes will be too lengthy and complex, the best thing to do is say no right away. It is all about speed, and in the end, everyone will be better off for respecting each other’s time. The speed and openness of the collaboration between DB Schenker and Einride was astounding, and while they inevitably followed best practices, part of this success could of course be attributed to the money that Einrideraised. While any startup would readily agree that venture capital dollars benefit the supply chain and logistics industry, some incumbents are bemoaning the advent of young companies trying to disrupt them. The broader question becomes the compatibility between the world of venture capital and the world of supply chain and logistics: who wins in the end? Is the injection of huge sums of money into the space unhealthy for the market? Do investors know the supply chain and logistics space well enough to be placing such huge bets in the market? Ultimately, the impact of venture capital is greater than the sum of its parts. The level of innovation in the supply chain and logistics market is incredible, 312

especially considering the nascent stage of the space in general. Every new startup is pushing the industry forward and its technology will benefit the legacy companies and its customers, regardless of whether the startup survives or not. As in all industries, incumbents are challenging themselves to question their current offerings and be open-minded to the inevitable changes brought on by new technologies and new consumer demands.

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© Springer Nature Switzerland AG 2021 C. Wurst, L. Graf (eds.), Disrupting Logistics, Future of Business and Finance https://doi.org/10.1007/978-3-030-61093-7_20

Transactions & Valuation in the Global Logistics Market Steffen Wagner1 and David Klein2 (1) KPMG AG Wirtschaftsprüfungsgesellschaft, The SQUAIRE/Am Flughafen, 60549 Frankfurt/Main, Germany (2) KPMG AG Wirtschaftsprüfungsgesellschaft, Ludwig-Erhard-Straße 11-17, 20459 Hamburg, Germany Steffen Wagner (Corresponding author) Email: [email protected] David Klein (Corresponding author) Email: [email protected] Abstract The transaction market in the transport and logistics sector is a valuable indicator for the state of the industry. Digitalization shaped the development of logistics throughout the last decade. Often, the players behind this disruption are targets for investments and acquisitions by established incumbents. However, investments in digitalization and the emerging platform economy are primarily driven by venture capital, rather than strategic investors. At the same time, the global economy is experiencing a shift towards new hubs of innovation and technology. A look at the intricacies of global M&A activity reveals a turning point for the industry that questions the foundations of traditionally asset-heavy business models. The emergence of new players and new disruptive concepts might drastically change the industry. Yet, disruption is not necessarily a destructive force, but a transformative driver for change and improvement within an industry that has always been at the forefront of innovation. The authors of this chapter are members of KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of 314

independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG and the logo are registered trademarks of KPMG International. Steffen Wagner Global Head of Transport & Leisure, KPMG Dr. Steffen Wagner studied Economics and Finance at the Johann WolfgangGoethe University in Frankfurt and at Université Paris-IX Dauphine. 1997 he joined KPMG Germany’s corporate finance practice and parallelly completed his doctoral degree in Accounting in France. In 2004 he became a partner of KPMG Germany. Since 1997 Dr. Wagner was involved in a multitude of international M&A transactions, privatizations and public partnership projects. He has extensive expertise in transport & logistics, business services and infrastructure. Additionally, Dr. Wagner is the Head of Transport & Leisure at KPMG International and Germany and is responsible for all activities in the transport, logistics, shipping, aviation and tourism sectors. Dr. Wagner is a member of a German Logistics Expert Panel (“Gipfel der Logistikweisen”) and lecturer at the University of Mannheim Faculty for Accounting and Capital Markets. David Klein Global Sector Executive Transport & Leisure, KPMG David Klein studied Global Logistics and Supply Chain Management at the Kühne Logistics University in Hamburg as well as International Hospitality Management at the University of Brighton. Previously David Klein served as a Logistics Officer at the German Federal Armed Forces Navy until 2012. After his studies he joined the German Logistics Start-Up scene working as a Business Development Manager in urban last-mile settings. Since joining KPMG in 2017, David Klein has worked extensively on digital transformation and IT compliance projects with transport, logistics and mobility clients. In 2019, he took on the role of Global Sector Executive for the Transport & Leisure sector at KPMG International and provides expertise to the global industry practices in transport, logistics, shipping, aviation, tourism and hospitality. David Klein is an author of KPMG’s thought leadership publications and maintains a close connection with the German Logistics Start-Up scene as a Co-Founder of the Logistics-Start-Up Day Hamburg.

1 Transactions & Start-Ups in Logistics 315

The most intriguing characteristic of the logistics industry is its indisputably interconnected role in our globalized commercial world. The state of the logistics and transportation sector is an indicator of economic health and growth potential. Consequently, the sector is subject to change and disruption introduced by macro-and microeconomic forces, just as its dependent industries. In the last decade, the industry faced considerable disruption by new technologies and business models, some of which were introduced by start-ups, funded by both existing incumbents and venture capital. The transaction market within the transport and logistics industry is a highly fragmented arena, where key players struggle for supremacy in an ever-changing and evolving market that continues to be subject to growing start-up activity and influence. Additionally, the global playing field has widened, resulting in an increase in cross-border and multinational transactions in the freight and logistics industry. An analysis of the interdependencies among domestic economies, as well as the global size and scope of the transaction market, provides insights on trends and developments in the logistics sector. Geographical expansion, strategic investments as well as the focus on specific modalities and technologies can provide a better understanding of the players behind the perceived disruption at the beginning of the 2020s.

1.1 An Industry at the Crossroads The market for mergers and acquisitions (M&As) has drastically evolved over the last decade. From being a driver of inorganic growth among logistics entities, it has evolved into a more meticulous endeavour with more dimensions than growth. In fact, where large and asset-heavy M&As were previously the dominant activity driven by corporate incumbents, the current M&A landscape has evolved into a sprightly market, where nuanced additions to the competencies of logistical entities are considered daily business. This development is mainly driven by the surge in start-up activity within the sector. Specifically, innovations in digital systems and processes are increasingly considered viable assets to acquire and integrate. Yet, as recent research shows, one of the top priorities among logistics companies in Europe remains the need to adapt to rapidly changing customer expectations and volatile macroeconomic forces. While not being the primary goal of investments into these areas, the ability to acquire and integrate innovative and potentially disruptive digital technologies as well as the ability to merge competencies to cope with internal and external challenges has become an increasingly important success factor for established industry players. To shed some light on the intricacies of these 316

challenges and developments, the analysis of the occurrence, size, trend and nature of transactions within the market requires a basic understanding of transport economics pertaining to the rationale behind transactions.

1.2 Foundations of Transport Economics & Transactions Key players in the logistics M&A market are spread across different modalities with specific characteristics and requirements. However, across all modalities, the general purpose of operations is timely, reliable and cost-efficient transportation. The accomplishment of this goal is inherently dependent on three variables: location, capacity and time. Optimizing these variables competitively is the core of value creation in the industry. The acquisition and integration of competitors or innovators can be a vital strategic step towards maintaining a respective competitive edge by controlling more assets, network connections and know-how in order to optimize the interplay of these variables. Another reason for M&As is the fusion of smaller companies to utilize combined assets and economies of scale. This consolidation through M&A activities can be required to maintain a profitable and sufficiently diversified client base, reduce cost or offer a wider range of end-to-end services in order to survive in an increasingly competitive market. Acknowledging these strategic implications, a closer look from a geographical standpoint is warranted.

