Digital Freight Forwarders: The travel agents of container shipping
The logistics industry has been at the forefront of technology for decades. In 1994, FedEx launched it’s website which allowed customers to book and track parcel deliveries making it one of the internet’s first useful applications. The container is perhaps the most profound technology adopted by some logistics players in the 1950s and standardized in the 1970s. The next wave of innovation in the logistics industry will be driven by the adoption of the ever so ubiquitous machine learning algorithms sweeping many other industries.
At the core of the industry are the carriers who operate physical assets such as vessels, trucks, planes, and ports. Carriers can benefit from adopting machine learning algorithms to optimize everything from their forecasts to stowage planning. Although these players, such as Maersk, are technologically advanced, I will focus on Freight Forwarders who are asset light players that can be thought of as international trade’s travel agent.
Freight Forwarders employ hundreds of people to find the best route for a container, retrieve quotes via email and phone, fill customs clearance documents, prepare Bills of Lading, and send them back and forth. The work is complex with exceptions but it is mostly routine. Furthermore, there is significant interchange of information among many parties. At best, information exchange is done via inflexible EDIs but more likely via emails, phone calls, and CSV files. Verifying whether customers are on the Denied Parties list is a simple example of a manual process cited by FlexPort CEO Ryan Petersen: “The default now is to go to export.gov, download it as a CSV file, put it in Excel, push control + F, and see if a name is matched.” Flexport has automated this process now using fuzzy algorithms.
Keuhne + Nagel, the largest and most tech savvy freight forwarder, spends $180 on labor per container. And they only have ~3% share of the ocean freight market (estimate vary widely). I assume the rest of the market operates at much lower efficiency levels. Labor costs for container ocean shipping alone would represent a $23bn opportunity (World Shipping Council: 128m TEUs in 2014); K+N records a gross profit per TEU of $370 equating to $47bn for global containers shipped. The numbers are multiples larger if you include the trucking and air freight markets.
To automate these labor intensive processes, Digital Freight Forwarders need to build the data infrastructure for its ecosystem. To do so, Digital Freight Forwarders have to build mutually beneficial relationships with carriers (ship/truck/plane operator), customs authorities, and many other parties. In return for data access, Digital Freight Forwarders can offer carriers more accurate demand forecasting, efficient booking processes, and targeted distribution (to offset structural imbalances). They can also create value for shippers. Besides price, which not all shippers are sensitive to, digital freight forwarded can provide customers with supply chain analytics, advanced inventory management, service level improvements, and seamless booking. Many of these partners will be local in nature and as such, tech startups may need to expand their international presence quickly.
The most prominent startup in the space is Flexport, but there are also Digital Freight Forwarders here in Europe such as Freight Hub in Germany. These players are building the infrastructure the industry will soon run on.
Freight Forwarders today are where travel agents were in the late 90s. It is just a matter of time until booking a container from a manufacturing facility in Tianjin to a warehouse in Berlin is as easy as booking a weekend trip on Expedia.
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