EDIs To APIs: The on-going transformation in Transportation and Logistics
There are few defining moments in history where technological developments enable a wave of new innovation. It’s even more rare to appreciate their significance and be a part of trailblazing these transformations as they occur.
To truly understand the importance of this period in shipping and logistics and its future implications, we look at a similar transformation which occurred in the airline/travel industry.
Pre Computer Era: < 1964
In the early days of the airline industry supply and demand were very limited, as a result reservations could be maintained in a single physical ledger book. As larger airlines were introduced, multiple ledgers were required. Eventually these multiple ledgers were maintained on a turnaround table, with operators sitting around the table. As demand grew, this approach also reached its limitation; multiple ledgers had to be frequently reconciled to prevent overbooking. By the 1940s most reservation systems had transitioned to a centrally managed board similar to the image below. This manual process took approximately 45–90 mins to complete a reservation.
There are two key characteristics defined in this era. First, market forces acted as a catalyst to drive changes in the reservation methodology and would continue to do so in the future. Second, an operationally intensive booking process required significant labor and time for each transaction.
Post Computer Era: 1964–1990
In 1964 IBM and American Airlines launched SABRE (Semi-Automatic Business Research Environment). SABRE was technically impressive for 1960s technology. It had reliable synchronous messaging, store and forward messaging, complex database schemas and distributed database consistency.
The automated real time nature of SABRE enabled reservations to be completed in under a few minutes. The industry realized the efficiencies of an automated system. Almost a decade after SABRE was released, the top ten US airlines all had automated systems similar to the original SABRE implementation. These were referred to as central reservation systems (CRS).
SIDE NOTE: Have you were wondered why your booking confirmation number is six characters long ? Historically this used to be the memory address (pointer) on a physical disk where your itinerary details were stored.
Eventually travel agents also had access to these CRSs. However, they were highly fragmented with each airline or consortium having their own CRS.There were two important characteristics that defined this era.
First, recognizing technology adoption and automation was a necessity. Second, a highly fragmented industry discouraged innovation and created barriers to entry.
Internet/API Era: 1990-Current
In the early 1990s, the Department of Transportation (DOT) introduced regulation which required CRS to cooperate with other competing CRS and encouraged airlines to divest their ownership of CRSs. This led to the formation of multiple global distribution systems (GDSs) which provided software enabled platforms (including APIs) and finally allowed travel agencies to interoperate seamlessly among multiple airlines and CRS.
GDSs provided aggregated access points in a previously fragmented industry and as a result, unlocked significant economic value for the whole industry.
The key takeaways from this era were regulatory changes and software enablement were key drivers for innovation.
The Transformation — Shipping and Logistics
In this section we take the six key characteristics that we extrapolated from the airline industry and demonstrate how they will transform the logistics industry over the next decade.
The points below will be discussed within the context of over the road freight, which is currently an $800 billion dollar market in the US and newtrul’s primary focus.
There are three important actors within the industry: shippers, brokers and carriers. Shippers are a person or entity who produces and/or owns goods and commodities that are required to be shipped. Carriers are a person or entity that can have one or many trucks and physically move the goods from the origin to destination. Freight Brokers act as an intermediary between shippers and carriers. They arrange for the transportation of goods by a carrier on behalf of the shippers and collect a premium.
Shippers do have existing relationships with carriers to move their goods; however, they also often rely on brokers to delegate the responsibility of finding carriers and moving goods. The freight brokerage is currently a $60 billion business. Now that we have the scene lets look at the key characteristics.
1.Operationally Intensive Transactions
Domestic trucking still remains a very operationally intensive industry. Less than 10% of loads are digitally booked. Instead the industry primarily utilizes paper, spreadsheets, email and phone-calls to conduct business. Often booking a load requires multiple back and forth calls. If an adequate price cannot be negotiated, the load gets rolled over to the next day. An argument could be made that this process is even more cumbersome than the pre computer era of the airline industry.
2. Market Forces As a Catalyst For Change
Historically there had been little incentive to change. However there are two market forces currently driving change:
Amazon Effect: Refers to the impact that digitalization has on traditional businesses and the change in shopping patterns, customer expectation and the competitive landscape.
Amazon’s continued investment into its fulfillment centers and its own delivery services, including 7500 trailer trucks, has allowed them to exceed expectations and deliver convenience to their customers.
As a result consumers now expect orders to be fulfilled same day or next day. These expectations add pressure throughout the supply chain to optimize and seek operational efficiencies including adopting technology
Digital Freight Brokers: Uber Freight, Transfix, and Convoy are relatively new entrants in the domestic trucking market; they are technology first brokers who efficiently match loads with carriers.