2 Global Hotspots in Logistics M&A An investigation of the global transaction market within the logistics sector from a geographical perspective reveals insights into regional developments and investor confidence. While there is considerable media coverage on the transaction market, an analysis of the aggregated deal data covering the period 2016–2019 with over 6000 datapoints unveils a bigger picture.

2.1 APAC—Logistics Transaction Powerhouse The M&A hotspot in terms of recorded deals between 2016 and 2019 was China. With its booming economy, the country was host to more than 500 deals, a sign of the ongoing development of its logistics capacity to support its role as a major production and export-based economy in the last decades. China has also begun to improve its profile as a hub for technology and digitalization, reflected in the fact that of all transactions recorded, over 20% focused on technology start-ups 317

and digital business models. Additionally, three out of the top five countries in terms of the recorded number of deals are in the APAC region, including South Korea and India. While China retains the top spot in terms of deal occurrence, India showcased considerable potential given its ongoing overall economic growth predictions and an observable strengthening of the logistics and transport sector as a strong driver of the Indian economy, specifically in the maritime and truck segments. It does not come as a surprise that the countries leading the transport transaction race are major production-and export-oriented economies specialized in different industries. Supported by macroeconomic development, highly populated and fast-growing countries, such as China and India, recorded the largest growth in the logistics sector in the last decade, leveraging the advantage of cheap labour and the sheer capacity of their upscaling economy to grow the industry. The USA ranked second in terms of total deals recorded with about 300 transactions between 2016 and 2019. However, despite the constantly lower number of deals, USA deal values have drastically increased in 2019, putting the USA in the leading position in terms of deal values worldwide by the end of the decade. This shift disrupted the rise of the APAC countries, which had been dominating the market in both occurrence and value until 2018, boasting up to 2.5 times more deals on a yearly average than Europe and the Americas. In 2019, APAC countries were involved in relatively fewer deals than the previous years with lower average values, while the USA and Europe realized total values of 2 and 1.6 times that of the APAC region, respectively, making up 25% of the total global deal value in that year. MEA, being a minor geography for the logistics transaction market up until 2019 also picked up both in volume and value, making 2019 one of the most unexpected and volatile years of the last decade, with some historic investments in platform business models and digital infrastructure. However, considering the total value of all deals over the past four years, the APAC region retains the overall top spot with almost 50% of the total global deal value being unified in this region in the observed period.

2.2 Same Game, New Players While it remains safe to say that the rules of the game have not fundamentally changed regarding the geographical transaction landscape, one can certainly observe the entry of new players and a more rapid and volatile environment with more extreme peaks. As start-up activity in the industry continues to pick up, 318

this allows for more inorganic investment and scaling opportunities. While this is a symptom of the sheer size of the emerging markets for logistics in China and India, it is remarkable that the APAC region has also managed to position itself as a market for technology-based transactions. While the USA seems to maintain its technological edge as evident in the transaction volume peak of early 2019, the European transaction market seems to have fallen behind, being more concerned with deals in the context of network consolidation and classic M&A activities. This is also evident in the type of investors that partake in larger transactions. Generally, it can be observed that venture capital investments are more popular in China and in the USA than in Europe, where many investments are conducted by traditional industry incumbents. Based on these observations, it can be concluded that geographical shifts in the global transaction market are evident in both the number and type of transactions that are being conducted. Taking a closer look at the types of transactions that expedited these developments, one can observe that they were related to themes closely linked to the perceived disruption of the industry: platform economy, mobility services, shared assets and digital infrastructure. This, in turn, allows for conclusions about the importance of these themes and their strategic value for the industry, which will be elaborated upon in the following sections. Figure 1 illustrates the development.

Fig. 1 Global transport & logistics transactions

3 Segments in Detail Before diving deeper into the underlying trends and disruptive factors of the industry, one must first acknowledge the very distinct requirements of different modalities. Connecting the focus on different modalities to a geographical analysis of the transaction market allows for assumptions about local strategies 319

and developments.

3.1 Rail Transport The M&A market of rail transport worldwide declined in the last four years, especially from 2016 to 2017, as the average deal value fell by more than 50%. Throughout the years, rail transport in the Americas was the centre of attention; even with decreasing total value, the segment still recorded the highest average deal amounts above USD 1 billion and lowest deal number compared with other segments. The largest investor in the rail transport segment is the USA, with 2019 featuring peak values and six major investments in the digitalization of rail infrastructure. The APAC region only featured few significant transactions in the rail segment since 2016. This can be attributed to the absence of dense rail infrastructure in developing countries and the significant investments required for rail transport infrastructure. Europe also showed little major developments in the rail transport industry, with significant deals occurring last in 2018 while two of four major deals were conducted in Germany, attributable to its highly developed rail network. The investments in the MEA region were not focused on rail transport as well, with only one minor transaction on record within the observed period. While the transaction landscape for rail transport appears to be somewhat uneventful, the segment retains a special place among the modalities, since a lot of the underlying infrastructure is publicly owned and operated; this also partially applies to cargo rail operations. Additionally, a lot of railassociated cargo operations are handled through multimodal freight forwarders, making it partially difficult to track down their transactions. Furthermore, pertaining to technological investments in rail cargo, many technologies are multimodal and vastly associated with truck transport or ocean freight. While the same cargo units can be used, the rail transport segment is often not allocated to the primary mode for multimodal investments or transactions. Digitalization as an investment focus in the rail freight segment is limited in comparison to other segments, due to the low number of significant deals on record. However, what can be extrapolated from the transaction landscape for the rail transport segment is its characteristic as a rather domestic investment opportunity and modality, as evident in the US transactions associated with the segment which could be linked to a protectionist domestic investment focus.

3.2 Ocean Freight 320

Global transactions in the ocean freight segment are evenly spread throughout the quarters in the last four years with little variation in average deal values. Until 2019, the industry transactions were around USD 20 billion with a high point in 2017 with USD 22.4 billion while the first half of 2019 showed only USD 4.7 billion, possibly hinting at a decline in large-scale transactions. The effect of this transaction behaviour is evident in the maritime industry, where companies from the APAC region hold almost 30% of the market share. The European transaction market for ocean freight has been consistent over the last years. It has experienced a similar development as the general European M&A market. Coming out of a peak year, in terms of deal value in 2017 at USD 14.8 billion, it subsequently decreased by almost 65% to USD 8.0 billion in 2018 and further decreased by 55% to USD 3.6 billion in 2019. The Americas’ ocean freight industry also had its peak year in 2017 with a total transactional volume of USD 9.3 billion. Afterwards, it decreased to USD 3.9 billion in 2018 and stood at USD 2.9 billion in 2019. While the ocean freight industry was largely concerned with an abating consolidation wave, the investment focus within the industry is was also on digitalization and technology, which is partly related to the growing demand for real-time information and freight metrics. The need for digitalization is mainly driven by the emergence of platform models within the maritime industry. This demand has been widely catered to by a series of emerging start-ups in this segment. While being an asset-heavy and high value segment, the ocean freight segment is also one with considerable start-up activity, specifically pertaining to platforms, digital tracking and system interfacing. The focal point of digitalization in this segment also includes port operations and systems. The investment structure shows that platforms and marketplaces mostly received venture capital, while investments in digitalization of port infrastructure and vessel operations were mostly backed by traditional incumbents.

