Why digitising the freight-forwarding industry is no mean task
Disclaimer — this thought piece is based on my experience, and I do not speak for anyone but myself here. The idea was to share an honest view from the inside of the industry. Happy to discuss further if you have complementary insight!
You are fresh and ambitious, and you not only want to digitise supply chains and logistics, but also democratise fair access to supply chain software.
You certainly have your eyes on a big opportunity (still) as according to PR Newswire “The global digital logistics market size is expected to grow from USD 17.4 billion in 2020 to USD 46.5 billion by 2025, at a Compound Annual Growth Rate (CAGR) of 21.7% during the forecast period”.
To better drive that logistics revolution forward you need to be prepared for some major obstacles. This will slow down the automating, and systemising of these supply chain processes. There always is a moment of despair that hits where people realise they are at the foot of the mountain. It is a much tougher nut to crack than it at first seems.
Sometimes the industry forces that people encounter are invisible and complex. Entrepreneurs don’t even know which demon to fight. It can at times feel like a battle against yourself. But fear not! For there is a way to overcome each obstacle along the way. However hold tight, as it’s a hilly but a super fascinating journey. 🎢
So what are these obstacles then?
Logistics wasn’t sexy for a long time
Well by now it is, because as soon as Peter Thiel decides an industry is sexy, it usually becomes so (whether we like it or not). Flexport radically altered the perception of the space, when they were the best company to work for on Angel List back in 2018 amongst other things.
It is important to bear in mind that the tech industry did not have its eyes on logistics before the hype following Flexport’s growth (founded in 2013). Let’s say the wave didn’t truly catch until Forto was founded in 2016, and then every week on TechCrunch you could see seed rounds raised for Container-this, Freight-that companies left right and centre.
Now the cultural shift within the industry does not happen overnight. Despite the hype, it is important to understand that the forwarding and supply chain industries have deeply anchored mindsets (and systems!). We are entering a space where incumbents were founded in the late 19th century, so you’ll encounter a lot of “why fix it if it ain’t broken”. You might have to subtly insinuate that it is in parts, somewhat broken.
But this situation is not unlike any industry that is in its early adopter phase of digital products — although we are now entering the early majority. Crossing the chasm as Geoffrey Moore would say.
The other effect of late digitalisation simply means that the ecosystem is still in fairly early stages of digitisation and that integrating with other layers in the ecosystem can be unreliable, not centralised and partial in its coverage of data.
Unreliable, because the technologies and talent vary in quality.
Not centralised, meaning there often isn’t one single authority or data aggregator that will enable to gather data from all providers in a space (e.g. all customs providers in the world), albeit this is changing rapidly!
Partial coverage, because I can show data for some of my processes but not all as some providers cannot give it to me, which I will elaborate on in the next section.
So how do you address these obstacles?
Regarding the mindset issue, you need to demonstrate, in their language, the value you are creating; It is mostly a selling + change management game.
If you can tell a compiling story as to why your customer should recruit more analytical talent, have smarter insights on their supply chain and the ability to analyse these insights, a more quantitative way to KPI their manufacturers, then you’re a winner! You will also need to assist them in seeing these organisational changes through.
Smarter supply chains require a higher initial investment from your customers. You just need to guide them along the journey to reassure them that the return will be worth it.
Regarding the ecosystem issue, it’s just a matter of time before challenges are addressed. Meanwhile, use smart solutions to establish a strong presence. This approach ensures that as data quality improves, so will your product, helping you meet the rising demands for detailed and high-quality data insights.
Overall, for this point I’d say the best way is to draw experience from other industries who have experienced the same shift. (e.g. Fintech, medtech)
Asset owners are data bottlenecks
Every business within the industry will find themselves having to work directly or indirectly with hauliers, carriers and airlines. These are all industries that have an extremely high barrier to entry, especially as the vehicles become larger.
According to Wikipedia “In March 2010, the average price for a geared 500-TEU container ship was $10 million, while gearless ships of 6,500 and 12,000 TEU averaged prices of $74 million and $105 million respectively.” And most logistics startups series A funding is worth about $20million, so that gives you an idea.
Also the top 2 carrier holding companies own about 1/3 of the marketshare. So they call the shots.
It’s crucial to know that in logistics, transportation data is fundamental for adding value. If this data is poor, your business model will suffer.
