Crowdsourcing Comes to Logistics

A collaborative approach leverages the wisdom of the crowd to enrich and accelerate network design.

Crowdsourcing Comes to Logistics 1 After driving distribution costs to post-recession lows, traditional methods of designing logistics networks are nearing the end of the road.

Our 2016 State of Logistics survey found US business logistics expenditures dipped to 7.5 percent of gross domestic product in 2016, the lowest level since 2009 and the third straight yearly decline (see figure 1). In total dollars, logistics outlays of $1.39 trillion were down 1.5 percent, the first drop in seven years.

Figure In , US business logistics costs declined basis points to . percent of GDP

US business logistics costs as a share of nominal GDP

. . .

. 34 bp . . . . . . . . . .

Note: bp is basis points. Sources: CSCMP’s th Annual State of Logistics Report; A.T. Kearney analysis

Shippers delighted by the descending cost curve should control their glee, though, because additional distribution savings will be hard to come by. The tried-and-true methods that produced recent cost reductions are losing their edge. Typical network optimization programs unfold in two stages: a design phase conducted by shippers with little or no input from logistics providers, followed by extended price-focused negotiations with various carriers, warehouse operators, and third-party logistics providers (3PLs).

Benchmark-driven price negotiations have squeezed big concessions out of providers, particularly in sectors where excess capacity has sapped their bargaining power. But falling prices also have pushed carriers’ profit margins to unsustainably low levels, leading to disruptions such as last year’s bankruptcy of Korean container shipping giant Hanjin. Unable to afford more price cuts, carriers are moving to regain pricing power through consolidation and capacity cuts.

Ocean shipping rates started recovering in the first half of 2017, and trucking rates posted even stronger gains in the second half. Rates have been rising sharply throughout 2017 in warehousing and parcel delivery, where booming e-commerce shipments have soaked up capacity, lifted labor costs, and flipped the supply-demand balance to favor providers. A strengthening economy would push the cost pendulum further in the same direction.

To offset increasing price pressures and drive further efficiencies in a huge cost center, shippers need a new approach to network optimization. Next-generation network optimization will be holistic, strategic, and—most importantly—collaborative. Successful shippers will open up network design, enlisting 3PLs and carriers to help plan and develop the optimal combination of distribution assets.

Crowdsourcing Comes to Logistics 1 Call it crowdsourced network optimization. Crowdsourcing, the open sourcing model that’s jump-starting innovation and efficiency in consumer products, transportation, and other industries, can revolutionize logistics. While the term is new, crowdsourced network optimization brings to logistics a collaborative ethos that has produced compelling results in activities ranging from product design to manufacturing. Japanese automakers working as partners with suppliers launch new models in 12 to 18 months, twice as fast as their US rivals. Collaboration also reduced manufacturing costs for the Honda Accord and Toyota Camry models by 25 percent. In product design, supplier Denso recently helped agricultural equipment manufacturer Deere & Co. develop a new diesel fuel system with higher pressure levels, needed to meet stricter emission standards.

Applying the same principles to logistics network design yields similar benefits in three primary areas. First, crowdsourcing produces greater cost savings and sustainable productivity gains by tapping the combined insights of industry players, who have a broader view of the logistics landscape than any individual shipper. Second, shippers and providers working together can design stronger logistics networks with the agility to meet rapidly changing customer needs, and better resilience to withstand bankruptcies, natural disasters, political upheavals, and other disruptions. Finally, collaboration also eases and accelerates implementation, delivering benefits faster and avoiding roadblocks that often derail networks configured without input from providers.

Network Optimization: Complex, Evolving, Essential

Few business challenges are as persistent and important as designing and managing distribution networks. Most goods-selling companies spend 3 to 8 percent of sales on logistics, making it the second- or third-largest expense category and a perennial target for cost-cutting campaigns.

Yet reducing distribution costs is no simple matter. Multilayered global logistics networks are inherently complex, encompassing multiple transportation modes and legions of 3PLs, carriers, warehouse companies, and other vendors. Continually changing customer requirements and competitive disruptions compound the intrinsic complexity, as shippers face ever-faster and more-complex delivery expectations, increasing customization requirements, and shrinking tolerance for error.

As day-to-day operational pressures intensify, logistics networks remain vulnerable to external shocks. In 2016 alone, the Hanjin bankruptcy stranded cargo around the world, an earthquake damaged ports in New Zealand, and a turn toward protectionism in developed countries threatened global trading relationships. Meanwhile, several US states imposed higher minimum wage requirements, substantially increasing warehouse labor costs and leaving most 3PLs wondering how to offset the cost increase.