3.3 Freight Forwarding The freight forwarding industry exhibited characteristics like the ocean freight segment, featuring almost the same amount of deal value and occurrence between 2016 and 2019. With the highest deal value of USD 45 billion in 2017, the freight forwarding segment had an average yearly global deal value of USD 20 billion until 2019. 50% of all associated transactions took place in the APAC countries. In the Americas, the segment was a minor one in terms of deal value of around USD 4 billion; however, a quick rise was observed in 2019, where the 321

first half of the year almost reached the yearly deal value of the previous years due to a record investment in a digital freight forwarding start-up. Europe’s top value transaction was also recorded in the freight forwarding sector, where a Chinese wealth fund invested USD 13.7 billion in a UK freight forwarder in 2017. While the freight forwarding business is mostly multi-or intermodal, there are forwarders focused on specific modalities. Considering the size of the segment regarding its coverage of all modalities, the freight forwarding segment is expected to grow in importance in the coming years. Especially due to the emergence of digital business models and the coining of the term “digital freight forwarder”, this segment is likely to receive more attention. Looking at the types of transactions on record, there is a significant focus on digital technologies like artificial intelligence for monitoring, exception management as well as technologies for real-time tracking, price calculation and platform infrastructure. The nature of prominent business models within this segment will be further elaborated upon in the following sections. Investments in digitalization and digital freight forwarding business models showcase an interesting paradigm shift. Tracing back the seed steps of the start-ups in question, first investments were mostly venture capital, while later investments also increasingly included buy-ins by traditional incumbents. While still at a minority share, this shift further underlines the growing importance of respective business models.

3.4 Other Segments The fourth biggest industry segment is truck transport. However, the segment is exhibiting declining deal values throughout the years with USD 8.1 billion worth of transactions in 2019, compared with three times the number of deals four years earlier. Truck transport takes on an important role in the Americas with transactions worth USD 4.9 billion in the last four years. Since the enormous investments valued at USD 18 billion of Chinese entities within its borders in 2016, the APAC region has conducted about 200 transactions yearly amounting to USD 7.5–9.3 billion in the following years. In Europe, the truck transport segment accounted for around 10% of all transactions in 2016 with USD 3.6 billion while this percentage decreased to 5% in 2019, indicating the end of another consolidation wave. One of the most prominent countries for this segment within Europe was Germany, where truck transport is among the dominant modalities, likely due to its advanced road transport infrastructure. However, on a global scale, the consolidation in the truck segment is in an earlier stage of its lifecycle compared with the ocean freight segment, starting its 322

decline at the end of the decade. Investment focus areas within the truck transport segment are, however, still consolidation and digital technologies related to tracking, predictive maintenance and autonomous driving, aimed at countering inherent challenges such as driver shortage and low operational margins. Compared to other segments, the share of traditional incumbents investing in start-ups is generally higher, whereas these players oftentimes join forces with investors from the automotive industry as a main sponsor of start-up activity and technological advancement in this segment. Figure 2 illustrates the development.

Fig. 2 Global segment transactions in detail

3.5 Investments in Digitalization While a focus on geographical hotspots and segments provides an overview of industry activity, a closer look at the types of business at the centre of M&A attention reveals more: In the last 4 years, start-up activity within the sector has been largely focused on digital business models and digitalization in general. This trend is a consequence of increasingly lower entry barriers to a formerly purely asset-driven industry. In terms of financing, investments in digitization between 2016 and 2019 were mainly financed by private equity in forms of venture capital, primarily in the Asia-Pacific region, with China being the strongest regional hotspot. In 2019, however, there was also increased investment in Europe and the Americas, with both regions overtaking Asia in this strong year regarding the overall investment volume spent on digitization in proportion to the overall growth in investment activity. However, it is noteworthy that in 2019, for the first-time, larger sums were also invested in 323

digitization by public companies and funds. Extrapolating from these observations, it can be concluded that digitalization as a focal point for investment within the logistics industry is mainly driven by venture capital, rather than by strategic investors such as traditional industry incumbents, which applies across all segments. Analyzing the investments in question, the last 4 years exhibited a clear trend towards investment in digital platforms and marketplaces, software in general and the digitalization of warehousing as well as transshipment operations at stations and ports.

4 Fight for the Crown: Asset-Light Versus Asset-Heavy Models Considering the digital focus of investments in start-ups across geographies and segments, the applied business and operating models must be investigated regarding entry barriers and characteristics that enabled the surge in related activity between 2016 and 2019. One crucial aspect to consider when assessing digitalization, digital business models and digital transformation through emerging start-ups is asset ownership:

4.1 To Own or not to Own… Two crucial aspects of M&A within the logistics market are asset ownership and network connections. While companies with little or no assets, such as freight forwarders, rely mostly on their network connections, the ultimate access to capacity lies with the asset owner. Hence, expansion or diversification through M&A can be a viable strategy to stay ahead of the competition and to hedge market risks. However, as we observe new customer-centric and data-driven business models such as the market entry of digital freight forwarders, the question about ownership of and access to capacity becomes increasingly relevant in the context of the emerging platform and data economy. In order to cope with the emergence of these concepts and their potentially disruptive impact, acquisitions of, or investments in logistics technology (logtech) start-ups become increasingly attractive. Start-ups often function as incubators and agile development platforms, complementing the capabilities of traditional incumbents and challenging traditional strategic mindsets. Traditionally, the logistics industry is an asset-heavy industry and the acquisition of assets is considered a viable means to increase market share. 324

Consequently, logistics companies have embraced the notion that M&A activities provide the means for subsequent growth in relation to physical asset acquisition and network expansion. Transactions would be conducted in order to become more asset heavy. While asset-heavy businesses maintain direct control over their available capacity, as one of the core variables of the industry, they are less flexible. Considering the characteristics of the logistics industry, this is a tough balance, since both volatility and capacity optimization are its inherent properties. This results in comparably low margins to mitigate inefficiencies and volatility in asset and capacity utilization, as well as high upkeep and the inability to scale rapidly due to high upfront cost. Therefore, technology companies usually turn towards asset-light models. While this fundamental dilemma remains, investments in digital start-ups cause a shift towards business models deviating from the traditional asset-heavy business practice. Specifically, the transaction value peaks observed in 2019 point towards alternative models, which are not bound to the restrictions of purely asset-heavy businesses and are therefore often described as disruptive.

4.2 The Emergence of the Platform Economy As a result, asset-light business models have become an interesting alternative in the logistics market, which is evident in the analysis of global transactions by the growing transaction volumes associated with (digital) freight forwarding and other forms of digitalization. While the traditional business of a freight forwarder has always been asset-light in a physical sense, the business has always been very labour intensive and thereby de facto asset intensive in terms of human capital. Given the rapid digitalization over the past decades, this playing field is changing, and asset-light business models are far easier to scale. One of the reasons for this is the wider availability of data and the opportunity to exchange data without additional manual labour via digital interfaces. Consequently, the freight forwarding business has become digital and so has (B2B) customer demand. Looking at peak transaction volumes at the end of the decade, we can observe the emergence of the platform economy. Platforms and digital freight forwarders make use of asset-light models that can deliver an increased return on assets (ROA), a lower volatility in terms of revenue, greater flexibility and higher scalability than asset-heavy models and are thereby beginning to be considered a superior investment opportunity by many investors.

