The Big and Hairy Problems in Shipping and Logistics
Did you know total logistics costs globally amount to 10% of GDP? That’s $7T. The GDP of the US is $18T in comparison. It’s huge. Moreover, the need for modernization is everywhere.
The most visible part of this market is carriers — those who own the modes of transportation such as ships, trucks, planes, and trains, as well as those who run the warehouses and ports. The connective tissue between these asset-based carriers are asset-light third-party logistics providers, or 3PLs. Working behind the scenes, 3PLs are a $700B industry.
Often overlooked, a substantial part of the logistics market is inventory holdings. As the need to hold inventory is negatively correlated with lead time and variability, it also reflects logistics costs. The value of business inventories in the US alone amounts to $2.3T, resulting in annual carrying costs of ~$500B.
In many ways, the supply side of logistics is still stuck in the old world. They have fallen behind as an increasing number of their customers, the demand side, moved to e-commerce, cloud-based records and communications, and ever-quicker product cycles. This translates to enormous opportunities for innovation and value creation.
The pain points on the supply side are significant — with each a multi-million-dollar market, startups are not shy to tackle these interesting challenges.
1. High capital requirement
Obviously, logistics require carriers to make enormous investments in assets such as ships, planes, and trucks. The hub-and-spoke networks where much of shipping and trucking happen through — you guessed it — require building CapEx-intensive warehouses and ports as the hubs.
Such heavy asset base is a formidable moat protecting the incumbents, but it also causes problems. For example, the overcapacity among shipping lines in recent years due to over-building has led to financial struggles for the players. The largest container shipping line, Maersk Line, saw revenue declining from $49B in 2012 to $35B in 2016, EBITDA almost cut in half, and profits going into the red for the first time in 2016. Margins for shipping carriers have been razor thin and overcapacity is expected to worsen through 2020.
On the other end of the market, last-mile delivery has also been challenging due to the logistical complexity of intra-city deliveries. Efforts like drones (e.g., Amazon Prime Air, Matternet, Flirty, Volans-i) and delivery robots (e.g., StarShip Technologies, Marble, Robby Technologies, Boxbot) attempt to reduce the infrastructure needed for last-mile delivery. Instead of using delivery trucks to navigate city streets with varying clearances and be at the mercy of city traffic, drones or robots can bypass those and deliver straight to your doorstep.
2. High inventory levels
There is $500B in annual inventory carrying costs in the US. To see why, if a good takes 3 months to manufacture in China and 3–6 weeks to get shipped to the US, then you would need to hold 4.5 months of inventory on hand. In fact, you would likely need to both hold and order more inventory in order to compensate for unpredictable circumstances and the resulting delays that are facts of life in logistics, also known as the bullwhip effect.
Higher supply chain visibility can cut carrying costs by $40B in the US and $160B globally over the next decade.
IoT devices can monitor and track individual shipments, providing real-time visibility for their locations to customers in order to help them better anticipate delays and make plans. For example, Samsara, Nimble Wireless, Armada, Weft make Wifi-, GPS-, and/or cellular-enabled tracking devices as well as the associated dashboards and analytics software — enabling cloud-based, next generation ERP systems.
3. Low asset utilization
30% of the trucks on the road are empty and 60% are less than half full. Similarly for container ships: container fleet utilization stands at 50–90% depending on the trade lane, or an origin-destination pair.
There are two main reasons reasons for this inefficiency. The first is backhaul: when trucks return from their destinations to their origin, often they don’t have another load to carry or can only find a partial load for a part of the route. The second is express deliveries: as Amazon Prime has trained consumers to expect ever-faster deliveries, the impact trickles down and allows less flexibility for carriers to pick up an extra load on the way or allow them to wait until they have a full truck before having to depart.
It’s not hard to see, then, that minor improvements can have a large impact: every 1% improvement in container ship utilization is worth $1B in annual cost.
Startups are leveraging data to improve transparency of ocean freight prices and capacity, thereby enabling brokers, shippers, and carriers to better understand where the inefficiencies are and take action. Examples include Xeneta, Panjiva, and ClearMetal.
4. Low workflow automation
It takes 24–48 hours to get a shipment quote from a traditional freight forwarder. Why? If you get raw materials from Asia, your freight forwarder needs to find a truck to get your goods to the port, where it then needs to find a ship to carry your goods to the US, and finally, it needs to find another truck to get your goods to your warehouse at destination, before you can even think about shipping it downstream in your supply chain. During this process, it likely also needs to file with the relevant government agencies, clear customs, go through inspections, be insured, and locate intermediary warehouses, if needed. Today, all this coordination is done by phones and faxes in a very decentralized network of relationships. The documentation to be on a ship is hundreds of pages alone.
Similarly, a trucking broker books only 3–4 shipments per day. Overland transportation, especially Less-Than-Truckload (LTL) trucking, has even more complications. By definition, LTL trucking requires picking up and dropping off at multiple places, which requires coordination and loading and unloading. Add onto this that by union rules, truck drivers can’t drive for more than 11 hours per day. A delay in loading, a closed loading dock, unpredictable weather or traffic, and myriad other things can have a trickle down effect. What does a broker do when the truck doesn’t show up? Pick up the phone and call.
Automating the data input functions in 3PLs could save up to $40B per year.
A rising crop of tech-enabled freight brokers are building brokerages from the ground up. The difference is that they’re building tech to streamline and automate their broker operations where they can, through which they can improve asset utilization and drive down costs. Flexport is the most well-known among those brokering seafreight, but newer entrants include Shippabo and Fraight AI. As for domestic trucking, there is Convoy, Transfix, and Uber Freight.
5. Labor intensive
1 in 16 American workers are employed in a trucking-related job. Turnover rates at large truck fleets is 80%+. Long-haul trucking is particularly challenged, as it is a difficult job that requires the truck drivers to be away from their families when they’re on the road on multi-day trips.
As a result, long-haul trucking faces an increasing shortage in drivers, estimated at 50,000–100,000 gap in the US today. Carriers have responded by offering high salaries (often exceeding $70,000 per year) and free education, but the trend continues.
For enterprise customers like General Mills that have significant demand for shipping, they talk about needing to plan around these labor shortages and prioritizing their freight needs with carriers.
The most visible efforts here are companies developing self-driving trucks for long-haul trucking, such as Uber, Google’s Waymo, and Starsky Robotics. Human operators will still be needed to navigate city streets and load / unload, but the truck can navigate thousands of miles of highway driving without fatigue or driving time limitations.
Automation is also happening in the back office. Startups are developing workflow tools, integrating with the disparate systems, bringing carriers into the digital age, and enabling parties to collaborate more easily. For example, startups such as Turvo, Haven, and RoseRocket are allowing carriers, shippers, and brokers to improve their staff’s productivity and reduce the overhead cost per job.
These innovations are certainly exciting, though unsurprisingly, there are big sectors that remain sleepy and have yet to be challenged. If you’re a startup addressing any of these issues and want to share what you’re working on, drop me a line at chang@upfront.com.
This is the second article in a series about shipping and logistics. Other articles are:
- Thriving Industries Based in LA That You Would’ve Never Guessed
- The Big and Hairy Problems in Shipping and Logistics
- The Evolution of Logistics: Is the Industry Ready for Your Startup?
- How We Evaluate Startups in Shipping and Logistics
*Goldman Sachs’ excellent 2017 “Logistics Digitization” report provided a number of data points used in this article.