A recent wave of consolidation in retail, consumer packaged goods, and other sectors presents new network optimization challenges. Merging companies often promise significant cost synergies from combining disparate supply chain and logistics operations—without service interruptions.

All these unpredictable variables make distribution costs volatile, difficult to manage, and ultimately inflationary. It’s getting harder, as tightening logistics markets reduce shippers’ leverage to extract more price cuts from providers, but capitulation isn’t an option. With competition and profit pressures intensifying, few companies can afford inefficiency in a spending category as large as logistics. Shippers need a new strategy for network optimization, and they need it now.

Crowdsourcing Comes to Logistics 2 Today’s challenges, yesterday’s tools Amid accelerating change, most shippers still design logistics networks with decades-old optimization techniques that are overdue for an update. Generally, network planners operate with relatively little external input. Relying on their own limited view of the logistics industry, and guided by internal data and benchmarks, they miss opportunities and threats that outside perspectives might have revealed. Rather than seeking transformational performance improvements, the new design usually tweaks existing network structures based on short-term volume fluctuations and guesstimates of 5-year supply and demand trends.

After completing the design, shippers circulate requests for proposals (RFPs), kicking off a lengthy series of negotiations with logistics providers. Focused largely on annual contract pricing, these sparring sessions tend to produce one-time savings, not sustainable efficiency gains or innovative solutions.

Typical optimization initiatives do little to assure a robust implementation process, leading to a protracted, glitch-plagued struggle to make the new design work. Implementation lags as real-world obstacles force shippers to revise network requirements created by high-level planners without consulting providers. RFPs based on these designs often bear little relation to actual pricing and service levels in the industry, and elicit unsatisfactory responses from providers.

This disconnect is the leading cause of failed network implementations. Crowdsourcing solves the problem by giving providers a voice in shaping network requirements grounded in the realities of their markets.

Losing leverage Even fleeting price breaks will be harder to get in coming years, as shippers’ negotiating advantage over carriers fades. Trucking companies and container ship operators are consolidating and idling unused assets in an effort to reduce excess capacity that gives shippers pricing leverage. Soaring e-commerce shipments are filling up warehouses and straining parcel delivery networks.

While trucking and ocean shipping rates remain low by historical standards, pricing in both sectors turned upward last year after multiyear declines, and trucking rates accelerated in the second half of 2017. Warehouse rental rates climbed nearly 7 percent in 2016 as available space sank to record lows, and all three major parcel delivery companies raised rates early this year.

Rising prices signal the impending obsolescence of self-reliant network optimization. Future efficiency and performance improvements will require strategic collaboration among shippers and 3PLs in a common effort to build strong, agile, and resilient logistics networks (see sidebar: Strength, Agility, and Resilience: Hallmarks of an Optimized Logistics Network on page 5).

Why Crowdsourcing?

Even the most well-informed logistics manager or consultant can’t match the collective knowledge of the entire industry. So it stands to reason that a logistics network designed with input from a wide spectrum of players would be stronger, more agile, and more resilient than a network created within the walls of a single company. That’s why leading shippers are turning to crowdsourcing, a digitally enabled collaboration platform that McDonald’s uses to develop new sandwiches, Lego uses to design new toys, and AirBnb uses to disrupt the hotel business (see figure 2 on page 4).

Crowdsourcing Comes to Logistics 3 Figure Crowdsourcing has been used successfully across a variety of industries

Product innovation

Asset and information sharing

Solutioning

Sources: Company websites; A.T. Kearney analysis

Early applications of crowdsourcing in logistics confirm the potential of this new approach. Route-finding app Waze helps truckers avoid traffic jams, and Uber Freight enables shippers to bypass brokers and source cargo space directly from carriers (see sidebar: Is Crowdsourced Network Optimization for You? on page 7).

Crowdsourced network design is the next logical step. Opening up network design reveals new ways to drive excellence in distribution alongside perpetual cost improvement. 3PLs and other service providers with intimate knowledge of their sectors can identify shipping

Crowdsourcing Comes to Logistics 4 options and potential efficiencies that a shipper designing its network in isolation never would have discovered.

Cost savings, and more. The benefits of collaboration go far beyond incremental rate reductions. Crowdsourced network optimization enhances performance across a wide spectrum, with notable improvements in four key areas:

1. Network strategy. At a recent crowdsourced network optimization (CNO) event, a large 3PL proposed a “campus model” that opened up warehouse-sharing opportunities for a shipper with diverse distribution requirements across multiple business units. The 3PL’s warehouse campus comprised several buildings, each designed for a specific set of storage and handling requirements. This enabled the shipper to consolidate products with different requirements at a single location, without jeopardizing operations or customer service. Storing all types of products at the same location improved efficiency and created transportation synergies for the shipper. Concentrating more goods at a single site also saved the shipper money through volume-based discounts as high as 10 percent of the total warehousing spend.