4.3 A Story Already Written 325

The logistics industry is not the first industry to undergo this change or perceived disruption. For many different traditionally asset-heavy industries, embracing asset-light business models has marked a drastic turning point. One prominent example and fitting comparison is the hospitality industry at the beginning of this century. In the early 2000s, hotel chains scaled back their asset ownership and turned to utilizing the capital released to expand into developing economies, where demand growth was projected to be exponentially greater than in developed markets. The asset ownership of the five largest hotel chains in 2019 was about one-third lower per revenue dollar than it was in 2002. For hospitality companies seeking to shed fixed assets such as real estate, sell-andlease-back strategies partially proved to be a more flexible approach offering new options for negotiations and portfolio adjustments. The hospitality and logistics industries share one key success variable: capacity. Optimizing models of ownership, management, operation and offering of capacity is a way for any such industry to become more flexible and embrace asset-light models. While this development could be observed in the hospitality and tourism industry in the past, its beginnings can now be observed in the transport and logistics industry. Taking a closer look at the types of businesses that qualify as asset-light which were subject to peak investments in 2019, one can spot yet another similarity to the hospitality industry. While asset-heavy hotel chains were shedding real estate in the early 2000s, that time also marked the rise of booking platforms. As of 2020, the two leading booking platforms in the hospitality market facilitate every third booking while owning no physical capacity in the market. The rise to power of booking platforms was a decisive step for the industry, as it introduced price transparency, comparability and raised questions about rate parity and price dumping. In recent years, a similar development accompanies the asset-light discussion in the transport and logistics industry. While traditional freight forwarders are comparable to travel/tour operators, digital freight platforms and marketplaces are comparable to the likes of online booking platforms. Consequently, the logistics industry is exhibiting the same type of conflict, which is evident in the observable investment behaviour.

4.4 The Case for Change Exploring this development and the underlying concepts further, it must be stated that the ultimate access to and ownership of capacity will remain a viable business model, specifically for larger players offering global end-to-end 326

transport and supply chain solutions. However, given the fragmented nature of the logistics industry, evident in the high number of small and medium enterprises (SME), this development is considerably impactful. One important concept in this context is virtual consolidation, which is endorsed by digital platforms and marketplaces. While two major physical consolidation waves are observable in the transaction market for the ocean freight and truck transport segments, consolidation is not only a current industry trend but a fundamental property of continued optimization in transport and logistics. While smaller companies with smaller capacities are often under the radar of major players and bigger transactions, consolidation of their capacity is often achieved virtually, by building alliances and cooperative networks, and most recently by means of the emerging platform economy. Having virtual access to diversified capacity provides platforms with the opportunity to offer customers direct comparisons and flexible booking options, while smaller companies receive the benefit of potentially optimized utilization of otherwise unused capacity and assets. While the fundamental properties of the industry do not change in this regard, competition within the market does and follows a changing customer demand, which will be elaborated upon later in this chapter.

4.5 Sharing Is Caring… Another alternative to physical and virtual consolidation that can be observed within the transaction market, are shared assets, bridging the gap between these concepts. In asset-sharing models, two or more companies share the cost of expensive assets. This is especially beneficial if high utilization is the key to returns, which is true for the logistics market. Partners that enter into assetsharing arrangements can be in the same or different industries, depending on the interdisciplinary usability of assets, such as warehouses or infrastructure. One example of successful asset-sharing models is the cooperation between airlines and postal networks, sharing aircraft to provide combined passenger-and -cargo flights. Even competitors can share assets. Looking at the transaction market in logistics, shared services are especially found in the mobility segment and are increasingly making their way into urban logistics, with concepts ranging from shared transshipment hubs and warehouses to consolidated lastmile delivery units. An additional appeal of shared assets is their fundamental reliance on technology and respective infrastructure, making them easier to integrate into platform and marketplace models to optimize their utilization. Consequently, these concepts offer a new type of competition and require new 327

models of revenue sharing and capacity allocation which are enabled by widespread digitalization of logistics processes and propelled by innovative approaches by start-ups. Having explored the surge in investments related to the platform economy, asset-light approaches and underlying concepts, the market value of companies as well as the willingness to invest in technologies and start-ups has become evident. Consequently, the projected market values, specifically of platform models, remain an interesting yet elusive subject, warranting a closer look at the valuation of logistics companies.

5 Valuation of Logistics Companies and Start-Ups In order to provide context to the trends and developments that can be derived from the transaction market, this section will cover some basics. The net worth of listed companies is calculated by the price of shares times the number of shares offered. The selling price can be calculated from the adjusted present value, discounted cash flow and profit value. Since only big corporations are usually listed on the exchange market, this method only applies to a fraction of the fragmented transportation market. Another method to estimate or approximate a company’s value is using the multiplying factor. These factors are determined based on the information of similar listed companies and past deals with homogenous characteristics. The chosen financial figure (such as net profit, revenue, EBIT) is increased by the multiplier. The multiplier varies according to the previously mentioned asset models. Asset-light companies can include freight forwarders, contract logistics providers or any form of higher integration levels (4PL & 5PL) and new digital business models. Traditional transport businesses comprise the asset-heavy category. Additionally, there are also mezzanine forms of integrator business models used by big market players and multimodal postal networks. These three categories can apply to all modalities and feature different valuation multipliers to approximate the value of a company.

5.1 A Look at the Numbers Based on a KPMG study, calculating the medians of listed logistics companies, both asset-light and asset-heavy companies is expected to record a 50% decline in their compound annual growth rate (CAGR) during the period 2018–2021 328

compared with the previous three years. Only integrators are estimated to grow by 0.5% during this period. Extrapolating from earnings before interest and taxes (EBIT) margin, it can be concluded that asset-heavy companies generate greater margins from their services with 9.3% (2019), whereas integrators have a margin of 6.5% and the freight forwarders earning 4.8%. However, the difference between EBIT and earnings before interest, tax, depreciation and amortization (EBITDA) margin exhibits that the cost of depreciation and amortization of asset-heavy companies is almost 10% due to the high amount of assets, while that of integrators and asset-light companies is distinctively lower, mitigating the positive effect and leaving less asset-heavy companies better off. The multiplier is calculated by dividing the enterprise value (EV) by EBIT or EBITDA. A comparison of the numbers for 2018 and 2019 shows that assetlight companies experienced a drop-off for both multipliers with EBIT and EBITDA. On the other hand, asset-heavy companies are benefitting from the multipliers, with an increase compared with the previous years. Interestingly, the multiplier EV/EBITDA for integrators has also increased, while the EV/EBIT ratio has fallen, which leads to the assumption that depreciation costs have been decreasing, meaning integrators could have been cutting back on assets. The multipliers for asset-light companies are estimated to increase in the upcoming three years, while those for the asset-heavy and integrator businesses are expected to remain unchanged or decrease marginally. Having explored the intricacies of valuation and underlying concepts, several questions about the forces behind the observed trends remain. The following section will dive deeper into these questions.