Both of these market forces are driving significant change in the industry.
3. Technological Adoption
Similar to the airline industry technological adoption is no longer optional but rather a necessity. In a highly fragmented market, technology drives economies of scale, which allows access to a greater number of carriers to provide more competitive rates with quicker turnaround times.
Industry leaders have been early to recognize the need to adopt technology.
Our 2019 investment in technology was among the highest in our industry at approximately $550 million. We concentrate our technology efforts in four areas: our digital freight marketplace, automation and intelligent machines, dynamic data science, and visibility and customer service, specifically in the e-commerce supply chain. XPO Logistics 2019 Annual report
This trend of continued technological investment is consistent with other market leaders including ECHO and CHRW, which has resulted in YoY % increase in market share for these companies.
In contrast, with less capital to invest, the medium to smaller size shippers, brokers and carriers have been slower to adopt technology. To remain competitive these companies must proactively ask more from their service providers and seek out tech/SaaS offerings to ensure they do not get left behind. We have already seen a consolidation in the industry from ~21,000 brokers in 2013 to ~13,000 by 2020.
4. Regulatory Changes
The Federal Motor Carrier Safety Administration (FMCSA) published the Electronic Logging Device (ELD) rule. The primary goal of this mandate was to increase driver safety by ensuring they do not exceed a maximum number of hours. The mandate requires:
-Drivers must track their hours of service electronically.
-The actual drive time must be synchronized with the engine.
-Finally, e-logs must be accessible in real time.
This has led to a proliferation of ELD providers. Even though the mandate when into effect December 2017, full enforcement did not begin till April 2018.
This regulatory implementation is still in its early days and there is still a lot of value to be realized including the second order effects of visibility, access to where trucks are currently located and forecasting how long until goods are delivered.
5. High Fragmentation
The market is composed of approximately 2 million shippers, 13,000 brokers and 3.5 million trucks. In addition, they all use many different proprietary software, across numerous versions to manage their business needs. It is an extremely fragmented market especially when compared to the airline industry which currently has approximately 5000 airlines in total. As we discussed before this high fragmentation is often a barrier to entry for new startups entering the space.
6. API Enablement
The industry is currently centered around Electronic Data Interchange (EDI) as a means of electronic communication. EDIs are standardized documents of specific types which represent various transaction sets: 204 Load Tender, 990 Response Load Tender, 211 Bill of Lading, 214 Shipment Status etc. EDIs were a significant improvement to paper based workflows. However implementation of EDIs has not significantly changed since the 1970s and as a result, is not equipped for modern day needs.
The asynchronous file based nature of EDIs combined with no transmission time guarantees and custom implementations does not allow for scalable, realtime load, fleet and inventory management. Even though EDIs have accepted data format there can be various standards including TRADACOMS, UN/EDIFACT, ANSI ASC X12, and ODETTE. Therefore each implementation will be dependent on trading partners. EDIs are also expensive to implement and maintain. This results in smaller businesses being excluded from transacting with larger organizations.
A trend is emerging in the industry that EDIs will eventually be superseded by APIs. We believe this will have a very similar effect to the impact GDSs had on the airline industry. A highly fragmented industry will now be navigated effectively and efficiently via APIs providing significant opportunities
Conclusion
Like many others in the space, we are committed to transforming the industry. However, that’s just the beginning. At newtrul, we’re obsessed with giving carriers, who struggle with expensive operations and low margins, the tools they need to make the best decisions possible. That requires speed, flexibility, data and a modern interface. If you are a solutions minded individual who is hyper focused on digital transformation, please introduce yourself. We’d love to chat!
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References:
https://en.wikipedia.org/wiki/Global_distribution_system
https://ethw.org/SABRE_Airline_Reservation_System
https://www.sabre.com/files/Sabre-History.pdf
https://static.seekingalpha.com/uploads/2018/7/48272473_15319883731638_rId6.jpg
https://web.archive.org/web/20170612095003/http://www.tailsthroughtime.com/2015_06_01_archive.html
https://www.youtube.com/watch?v=8_t41xvPp1w
https://seekingalpha.com/article/4188304-journeying-around-world-investing-in-travel
https://www.businesstravelnews.com/Research/Distribution/A-Brief-History-of-Air-Travel-Distribution
http://www.turismeproactiu.com/en/are-we-slaves-of-otas/
https://www.forbes.com/forbes-insights/our-work/transportation-2023/
https://www.youtube.com/watch?v=1PHJkm_nNL8
https://skift.com/history-of-online-travel/
https://www.redwoodlogistics.com/electronic-data-interchange-edi-transportation/
https://agile-ideation.com/information-assurance/2011/2/17/edi-advantages-and-disadvantages.htm