Avenues for growth

Andrew Tipping, Principal, PwC US, highlights current trends, explores strategies freight carriers can use to survive in a fiercely competitive market and talks about the way moving forward…

On the surface, the commercial freight transportation and logistics industry looked calm over the last year. However, beneath the relative tranquillity, roiling forces were (and are) at work. These dynamics are rooted primarily in the changing needs of commercial transportation and logistics customers. Shippers’ supply chains are becoming ever more complex, even in market segments where their needs have been relatively straightforward in the past. These changes are best encapsulated by five trends:

• The fracturing of supply chains, which increasingly feature a mix of offshore, nearshore, and onshore locations, and the expanding number of nodes in shipper distribution networks aimed at reducing delivery time to customers from days to hours.
• The rising recognition among shippers that transportation and logistics can yield a considerable competitive advantage for them; shipping is no longer a tactical decision influenced solely by cost, but rather a strategic consideration based on such factors as customer expectations, sales volume, and product mix.
• The expanded presence of high-margin shippers selling valuable and sensitive products, such as specialty pharmaceuticals and fragile electronic equipment, that require exceptional handling, security, reliability, and tracking procedures from their transportation companies.
• The frequency and magnitude of disruptive events – higher peaks in demand, “100-year” storms and other natural disasters, labour strikes, and geopolitical uncertainties — that are causing shippers to re-evaluate their procurement tactics and the efficacy of their logistics networks.
• The double-digit growth of e-commerce and the inroads that it is making in the business-to-business arena, where shipment complexity is higher and transparency and tracking requirements are greater. These trends are creating new demand patterns for the commercial freight transportation and logistics industry. Shippers want logistics partners that can operate across their diverse supply chains and distribution networks and that are strategically inclined – as comfortable in the C-suite as in a buyer’s office. Shippers particularly seek carriers that can accommodate spikes in volume and maintain a high level of performance during disruptions. And they are looking for business-enhancing opportunities, such as 3D printing and digitally enabled solutions that provide visibility into multiple vendors, greater price transparency, and a consumer-like user experience.

Enter the disruptors

Established commercial freight and logistics companies are generally not suited to satisfying their customers’ full range of new preferences. Their network configurations, physical assets, skills, and service offerings are the product of an earlier set of market conditions and customer expectations. As a result, a raft of new competitors are slicing off bits and pieces of the logistics sector, offering targeted services that some shippers perceive as providing more value and innovation than the more traditional, wider but less specialised, menus of the larger companies. One category of disruptor — let’s call it “local network builders” — bucks the conventional model of centralised warehousing and expansive transportation networks for a distributed, localised structure that exploits the benefits of speed and dynamic flexibility at a competitive cost. Currently, leading e-commerce retailers like Amazon.com are building such networks for themselves. But it doesn’t take much imagination to see the emergence of third-party logistics consolidators — perhaps the aforementioned retailers themselves — that can build out local networks providing better service than established carriers. Another kind of disruptor could be termed “crowdsourcing fillers.” Such companies leverage the fundamentals of social networks to offer shippers the supply chain flexibility and agility that they need to better manage surge capacity and network disruptions. This category includes firms like Cargomatic, which connects shippers and carriers through Web and mobile apps, and Roadie, which connects customers to people who will transport their stuff. The success of these businesses is not a foregone conclusion, but their very existence suggests that a creative and flexible model that addresses today’s workforce challenges — such as driver availability and unionisation — eventually will succeed. A third sort of disruptor is something we might call “start-up simplifiers.” These companies target new and small shippers that don’t offer enough volume to warrant the attention of larger carriers. Their elevator pitch is that they view such shippers as more than just high-margin customers to be harvested by a specialised sales force. Rather, they see small shippers as a distinct customer segment that requires specific and differentiated products and services. Their offerings often go beyond shipments to a broader set of logistics activities, such as website design and online channel management. ShipStation and uShip are two companies in this niche. A fourth disruptor could be labelled “big data manipulators.” They use a strategy that harnesses digital capabilities and the power of analytics to satisfy shippers that require more consumer-like buying experiences and greater control over their shipments. When managed well, these services can also yield substantial cost savings for the carriers and logistics companies that provide them. These savings can be reinvested in extending their digital competence. Companies such as Echo Global Logistics and Keychain Logistics are good examples of players pursuing this strategy. An appropriate name for the final disruptor type is “hybrid carriers,” because they seek to balance the traditional divide between asset-light and asset-heavy models, creating a combined ground network that offers the best of both — a base load of fully controlled, owned equipment plus a portfolio of instantly available non-owned equipment that can be contracted to manage demand fluctuations.