6 Drivers of Transactions In order to provide a complete understanding of the dynamics influencing and shaping transactions within the logistics markets, we need to investigate the drivers behind the transaction behaviour that was observed at the end of the decade. The main forces behind the observed transaction behaviour are closely aligned with macroeconomic trends and societal changes. Changing customer expectations, a growing demand for sustainability and the emergence of the data and platform economy are among the main driving forces across the industry. While these drivers are applicable regardless of modality, they influence different modes and geographies in different magnitudes and occur in a time of 329

macroeconomic pressure and uncertainty, where the need to optimize and reduce operational costs is at the heart of all logistics operations and can often be achieved by digitalization.

6.1 The Evolution of Customer Demand Customer demand has been rapidly changing over the course of the decade. A clear determinant for customer demand is the growing transport volume resonating through all supply chains, which has been significantly influenced by the ongoing success of e-commerce. E-commerce has become so influential in the industry that major logistics players have set up dedicated divisions to meet the special requirements of their e-commerce customers. Furthermore, one can observe a convergence of B2C and B2B demand in customer behaviour. The B2C customer experience has been shaped by e-commerce to a considerable degree in the last decade. The specific traits of B2C e-commerce experiences are transitioning to other industries as well as to the B2B environment in general. Logistics companies are now increasingly confronted with the demand for price transparency, real-time information, sustainable solutions and efficient problem resolution. While challenging, these demands are not new and there is a resemblance to the developments in the hospitality industry. When looking at the transaction market, one clear observation is the focus on consolidation and digital solutions. This focus is clearly fuelled by both changing customer expectations and the need to provide better optimization and utilization for available capacity. The ability to provide transparent real-time information in appealing digital formats is another critical component. Across all geographies and modalities, transactions also include pure technology investments, which are in many cases related to tracking technology and solutions for real-time information exchange. With the increase in demand for more efficient optimization, real-time information becomes key, and platforms offer the means to consolidate, enrich and distribute this information. Consequently, the underlying demand patterns evidently constitute the interest in technology, consolidation, digitalization and platform infrastructure that we can observe in the market.

6.2 Sustainability as a Driver for Transactions Another driver that is often associated with customer demand is sustainability. While the overall awareness for sustainability is growing, this is not a purely 330

customer-driven topic. The issue has become a societal one and has increased the political pressure on the market. As the last consolidation wave within the ocean freight segment seems to abate, the segment is confronted with another challenge. At the beginning of 2020, the International Maritime Organization (IMO) introduced a new emissions regulation for the maritime industry in international waters called IMO 2020. Significantly limiting sulphur emissions, IMO 2020 presents a regulation that significantly and strategically impacts the shipping industry; and potentially requires investments in new technologies and support infrastructure, which is evident in the overall transaction volumes within the segment. While IMO 2020 constitutes a primarily maritime challenge, its effects ripple through supply chains and increase cost pressure, further intensifying the need for sensible consolidation and innovation to cut cost. Other segments are not as drastically affected but are also bracing for a change. Technology investments in the road transport segment exhibit a tendency towards alternative fuels and shared operating models, as urban areas are expected to expand their emission restrictions. Furthermore, sustainability as a demand metric will only truly become part of the equation if it can be appropriately measured, which is largely enabled by digital technology. Thus, it can be concluded that all drivers are interconnected and that the start-ups behind disruption are propelled by these concepts across multiple modalities. While start-ups become an increasingly important part of the digital transformation of the industry, their role has shifted from mere innovators to interdisciplinary hubs for change. As the driving forces behind change become more intricately connected, start-ups often connect the dots and achieve unforeseen synergies, which is often perceived as disruption.

7 Conclusion Summarizing the trends in the global logistics transaction market and taking into consideration the drivers and dynamics behind this transaction behaviour allows for a multifaceted bottom line and an intriguing outlook. Geographically, the Americas’ logistics transaction market was least affected by international trade tensions at the end of the decade. While the focus on domestic logistics segments explains their relatively low transactional activity in the ocean freight sector, the transactional volume of the freight forwarding and rail transport segment shows signs of a protectionist investment strategy. In the APAC region, peak transaction activity occurred between 2016 and 2018 in 331

terms of transaction volume within the maritime sector. Thus, businesses from the APAC region have emerged as dominant entities in the maritime industry, owning almost 30% of the global maritime liner market in the process—a clear sign of the maritime consolidation wave abating by the end of 2019. Europe had a record year in 2017 with USD 18 billion in freight forwarding and USD 14.8 billion invested in ocean freight. In contrast, transactional volumes from rail transport remained low until 2018 where a record year at USD 9.7 billion was observed. Generally, it is evident that the current waves of consolidation are coming to an end through the decrease in both transaction volume and average deal value in 2019 following the peaks in 2017 and slow decline in 2018. Consequently, the affected segments are exhibiting an increasing saturation of the market in the light of physical consolidation. However, the deceleration of consolidation by the end of 2019 due to market saturation is most likely not the only reason for a slowdown in the overall transaction volume. Indeed, the current macroeconomic situation, international tension and growing uncertainty in the global market put pressure on businesses to modernize their business models in order to keep up with the latest developments and to build up strategic risk reserves. This subsequently leads to less funds being available for major transactions and a respective overall decline in activity. However, the emergence of the platform economy and the rise of digital start-ups caused a global surge in investments in digital business models, specifically in the areas of infrastructure and process digitalization across all modalities. While this development resembles developments in other industries like the hospitality industry, the transport platform and data economy is still in its infancy, which is why more transactions in this area are to be expected. Investments in digitalization across all modalities and geographies between 2016 and 2019 were primarily driven by private equity and venture capital, while only later stage start-ups receive buy-ins from strategic investors and traditional incumbents. This behaviour is expected to change in the future, as the impact and role of start-ups as agents for change becomes more widely accepted by traditional players heading into the next round of capacity and network consolidations. The drivers behind the trends that give rise to a growing number of start-ups and respective investment opportunities are lower entry barriers due to assetlight operating models, changing customer behaviour and expectations as well as the need to optimize capacity access and utilization due to increasing pressure by 332

sustainability requirements and regulations. While the logistics industry has a lot to learn from other industries and has a lot to explore for itself, continued observation of the transaction market will continue to provide more insights about the future of the industry, and about the players behind the disruption.

