Crowdsourcing Comes to Logistics

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 indus- tries, 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 advan- tage 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

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