2. Network implementation. A telco provider that disclosed its future demand projections and distribution needs to 3PLs early in the design process completed the design, sourcing, and awarding of a new North American distribution network in 16 weeks. Compare that with the typical six-month process in which 3PLs operating without knowledge of the shipper’s specific needs bid on a theoretically optimized network and then work through several iterations to create a workable design.

3. Value-based partnerships with third parties. Collaboration with multiple 3PLs in network design laid the foundation for strategic partnerships that saved a large chemicals company more than $100 million. As partners with the company, 3PLs promised 5 percent per year in continuous improvement benefits. Looking beyond the usual efficiencies from optimization and consolidation, they suggested a series of additional improvements in areas such as load

Strength, Agility, and Resilience: Hallmarks of an Optimized Logistics Network

Logistics networks optimized They comprise “best-in-region” carrier goes down, another is to meet today’s distribution providers, including 3PLs and ready to pick up the load; if a port challenges have three essential forwarders that constantly adjust closes, facilities in another harbor qualities—strength, agility, and the network to maximize are available. Shippers collaborate resilience. efficiency and performance. with 3PLs and forwarders on Agile networks switch cargo contingency plans for carrier Strength. A strong network is seamlessly between modes such bankruptcies, port strikes, and well-planned and constructed to as air freight and ocean shipping, other service interruptions. They meet customers’ core business relying on the expertise of 3PLs ensure “surge” warehouse needs, with strategically located and connectivity enabled by availability through agreements distribution centers operated by technology and specialized talent. with 3PLs for overflow and public 3PLs under “build and warehousing space that can be lease-back” arrangements. Resilience. Resilient networks reallocated as needed. Multiple keep running when unexpected transportation options balance Agility. Agile networks quickly add events disrupt distribution flows. private and dedicated fleets with or subtract scale and scope with Redundancy and multiple options common carriers. changing customer requirements. underpin this capability: when one

Crowdsourcing Comes to Logistics 5 and packaging optimization. Savings have exceeded the annual target in each of the three years since the partnerships were formed.

4. Collaboration among procurement, supply chain, and business units. Traditional network optimization is a sequential process initiated by supply chain managers, who design a network and ask procurement to find suppliers who can meet the predetermined requirements. This approach limits flexibility to reduce costs in collaboration with suppliers. CNO, by contrast, crosses functional boundaries to identify greater savings opportunities. Supply chain creates a network blueprint, and then works with procurement and suppliers to optimize the design. Simultaneously, business units delineate “must-have” and “nice-to- have” requirements, giving suppliers greater visibility into cost drivers.

Your crowdsourcing itinerary. How does crowdsourced network optimization work? Pretty much the same way most people plan a vacation. Travelers rarely lay out an itinerary alone in a room with no input from others. Instead, they reach out to friends who have made the trip before, collecting recommendations on where to stay, where to eat, and what sights to see. Many also log on to travel websites, harnessing the experience and insights of thousands of contributors. Armed with this knowledge, they proceed to plan routes, book flights, and reserve hotel rooms.

Imagine a system that enabled travelers to efficiently gather and evaluate the top recommendations from 10 or more travel agents. That’s what crowdsourcing does for logistics network design. Shippers start by sharing their current state network, operating constraints, and future distribution needs with 3PLs, carriers, and other logistics service providers. They ask the service providers for ideas on distribution node locations, transportation modes, routing options, pricing, and other distribution solutions that will reduce operating costs without disrupting customer service (see figure 3). Shippers also discuss strategic goals and operational challenges with providers, who may have solutions to offer. These exchanges unveil new possibilities for improving performance and reducing costs while advancing broader corporate goals. For example, a warehouse operation might know of a storage location with available space in a

Figure Crowdsourced network design taps the collective insight of logistics providers

Network Technology and alternatives innovation ideas

Warehouse Logistics pricing pricing and mode options Customer

Source: A.T. Kearney analysis

Crowdsourcing Comes to Logistics 6 Is Crowdsourced Network Optimization for You?

Take the quiz below to see if • Have your distribution costs • Has your network volume crowdsourcing might improve increased in two of the past increased by more than 15 your logistics network. three years, or are they about percent in the past two years? to rise? • Was your last network optimi- If you answered “yes” to more • Do your 3PL contracts lack zation event held more than two than two questions, you would provisions for continuous years ago? probably benefit from crowd- improvement and profit sourced network optimization. • Does your organization spend sharing? more than $200 million a year on distribution?

critical market where other warehouses are full. A 3PL might know of a reliable local trucking company that can meet the stringent delivery demands of a key customer at lower rates than national carriers.