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© Springer Nature Switzerland AG 2021 C. Wurst, L. Graf (eds.), Disrupting Logistics, Future of Business and Finance https://doi.org/10.1007/978-3-030-61093-7_21

Financing Disruption—The Role of Venture Capital in the Logistics Industry Christian Saller1 and Felix Klühr1 (1) Holtzbrinck Ventures, Berlin, Germany Christian Saller Email: [email protected] Felix Klühr (Corresponding author) Email: [email protected] Abstract Over the past five years, Venture Capital investment into logistics start-ups has exploded, growing from $1.6 B in 2014 to over $12 B in the first nine months of 2019. But what explains that dramatic rise in venture dollars? In this chapter, we share our perspective—that of a European Venture Capital fund actively investing in the logistics industry—on what attracts us to the sector. In short, we believe that the “size of the price” is a driving force behind VC’s increasing appetite for logistics start-ups. However, market size alone does not explain the timing of the increasing VC invested. Here, we argue that the consumerization of enterprise, the increasing competition from players such as Amazon and the resulting shift in consumer expectation and a new cohort of courageous entrepreneurs make a compelling case as to “why now.” Adding a few macroeconomic factors, we believe also provides a solid hypothesis for the emergence of mega rounds, funding rounds >$100 M, which are highly prevalent in the logistics industry. Finally, we discuss why VCs are a good fit for logistics entrepreneurs and complement our perspective with insights from other renowned European VC investors. Christian Saller joined the HV Holtzbrinck Ventures team in 2013 and is managing the fund’s investments into Cabify, Tourlane, Zencargo, Warehousing1, and Exporo among others. Before coming to HV, Christian was CEO and Co-Founder of flight search 334

engine swoodoo where he was responsible for company development, from market entry to market leadership in Germany and the sale of the company to KAYAK. Then, in his role as Managing Director for Europe, Christian managed the European organization at KAYAK. As a member of the KAYAK management team, he was also involved in the successful IPO on the NASDAQ and the subsequent sale of the company to Priceline. During his time at KAYAK, Christian was also active as an angel investor, investing very early in GetYourGuide, one of Germany’s most successful travel start-ups. Christian holds a doctorate “summa cum laude” in mathematics and also received an MBA with distinction from the London Business School. Felix Klühr joined HV Holtzbrinck Ventures in early 2017 and is managing the fund’s investment in Sennder, Dialogue, and heartbeat among others. Before that, Felix founded Skive, a digital learning platform trusted by more than 250,000 students across Europe. As CEO of Skive Felix successfully coordinated two funding rounds and was responsible for all HR, product, and business development efforts. Felix combines strong operational experience with a deep expertise in education technology and is part of a task force that advises the German federal government on digital learning. Felix holds a Bachelor of Science in Business Administration from Ludwig-Maximilians-Universität München and a Master of Science in International Political Economy from London School of Economics, graduating with distinction.

1 Introduction Over the past five years, Venture Capital (“VC”) investment into logistics startups, defined as young companies that aim to transform the logistics industry, has exploded. In the first nine months of 2019, according to CB Insights, VCs invested more than $12B in start-ups that tackle the logistic industry (see Fig. 1). This represents a stunning 7.6× growth from the mere $1.6 B invested in 2014 or, put differently, a 50% compound annual growth rate. Moreover, this trend does not seem to be bound to one region. While 40% of the investments took place in the USA, an increasingly large amount was invested in companies operating out of Europe, China, and India reflecting the systemic and global nature of the supply chain industry. Any remaining VC concentration in USAbased companies, therefore, rather seems to result from the higher availability of VC in the USA and is expected to diminish as other VC ecosystems mature. 335

Fig. 1 Global funding for supply chain start-ups (Source CB Insights)

But what are the underlying factors behind the apparent interest of Venture Capital investors in the logistics industry. Or in the words of a VC investor, why did the logistics industry become “hot”? And why do logistics entrepreneurs choose to accept financing from VCs in the first place (yes, it’s a two-sided decision-making process) rather than from say Corporate investors with deep industry expertise? In the following chapter, we will try to answer these questions from HV’s perspective. The perspective of a VC fund combined with the insights gained from reviewing hundreds, meeting dozens and investing in a handful of European logistics start-ups. The latter including digital road freight forwarder Sennder and digital freight forwarder Zencargo whose founders share their own perspective in this book. To do so, we have reviewed and refined our internal notes and investment memos and condensed it into an “educated guess” as to why the logistics space has become “hot.” We derive that VC’s investment appetite is driven by a gigantic industry on the one hand, and the resulting opportunity to build VCrelevant businesses, while a compelling case as to “why now” can be made on the other hand. The latter is determined by three factors, namely 336

consumerization, competition, and courage. After discussing each of these elements in detail, this chapter hypothesizes a fairly simple logic behind the phenomenon of mega rounds (financing rounds larger than $100 M) that seems to be especially common in financing rounds of logistics start-ups. Then, we argue that VC investors are particularly well-suited to specific types of risk— expect professional bias!—and therefore make a good match for entrepreneurs tackling the grande challenges found within the logistics industry. Lastly, we have asked fellow European VCs for their appetite for and take on the logistics industry to give readers more insights into the way European VCs think.

2 The 3C’s: Consumerization, Competition, and Courage To evaluate whether a start-up or a sector is worth considering, Venture Capitalists oftentimes start with looking at the market size that a company is able to address. While other factors do play a crucial part in the investment decision —in fact most VCs would probably tell you that it is “team, team and team”— investors care first and foremost for the potential “size of the prize.” Put in the words of renowned Venture Capitalist Marc Andreessen, “the #1 company killer is lack of market […and…] “market matters most”. Apply this simple mantra and it will not take you long to arrive at the logistics industry. Compared to other industries that VCs have invested in over the past decades, the logistics industry seems like one of THE elephants in the room. In fact, it is so big—north of $1 trillion—you would have to intentionally overlook the logistics industry. And it is not just the sheer size of the markets. Other crucial market characteristics play along. Take the level of fragmentation for example. Except for a few segments, both supply (e.g., thousands of carriers in road freight) and demand (e.g., hundreds of thousands of medium and small shippers) come with significant levels of fragmentation that makes starting-up new companies radically easier and thus significantly more attractive. But the logistics industry did not just pop-up over the past years, as other industries have. How come then, that it is only just now that VCs are discovering their appetite for logistics and start-ups operating in this industry? Does not it sound too good to be true? And why did nobody else see the opportunity before? Generally speaking, we found that there is a fine separation in our line of work between excitement for any new opportunity (“this can really work”) and the hard reality of building a company (“this will never work”). To balance that 337

inner conflict, we undergo a form of reality check by trying to diligently answer the question of “why now” within each investment process. Specifically, when reviewing markets as obvious as the logistic industry. Did a new technology emerge, think Internet, mobile, blockchain? A new distribution channel such as Instagram? A new expertise? Essentially, we try to find unfair advantages that todays’ start-ups may have over incumbents as well as other less successful predecessors. As you may have guessed, we have concluded the analysis of “why now” with a highly positive result. In fact, we believe that the interplay of three underlying factors, that emerged over the past five years, make it a “hell yes,” namely, consumerization of the enterprise, rising competition (and consumer expectation), and courage.

2.1 Consumerization Consumerization of the enterprise has been a wildly discussed theme among the VC and start-up community. In short, it hypothesizes that humans have gotten so used to the perks of modern technology in their private life, i.e., as consumers, that they are now expecting the very same from software they use in their professional life. A prime example of this has been the wild success of Slack that organically found its way into many small, medium, and large companies by offering a consumer-grade messaging tool. Less technical, the consumerization of enterprise software trend states that people love the seamless way of communicating, shopping, booking a holiday, and so forth and now expect the same simplicity and comfort at work. We believe that the consumerization of enterprise is one of the driving forces behind the rapid adoption of digital technology more generally and behind the rise of a new cohort of start-ups catering to large enterprise customers in the logistics industry more specifically. One of the reasons being that multiple dayto-day processes in the logistic industry share a fair number of characteristics with day-to-day processes we know from our private life. Take ordering food from Deliveroo as an example. Deliveroo uses technology to give you an estimated time of arrival for your food, notifies you when your driver picks the food up and lets you track his arrival on your smartphone. Why not apply the same technology to a road freight shipment from Amsterdam to Munich? Of course, this requires some technological adoption and tackling a few operational challenge but there is no systemic reason why it should be impossible. As a 338

result, companies operating in the road freight industry will find it progressively more difficult to explain to their shippers, run by individuals used to track delivery processes in their private life, why the very same does not apply to their professional environment. Similarly, you can today book a flight (or any other transportation that gets you from A to B) with only a few clicks, investing nothing more than two to three minutes. Again, should not the same ease apply when booking air or sea cargo? Both of these, and many more use cases, are being tackled by a cohort of emerging start-ups. And they are welcomed by individuals working for large firms that start to demand the user experience they have gotten familiar with at home.