These businesses stay the same and aren’t fully digital because there’s little risk of them being replaced. This creates a complex situation where multiple agencies, and even agencies of agencies, manage reservations for shipping slots. However, even with a reservation, there’s no guarantee of a slot if a more important customer needs space for their containers.
This is a scenario where smaller businesses face challenges. Imagine you’re trying to book a flight, but every time a large group books, you’re bumped to standby. You then have to go through agents who also need to communicate with the airline operators. This is similar to how freight booking operates, highlighting why a simple booking API may not be sufficient.
How do you address these obstacles?
Navigating the complexities of freight booking involves understanding the roles of integration providers, who build solutions around carriers to enhance data consistency and tracking.
It’s crucial to select these providers carefully due to varying data quality among carriers. Avoid direct integration with carriers to maintain flexibility, as provider options can change.
Alternatively, consider using tracking devices on containers as a straightforward solution to improve data reliability, effectively outsourcing the challenge of overcoming data gaps. This approach simplifies managing inconsistencies in freight tracking.
Manufacturing hubs are not that digitised
Be it China or South-east Asia, it’s people before APIs. I have found myself visiting container freight stations, where we were brainstorming ways to gather data of containers in and out, and never in a million years would it be easier for those businesses to automate a system rather than having people typing in the data manually. The reality is it’s still cheaper.
I am not speaking for the Foxconn-type factory in Longshua, which I am sure is fully digitised end-to-end but I’m assuming most of you aren’t transporting iPhones, so the technological capacity of your manufacturer won’t be at that level.
It is known that digitisation levels tend to increase with the cost of manufacturing, which is in line with China’s plan to fully digitise the Pearl River Delta. Where the government is planning on connecting the region into a Megacity that will be better equipped to produce more complex, high-value and mostly electronic goods (e.g. robotics & co). This means that a lot of the low-value goods will migrate to South-east Asia.
So how do you address these obstacles?
Ultimately, you get what you pay for. If customers opt for cheaper manufacturers, they’re likely to face issues with less reliable data.
The solution is to have people on the ground or software to chase them on data they need to input. However, many companies offering ground support for this manual task often do not pass the costs to customers, absorbing the margin loss themselves. This is feasible for those with venture capital backing, allowing them to offer such services without direct charges to their clients.
So best automate the chasing process quickly and cut costs at origin, or normalise charging customers for it!
Nothing is standardised
If you can find two manufacturers that have the same format for a packing list then they are probably cousins!
There is no international standard for anything, which is very surprising and taxing for what is a global business (understatement). Especially because the paperwork required can be astronomical.
Now this makes it very difficult for a business to expand internationally, but also makes it easier for players to anchor themselves regionally (a bit of local flavour!).
However this makes things particularly challenging when it comes to document parsing. No matter how much data is fed to a machine learning algorithm, it will seemingly never learn how to extract fields on a customer invoice (or at least we are not there yet at the moment I am writing this — 2021).
So how do you address these obstacles?
You enter a market/tradelane and you stick to it! As simple as, this will give you an unfair advantage over other players as your partners will also tend to be localised (except for carriers and airlines), so you deepen your network, domain knowledge and relationships.
In my opinion unless countries decide to come together to standardise and regulate practices, the logistics industry will remain a fragmented market which is also a good thing. I don’t see this changing.
Rich companies do things in-house
The technology that people are developing today, certain physical goods businesses had custom-made in-house 20 years ago. Not as glitzy of course, but sort of gets the job done.
This means that for decades companies did not invest into this domain, especially as logistics / supply chain was often seen as a cost centre (you need a profit centre to balance it out, so better absorb it in-house).
Some companies are even building in-house digital forwarding solutions, and even own planes. But luckily the logistics world has become more democratic with the advancement of businesses like Amazon and Shopify (who for the most part do not cover pre-last-mile logistics, so far), and also the general rise of SME businesses in the ecomm space taking a bigger share of the pie.
So how do you address these obstacles?
Well this one is easy, as a logistics business you can learn from solutions these businesses built internally. Hire in-house talent from these firms in your startup!
Conclusion
The journey to digital transformation in this industry has been slow due to various challenges, yet none are insurmountable. The industry is gradually digitizing, enabling the creation of smarter solutions atop existing structures. Despite this progress, the industry lacks standardization, favoring local players. The advice is to select your market carefully and fully commit to seizing the opportunities it presents.