Shippers evaluate these options, using advanced analytics to run various scenarios and identify the best warehouse locations, shipping routes, and carriers. The resulting network is easier to implement, and generates transformative performance gains that turn logistics into a long-term profit driver and competitive advantage.

A great time to crowdsource. Shippers interested in crowdsourcing find a receptive audience among logistics providers looking to play a broader strategic role with their customers. 3PLs, for example, have moved beyond narrow business models focused on discrete services such as transportation management or warehousing. Most now offer “one-stop shopping” for a full range of logistics services. The rise of end-to-end business models is fueling consolidation, as providers add capabilities through mergers such as XPO Logistics’ purchase of Norbert Dentressangle, UPS’s acquisition of Coyote Logistics, and FedEx’s Genco buyout. Integrated service offerings enable providers and shippers to recast their old transactional relationships as true strategic partnerships. That evolutionary shift continues with crowdsourced network optimization.

Authors

Michael Zimmerman, partner, New York Balika Sonthalia, vice president, Chicago [email protected] [email protected]

Rupal Deshmukh, consultant, Dallas [email protected]

Crowdsourcing Comes to Logistics 7 Case Study: Crowdsourcing Delivers for Chemical Giant

A large global chemicals company knew it was time to rationalize the sprawling, complex logistics network it had assembled over years of acquisitions, divestitures, and market expansions. The fragmented system encompassed 10 individual networks serving various regions and end markets. Some 800 warehouse locations and more than 100,000 shipping lanes spanned the Americas, Asia, Europe, the Middle East, and Africa.

With more than 200 logistics providers, including several underutilized 3PLs, the multilayered network operated well below peak efficiency at a cost of more than $1 billion annually. Senior executives wanted to streamline without losing the capabilities to serve a diverse customer base with widely varying and sometimes incompatible shipping and handling requirements— the company ships everything from food ingredients to hazardous materials.

Adopting a crowdsourcing model, the company reached out to more than 1,000 industry participants for input on logistics options. Network planners analyzed the responses to identify the local, regional, and global capabilities of 800 3PLs. Using “center-of-gravity” modeling, they outlined more than 20 network consolidation scenarios with various configurations of warehouse locations, routes, and transportation modes. A market event staged to gauge costs for each scenario drew bids from more than 200 providers. Based on the bids, the company’s logistics buyers and planners developed implementation strategies for each of the most promising scenarios.

Crowdsourcing yielded new options that helped the company score quick wins, lock in longer-term benefits, and surpass its rationalization and cost reduction goals (see figure).

Figure PL providers helped unveil multiple options by warehousing location

Consolidation at greenield location 4 • Consolidation of cluster of warehouses into a larger new warehouse that would be customized for the company by the incumbent or challenger

Consolidation at current location 3 • Consolidation of cluster of warehouses into a larger existing warehouse with the incumbent or challenger; consolidation brings cost reduction alu e

V Same site with transition • Through crowdsourcing, 2 • Change to the warehouse location and provider suppliers help unlock • Challenger commits to deliver a certain % options across the of cost reduction network • Options are not mutually exclusive. For example, As is for less Option 1 or 2 can be chosen for the near term 1 • No changes to the warehouse location or provider • Incumbent commits to deliver cost reductions while Option 3 or 4 to retain the business is mobilized

Implementation eort

Source: A.T. Kearney analysis

Crowdsourcing Comes to Logistics 8 Conversations with providers revealed readily available warehouse capacity previously unknown to the company, and the collaborative process elicited stronger commitment from suppliers. Some providers expanded their offerings in return for lower operating costs, while others added capacity to serve the company’s future network needs. Securing capacity for short-term and future requirements ensured a smooth implementation and a faster transition to the future network.

Ultimately, crowdsourced network optimization eliminated one-third of the company’s warehouses and culled 40 percent of its logistics providers, enabling it to focus on strategic relationships with a core group of stronger 3PLs. The fit-for-purpose network design won quick buy-in at all levels, contributing to an accelerated implementation that had the new system up and running within 18 months. Customer service and inventory levels improved, while annual logistics costs dropped $100 million—a 10 percent reduction. Strong cross-functional collaboration between procurement and supply chain from the get-go and enterprise-wide program visibility and C-suite support were crucial factors for success.

Crowdsourcing Comes to Logistics 9 A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world’s foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-critical issues. For more information, visit www.atkearney.com.

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