2.2 Competition Yet, companies are not known for purchasing software or switching suppliers based entirely on good “user experience.” Almost all of these decisions have to undergo a rigorous return on investment logic and require a willingness to deviate from “this is how we do things” from decision-makers. Here, mounting competitive pressures and/or shifting consumer expectations hold the potential to increase that willingness and thus accelerate the introduction of new technologies. We think that this is exactly what is happening in the B2B space and in logistics specifically. Over the last decade, a few behemoth commerce companies, most notably Amazon and Alibaba, have taken radical and long-term investment approaches to logistics and started to sacrifice margin and profit to rethink and rebuild supply chains. By introducing previously “unthinkable” delivery options (e.g., Amazon’s same-day delivery), they are rapidly and sustainably changing consumer behavior. This not only creates customer loyalty but also implicitly and explicitly sets the bar for all other companies selling to these consumers. That said, not every company can, should and will copy Amazon/Alibaba’s approach. These companies rely on their full vertical integration, outstanding investor sentiment and profitable adjacent business models to cross-finance these innovations. Still, we start to see the first cohort of shippers adopting by demanding innovation in an attempt to match service levels of Amazon and the like. Demand, we think, that created a window of opportunity that logistics start-ups have been able to tap into. Summarized, we believe that the success of Amazon and the likes is built on outstanding consumer experience, primarily driven by logistical innovation. This 339

is backed by our own experience with investments in Zalando or HelloFresh that succeeded by combining a great product with operational excellence in logistics. In other words, successful e-commerce companies used technology to build their own superior supply chains, triggering a radical shift in consumer expectation. Changing consumer expectation, in turn, create competitive pressures that forces incumbents to conceptualize and implement technology to rethink their supply chains, paving the way for this new generation of logistic start-ups that strive on the promise of offering “Amazon-like logistics out of the box.”

2.3 Courage Lastly, we have observed a correlation between the risk profile of entrepreneurs and the matureness of an innovation ecosystem. In other words, we are seeing entrepreneurs taking on bigger and more complex industries as the ecosystem, in which these start-ups are embedded, becomes more advanced. In Europe, this translates into more serial entrepreneurs that have more experience in building organizations and consequently are entrusted with more capital from early-and late-stage investors. Further, joining a fast-growing start-up becomes a less exotic career path for established management leading to more industry expertise available in these start-ups. As a result, diverse, ambitious, and experienced teams, equipped with relevant financial backing, are drawn to the complex but massive opportunity of bringing innovation into the logistics industry.

3 Mega Rounds in Logistics Going back to VC’s appetite for the logistics vertical, we witness another noteworthy phenomenon. The relatively high prevalence of mega financing rounds, defined as financing rounds larger than $100 M, in the logistics industry. To be clear, this is a broader phenomenon in the general Venture Capital industry and has been explained by many bright minds. Generally, the argument goes that large financing rounds can be explained by the significant influx of capital into riskier asset classes (e.g., from Private Equity Investors, Sovereign Wealth Funds or Corporate VC) driven by central banks’ zero-interest policy and the belief that investors capture more value when companies stay private longer. Although a “post WeWork” world started to shake these beliefs, we continue to see both the emergence of new and larger funds that lead to larger financing rounds for companies perceived to be the next uni-or even decacorns (a company worth $10 B). 340

That said, we think that mega rounds are a specifically prominent feature of the current logistics landscape as depicted by Table 1 highlighting select mega rounds in logistics start-ups over the past 12 months. And although the favorable macroeconomic environment contributes to these financing rounds (as there are more funds available), we think that the logistics industry is particularly suited for building what we call continental or regional champions. And that the opportunity to build continental champions in turn attracts investors that are willing to provide larger amounts of capital for perceived winners to achieve these goals. But let us start with the basics: Table 1 Select mega rounds for supply chain start-ups in 2019 (Source Crunchbase) Start-up

Category

Date Total funding

Investors

Flexport

Freight forwarding $1 B

Feb 19

$1.3 B

Softbank Vision Fund, DST Global, Founders Fund

Door Dash Last mile delivery $600 M

May 19

$2.1 B

Darsana, Softbank Vision Fund, Sequoia Capital

Convoy

Road freight forwarding

Nov 19

$665 M

Generation Investment, T-Rowe Price

Yimidida

Freight forwarding $266 M

Jan 19

$403 M

Boyu Capital, China Development Bank

Glovo

Last mile delivery $167 M

Dec 19

$513 M

Mubadala Capital, Lakestar

Nov 19

$293 M

Accel, Goldman Sachs, Sequoia Capital India

BlackBuck Road freight forwarding

Last funding

$400 M

$150 M

3.1 Continental Champions Continental champions are, as explained by the name, companies that have built meaningful market leadership positions in a specific continent. We first observed the phenomenon when analyzing the ride-hailing market a few years ago.1 Figure 2 provides a slightly simplified yet effective visualization of the phenomenon. In short, no ride-sharing competitor was able to build sustainable market positions outside their home-continent. The exception to the rule, UBER, decided to consolidate their position by merging with key competitors while continuing to push in Europe with yet unknown success. 341

Fig. 2 Select players in the global ride-sharing market (Source Authors)

To understand why some markets develop continental champions rather than global ones, one has to look into the characteristics of the underlying business models. In short, we believe there are a few defining characteristics that make markets more prone to develop these regional champions. A crucial one is the nature of the product and business model. While tech-enabled service companies (such as the cohort of companies tackling ride-hailing) tend to favor the creation of local champions, software-as-a-service products are more scalable and therefore more global by nature. This holds especially true when these techenabled service companies rely on local and fragmented supply such as drivers to offer their services. Additionally, industries with a high degree of regulatory complexity will favor continental champions in the same way that soft factors such as culture, language and the likes do. We believe that these characteristics can be found in the logistics industry at mass—i.e., markets that favor the creation of continental champions—and large financing rounds enable these companies to win and defend their “championship titles.” Take road freight as an example. Similar to ride-hailing, companies are using technology to more efficiently match shipper demand with local carriers. Here, the regulatory framework of what counts as a “carrier” differs heavily between 342

continents. Moreover, both demand and supply in these markets are extremely specific and shaped by culture, language barriers, and history of each geography. As a result, one can observe an emerging pattern of “continental champion” in the road freight industry. Figure 3 visualizes digital road freight forwarders that have raised more than $50 M (Source: Crunchbase, Company Pitch Deck) in the last 24 months. Naturally, none of these companies can truly be called a “winner” yet given the size of each market. Also, multiple contenders still exist per region whether it is NextTrucking, Convoy and UberFreight in the USA or Blackbuck and Delhivery in India. It is important to remember that VC investors play a dynamic role in shaping these markets. In some cases, VCs play a passive role by waiting until one potential company emerges as the perceived winner and then invest to manifest and extend these market-leading positions. In fact, highly competitive markets, so-called red oceans, are one of the key reasons for us to pass on a start-up pitching to us. In other cases, however, VCs criteria for what counts as a “leading position” are highly subjective. Thus, VC investors (specifically late stage) can also play an active role in shaping these markets by equipping their “perceived winner” with significant capital. In any case, we believe that several segments of the logistics industry share characteristics that favor the creation of continental champions that result in larger financing rounds (often mega rounds) with the promise of building leading positions that—due to the sheer size of the market—turn into incredibly valuable companies.

