Trends Shaping the Future of Supply Chain and Logistics
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What’s covered in this blog?
- The United Nations estimates that four billion people, or 54% of the World’s population, live in cities. In the next 15 years, the Economist projects that urbanization will increase average city density by 30%.
- Allan Rutter told BRINK news: “Given how integrated supply chains are, given how distributed people’s warehousing is, how much sourcing and manufacturing moves from one place to another where value is added, I’d have to say that urban congestion is going to affect pretty much everyone along the supply chain”.
- According to a report by the Reason Foundation, Nearly 5% of urban roads were reported in need of repair in 2015. According to ARTBA, 54,000 of the nation’s 612,000 bridges (~8%) are rated “structurally deficient.”
- From 1999–2017, e-commerce sales increased 30x, and e-commerce is growing nearly 20x faster than brick and mortar retail. Brick and mortar sales volume, however, is about 9x that of e-commerce.
- Congestion could lead to a 20% diversion of cargo from truck to rail, equating to a 33% increase of 8.5M rail intermodal shipments per year. BTS points out that inland barges can carry about 15 rail cars or 60 large semi-truck trailers worth of freight.
- According to research from Virtual Container Pool: Solution to Container Inventory Imbalance, about 30% of containers in circulation are empty and spend about half of their life sitting idle or shipped without cargo.
The supply chain and logistics industry is often considered a dinosaur, largely unchanged for decades and lingering in a non-digital world. This is of course an oversimplification, and in last decade, leaders like Amazon and Flexport have been transforming the industry with increasing last mile delivery standards and supply chain data transparency.
Today’s supply chain and logistics industry offers a long list of frustrating, inert problems that are begging to be solved. In 2019, we have the technology to solve, at the very least, inefficiencies like paper pushing, data collection/entry, and restrictive networks.
In this blog post, you’ll find insights on some of the major challenges and trends shaping the future of supply chain and logistics. Topics discussed include urbanization and congestion, the rise of e-commerce, alternative transportation modes, crowdsource logistics, autonomous vehicles, and predictive maintenance.
Urbanization: By 2050, two thirds of the global population will live in cities.
Today, the United Nations estimates that four billion people, or 54% of the World’s population, live in cities. In the next 15 years, the Economist projects that urbanization will increase average city density by 30%. By 2050, the ranks of urban dwellers will swell by 2.5 billion to nearly two-thirds of global population.
The charts above highlight findings from a Pew Research Center analysis of U.S. census data, in which Pew found, “since 2000, more people left rural counties for urban, suburban or small metro counties than moved in from those areas.”
Congestion: As urban areas become more saturated, traffic congestion will continue to negatively impact truckers and their customers.
Allan Rutter, freight practice leader at the Texas A&M Transportation Institute, told BRINK news: “Given how integrated supply chains are, given how distributed people’s warehousing is, how much sourcing and manufacturing moves from one place to another where value is added, I’d have to say that urban congestion is going to affect pretty much everyone along the supply chain”.
The chart and two maps above show the congestion index for both the US and Los Angeles, which is one of the most congested cities in North America. Juxtaposing Los Angeles and the US’s congestion index on the same chart provides insight into the large-scale congestion issues urban cities face. The US’s congestion index is significantly lower than Los Angeles’ likely because of low congestion rural outliers bringing the aggregate index down.
The traffic maps of Los Angeles in 2016 and projected 2045 reinforce the immediate need to find solutions that reduce traffic congestion. Notice how in the maps the red-shaded roadways (indicating high congestion) not only increases in the center of Los Angeles but also expands to highways that connect/pass by the city.
Like a virus, traffic congestion, if not addressed on many fronts, will continue to gradually spread beyond major metropolitan areas. Usually, warehouses and truck yards sit on the fringes of cities. As dense congestion spreads, we may also see more supply chain transportation and storage infrastructure move proximity farther away from urban centers.
As congestion increases across the US, infrastructure deterioration is cause for concern. According to a report by the Reason Foundation, Nearly 5% of urban roads were reported in need of repair in 2015. Also, according to the American Road and Transportation Builders Association, 54,000 of the nation’s 612,000 bridges (~8%) are rated “structurally deficient.” Considering drivers cross these deficient bridges 174 million times a day, not only is there a logistical risk associated with infrastructure deterioration but also a serious safety risk.
Infrastructure deterioration is a natural effect of increased traffic. Gasoline tax contributes to the budget for roadway repair and maintenance. In California, 59% of gasoline tax was allocated to roadway upkeep in 2018. Shown in the chart above, since 1999, gasoline tax has remained consistent at 18.4% per gallon. While gas tax is only one piece of the overall budgeting picture, the charts were created to get us thinking about solutions to the increasing road damage and funding requirements for infrastructure upkeep.
E-commerce: brick and mortar retail sales volume is 9x that of e-commerce, yet Amazon e-commerce continues to grow YoY while many brick and mortar retail icons file for bankruptcy.