Companies such as XPO Logistics, which recently acquired Con-way Trucking for US$3 billion to enhance its small freight portfolio in North America, are adopting this approach and rapidly expanding their transportation and logistics services. It’s highly unlikely that any one of these new niche value offerings will come to dominate the commercial freight transportation and logistics industry (or that these are the only new strategies we will see), but they are already reshaping the sector. Many additional competitors will arise in the near future, including but not limited to Amazon, which most of the industry views as the most threatening disruptor.

Disrupt yourself

What should executives of established commercial transportation and logistics companies do to defend against these disruptive business models? How can you strengthen your market position in the current environment? We believe the answer lies in developing a set of capabilities that address changing customer needs, that are sufficiently flexible to shift direction to match those changing customer preferences, and, importantly, that take advantage of the deep specialisation that your firm excels in while greatly improving operating efficiencies to drive optimum performance. That’s a tall order — and one that most logistics firms are not prepared to take on.

To help in this transformation, here are some pathways for success, focusing especially on required priorities and skills:

• Create a better balance between customer needs and operational efficiencies. Empower and encourage frontline employees to address shippers’ challenges within the framework of their daily duties. They should be able to provide shippers with greater visibility and manoeuvrability with respect to the timing and mode of shipments, and they should automatically aid shippers with global, cross-modal solutions — perhaps by mixing and matching owned and third-party services.
• Enable supply-side vigilance and strategic M&A deal making and integration. Foster the habit, throughout your company, of continually scanning for new competitors, seeking to understand how customer needs are being addressed by those competitors. When you identify product and capability gaps, consider acquiring companies that fill in those holes in your business model. For example, UPS’s US$1.8 billion purchase of Coyote Logistics gave it access to proven freight e-brokerage technology. And C.H. Robinson, a Minneapolis-based logistics company, has made M&A a central component of its strategic initiatives, spending nearly US$1 billion on acquisitions since 2010 on outfits that offer expansion opportunities in geographic regions or customer bases. Don’t view M&A in itself as a sufficient strategic response to the shifting demands of shippers. M&A can be an excellent tool for obtaining capabilities and fleshing out product and service portfolios, but only if you have an effective tactical plan for meeting customers’ needs.
• Fully deploy data analytics and digital management. Deploying data analytics includes tools needed to capture and store data effectively, the analysts who unlock insights from data, and the pathways needed to transform those insights into operational realities. Integrate this data with your customers’ systems, and with the systems of other third-party firms they work with. Design and implement advanced customer-facing digital tools.
• Enhance network agility and support capacity management. Develop your own local shipping networks or use third-party networks, bypassing traditional hub-and-spoke operations and taking advantage of more dynamic approaches to pickup and delivery of goods. These local networks can be more flexible than national systems because their packages travel only a short distance. They can promise overnight delivery even for pickups as late as 10 pm, which gladdens many shippers because most Internet orders are placed after dinnertime. Moreover, local networks can support the effective management of supply chain disruptions and of large variations in demand on a daily, monthly, and annual basis.

Together, adopting these capabilities — or the right combination of them for your company’s business model and customer base — can help carriers and logistics companies respond to the shifts in shipper demand that have opened the door to disruptors emerging within their markets. That’s a much more palatable option than sitting back and watching as your position in the marketplace erodes.