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Fig. 3 Select players in the global road freight market with funding >$50 M

4 Why Should Logistics Start-Ups Choose VCs Over Other Types of Funding In the next section, we want to make a case for accepting Venture Capital Dollars from the perspective of a start-up founder. To be clear, this is by no means intended to discredit other sources of funding. The rise of alternative investors, specifically Corporate Venture Capital, has been extremely positive for start-ups, founders and the entire ecosystem as it combines deep pockets with industry expertise, specifically in the logistics industry. Quite the opposite, we truly value the input of our colleagues from the Corporate VC world given the unprecedented amount of experience and knowledge they can bring to the table in these discussions. Still, we think it is worth defining the role and value of a Venture Capitalist in an increasingly crowded financing environment by looking at three specific types of entrepreneurial risks that we believe VCs can deal with well:

Organizational Risks Building and scaling an organization is one of if not the crucial challenge that every entrepreneur faces throughout their entrepreneurial journey. How do you grow a team from one to ten employees? How to build a lasting culture once you have hired employee #100? Who are the key people to hire and when? What does it mean to scale to 1000 people in five years? How do you build a wellperforming organization across countries and offices? Here, VCs tend to be at an advantage over other investor types due to a relatively large portfolio of firms spanning the entire company lifecycle. At HV alone, we have invested in over 160 companies of all sizes, forms, and industries and have seen founders and teams master (but also fail) at the daring task of scaling an organization in a hyper-growth phase. Margin Risks Taking a deliberate risk on margin, in the short term, to optimize margins at scale through technology in the long term is near and dear to the VC heart not just since Amazon’s success. Unbiased by “industry-standards,” VCs can take a fresh (sometimes naïve) look at business models and markets and bet on 344

companies taking margin risks. Road freight is one example where a handful of companies sacrifice margin for growth with the hypothesis of building even more profitable businesses through value added services and network optimization at scale. The same pattern applies to many more verticals in the logistics space, from traditional multimodal forwarding to warehousing and VCs are keen on evaluating these bets when getting to know a founding team in the diligence process. Again, that is not to say that other types of investors (e.g., corporate investors or Angels) cannot cope with margin risks nor does it say that we happily accept every type of low-margin business models. Yet we do actively look out for these types of bets as we have seen them succeed in other industries and think it can be worth the reward. Product risks Lastly, VCs are known for being able to take product risks. That is, financing the development and introduction of new technology and products ranging from autonomous robots solving last mile delivery to the various fields of application of blockchain technology in logistics. Moreover, a VC’s large portfolio of different start-ups allows us to benchmark companies at the various stages of development and derive practical implications of what it takes to build and deploy these technologies. As an example, we could share insights on the organizational and regulatory requirements when rolling-out, say a blockchain API, to large enterprise customers drawing from learnings out of our portfolio. Or we could connect the CTO of a start-up trying to extract data from forwarder’s cargo receipts using machine learnings with other HV CTO’s that mastered the same task in other industries and verticals. In a nutshell, we are extremely bullish on the impact of technology, especially in industries with such a low degree of digitalization, and belief that both customers and carriers will profit massively from the introduction of new digital products and services. To summarize all three, we believe that VCs are able to draw insights from a large portfolio of companies on how to (and how not to) build performant organizations in a short amount of time that can provide significant value for early entrepreneurs tackling the massive logistics industry. Additionally, VCs are able to more openly accept “margin risks” commonly found in multiple segments of the logistics industry, especially when compared to other sources of financing.

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5 What Other VCs Say So far, you have read a lot on what we at HV think about the logistics industry and the underlying reasons for the growth in investment herein. To complement the picture, we have asked other leading European VCs to share their take and appetite on the logistics industry. So, without further ado, here is what they say: Logistics makes the world go round but like many other industries, the processes of value creation in the field are changing rapidly. In the light of digital transformation, supply chains are becoming more elastic, developing into flexible supply networks. Through advanced digital interfaces, as well as data analytics and machine learning capabilities, we believe that new entrants into the market will be able to accelerate this process. They deliver superior logistics products by automating processes and augmenting humans in their workflows thus enabling more transparent, faster, and cheaper service across all points of the supply network. (LaFamiglia). The logistics sector is one of the biggest markets with a global size of more than $12 trillions globally. Compared to other industries, the VC market has underinvested that segment with only $4 bn per year within the last 10 years. Digitization has started late - so there´s a big opportunity for innovative start-ups. (Lakestar). Increasing globalization and concomitantly worldwide trade are central engines of growth in today’s world economy. The logistics industry provides the necessary infrastructure—and is facing disruptive digital technologies and novel business models across its entire value chain. From freight forwarding, brokerage and long-distance transport to warehousing, contract logistics and last mile delivery: also in Europe, young, technology-driven start-ups are rethinking processes. Although markets in the USA and China are in many respects more mature, European start-ups are also emerging as credible players in the logistics industry, e.g., Sennder, a Project A portfolio company. As a result, established logistics companies are in many ways forced to engage with 346

digital business models. This opens up unprecedented opportunities for young, ambitious founders to build successful start-ups, which are opportunities we would like to support. (Project A). For decades, logistics has cultivated an infamous reputation of a dusty industry, dominated primarily by old-fashioned logistics conglomerates. Yet, in the light of changing customer demands—such as transparent supply chains and predictable arrival times—the industry is ripe for change: While their sheer size has historically helped incumbents defend their market share, it now prevents them from responding to quickly changing market trends and technical innovation—a billion dollar opportunity for start-ups and agile solution providers. (Speedinvest). About HV Since 2000, HV Holtzbrinck Ventures has been investing in Internet and technology companies across several fund generations and is one of the most successful, experienced and well financed early stage and growth investors in Europe. HV has financed over 180 companies, such as Zalando, Delivery Hero, FlixBus, and SumUp. Over the last years, HV has been an active investor in the logistics industry with investments in, among others, digital road freight forwarder Sennder, digital freight forwarder Zencargo, and tech-enabled warehousing network Warehousing1. The total volume of all funds managed and/or advised by HV is € 1.05 billion. HV supports start-ups with investments from € 500,000 to € 50 m. Hence, it is one of the few venture capital firms in Europe, which is able to support companies through all investment stages.

Footnotes 1 More accurately (but less visual), would be calling them “regional champions” with regards to companies in Russia, China, India and SEA.

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