From 1999–2017, e-commerce sales increased 30x, and e-commerce is growing nearly 20x faster than brick and mortar retail. Brick and mortar sales volume, however, is about 9x that of e-commerce. While e-commerce is bound to catch up to brick and mortar retail as shown in the chart below, it’s smart to have omni-channel initiatives built into a retail strategy.
Unlike the many now-bankrupt brick and mortar retailers who strived for relevance online, Amazon, being born through the internet, faces the reverse challenge of growing their omni channel presence through their Whole Foods and Amazon Go stores. Amazon and others, such as Brooks Brothers, think about brick and mortar through a hub-and-spoke model, where physical retail locations can be the hub for storing inventory, which then spokes out to customers ordering online. This hub-and-spoke model (a.k.a. Last Mile Fulfillment Centers) represented 73% of the industrial real estate market in 2017.
Walmart’s CEO Doug McMillon also sees value in the hub-and-spoke model saying in an interview with Supply Chain Dive, “The boundaries between physical and online retail continue to blur and we’re in a great position to capitalize on that… [Walmart’s] super-centers can double as fulfillment centers and stores and also generate a great store experience”.
The below chart shows an impressive statistic, where about 80% of e-commerce growth in 2017 was directly attributed to Amazon sales.
The two charts below highlight some of the bigger brick and mortar bankruptcies of 2018 alone. As digital marketplaces, such as Amazon, grow by enabling customers to order anything from anywhere, brick and mortar retail icons will find differentiation through creating a strong omni channel experiences for customer.
Any company’s omni-channel experience is only as strong as their supply chain. Offering customers timely home deliveries, the right inventory at the right stores, and a seamless return/reverse logistics process sets the foundation for retail differentiation and a delightful customer experience.
Autonomous Trucking: driver wage and fuel cost make up 54% of a truck’s operating cost.
Highlighted in the charts below, wages and fuel cost are reported as making up half of the total cost of tucking. Analysts, however, forecast that trucking operating cost will drop 40% in the next 15 years. Autonomous trucking initiatives will help to drive down the costs of managing a trucking fleet.
Besides operating cost, regulation is unpredictable in the short-term as lawmakers assess safety and the willingness of the public to drive alongside driverless trucks going around 70 miles per hour on the highway.
In the two charts below, the various levels of automobile autonomy are highlighted. Level 2 autonomy, which still requires a human in the front seat ready to act if autonomous features fail, is one of the more common level-deployments of autonomous trucking today.
Platooning, which is largely defined by a series of trucks linked and traveling in a convoy lead by a single truck, has been deployed in the US by companies such as Peloton. Platooning, as highlighted in the chart below, is currently reducing fuel costs for early adopters.
As 87% of truck crashes are caused by human drivers, In the long-run, a big goal of platoons and autonomous trucks as a whole is to not only reduce costs for operators but also to increase road safety.
Alternative Modes of Transport: congestion could lead to a 20% diversion of cargo from truck to rail.
Autonomous vehicles have the potential to save time and improve safety for commuters. However, a recent report by the World Economic Forum and Boston Consulting Group reports findings that autonomous vehicles could actually increase congestion in downtown areas. If congestion increases in downtown areas, congestion will likely also increase on the roads that connect/circulate through and around cities.
In an effort to avoid projected congestion increase, alternative modes of transportation, such as rail or inland-waterways (current sate), robotics/drones (kind of current state), and hyperloop (future state) are all being explored as alternatives to trucking.
In a the report, Autonomous Traffic Jam, the author predicts that congestion could lead to a 20% diversion of cargo from truck to rail, equating to a 33% increase of 8.5M rail intermodal shipments per year. The below chart highlights the growth of rail intermodal shipment, with a 58% increase in rail traffic from 2000–2018.
Hyperloop has an appealing tagline that I’m sure many supply chain folks and beyond will appreciate: the speed of flight at the cost of trucking. The chart below shows a basic breakdown of cost and transit time between air, truck, and hyperloop to highlight the point. While a freight carrying Hyperloop is still future state, the promise of low-cost, high-speed rail is keeping several startups hard at work.
Ignoring air transport, which is ideal for high value timely freight, intermodal from truck>ocean>truck is perhaps the fastest, most reliable way to ship and receive goods. As this blog has pointed out though, the roadways are likely going to become even more congested over time (excluding innovations that will solve road congestion like Elon Musk’s Boring Company, which is not widely accessible in 2019).
As road congestion increases, rail is a simple alternative, which is tested and dependable with large volumes. Without discounting rail, some shippers may find success with inland waterways. The Bureau of Transportation Statistics points out that inland waterways provide an alternative to truck and rail transportation if a shipper is planning to feed cargo onto a mother vessel. Inland barges can carry about 15 rail cars or 60 large semi-truck trailers worth of freight.
Alternative methods of shipping cargo to and from sea ports and fulfillment centers will become more prominent over time as road congestion grows. Due to the large infrastructure investment requirement of alternative modes of transport, we will continue to see visionary concepts like hyperloop, drone delivery, and underground boring come to media attention, but the implementation and impact of these moon-shot transportation disruptions will be seen slowly over the next couple decades.
Equipment Rental/Pooling: containers in circulation sit idle or are shipped without cargo for about half of their lifetime.
Something I always found interesting about the global freight world is the staggering number of containers imported and exported each year that are empty (i.e. no cargo, only the empty box). The first chart below highlights the number of imports/exports of empty containers each year out of the port of Los Angeles, which has historically been the busiest sea port in North America by volume.
The reason for so many empty containers being imported/exported largely has to do with trade imbalance. The US, for instance, is a net importer. Logically it makes sense that empty containers accumulate at and around US ports waiting to be exported. Of course not all empty containers can sit waiting for their opportunity to be paired with a shipper. Often, empty containers in the US are loaded and shipped to areas where they are needed–such as back to China.
According to research from Virtual Container Pool: Solution to Container Inventory Imbalance, about 30% of containers in circulation are empty and spend about half of their 8-year life sitting idle or shipped without cargo. It’s staggering to imagine that ocean carriers own assets that are cash flow negative for nearly half of their lifetime — 4 years! Considering how ocean shipping is not a high margin business, the lack of container utilization takes a large hit on carrier’s bottom line–ocean carriers spend up to $100B on operating container assets with ~$15B coming directly from container repositioning.
Beyond containers, the underutilization of assets, such as in less-than-truckload (LTL) shipping, air unit load devices (ULDs), warehouse space, and automobiles, is a prolific cost problem in supply chain and logistics. To solve the problem of underutilized assets, existing and new companies are spinning up new offerings, whether it be FLEXE on demand warehousing or Uber Freight Powerloop trailer drop and hook program.
Crowd Sourced Logistics (CSL): the average automobile sits parked 96% of its lifetime.
Customers are extremely demanding when it comes to delivery expectations. For instance, in 2018, the majority of customer expect deliveries with 2 days of placing an order.
To meet customer’s increasing delivery demands, the supply chain and logistics industry needed to reimagine last mile delivery. Gone are the days where items can sit in inventory awaiting trucking capacity to make a final delivery. Today, offering at least 2 day delivery is table stakes for most online retailer, while same day is an expectation for food and medical deliveries.
The two charts below spotlight both the increasing cost of same day delivery and the majority share of cost attributed to last mile delivery.
Highlighted below, you can see that about 90% of delivery cost is attributed to the transportation of a shipment from a fulfillment center to door.
In urban areas, automobiles are sitting unused 96% of their lifetime. In an effort to create value off the disperse, underutilized fleet of urban vehicles, companies like Uber and Instacart ushered in the new industry vertical of crowdsourced logistics.
Just how effective is crowdsourced logistics? In a study called Crowdsourcing Last Mile Delivery: Strategic Implications and Future Research Directions, Vincent Castillo, John Bell, William Rose, and Alexandre Rodrigues modeled the on-time delivery rate and volume of deliveries made between a fleet of crowdsourced (CSL) and dedicated (DED) trucks. The researcher segmented the study by delivery window (i.e. how fast customer expect their deliveries to be made) and demand.
Delivery Window Definitions:
- Flex: majority of customers expect deliveries within a 2 hour time window.
- Standard: majority of customers expect deliveries within a 1 or 2 hour time window.
- Maximum: majority of customers expect deliveries within a 1 hour time window.
Demand Definitions:
- Actual: average daily demand.
- Extreme-Morning: high level of demand in the morning.
- Extreme-Afternoon: high level of demand in the afternoon.
Notice in the charts/simulation above, dedicated fleets of trucks perform better than crowdsourced fleets on almost all occasions. The only part of the simulation where crowdsourced fleets outperformed the dedicated fleet was when there was extreme morning demand. In the extreme morning demand situation crowdsourced fleets could make more total deliveries than the dedicated fleet, but their on-time delivery rate was still lower.
Because crowdsourced fleets are theoretically not capacity constrained, when there are large spikes in total delivery volumes, they can meet demand. However, crowdsourced fleets come with uncertainty–i.e. drivers control their own schedule, so there is no promise that a crowdsourced fleet will be able to meet any level of demand–It’s a chicken before the egg problem: to recruit critical mass of drivers, there needs to be demand, and to win demand over dedicated fleets, there need to be enough driver capacity.
I’d expect that the variance between crowdsourced and dedicated fleets will reduce as the industry vertical matures and both more drivers and customers utilize crowdsourced logistics as a means to employment and last mile logistics.
How to Keep Engaged
In the next couple weeks, we’ll be releasing more on supply chain and logistics, highlighting trends related automated inspection, asset monitoring, predictive maintenance and more, including general commentary about topics we find exciting.
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