Shifting patterns
The future of the logistics industry
PwC’s future in sight series
www.pwc.com/transport Contents Executive summary 2 Introduction 3 Disruption and uncertainty 5 Changing customer expectations 5 Technological breakthroughs 6 New entrants to the industry 8 Redefining collaboration 9 Logistics scenarios 11 1. Sharing the PI(e) 12 2. Start-up, shake-up 13 3. Complex competition 14 4. Scale matters 15 Leading through uncertainty 16 Learn more 17
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2 Shifting patterns Executive summary Like most other industries, transportation and logistics (T&L) is currently confronting immense change; and like all change, this brings both risk and opportunity. New technology, new market entrants, new customer expectations, and new business models. There are many ways the sector could develop to meet these challenges, some evolutionary, others more revolutionary. In this paper we discuss four key areas of disruption logistics companies need to focus on now, and explore some possible futures of the industry.
Four areas of disruption ‘Sharing’ is a big story for logistics Start-up, shake up: in this scenario now – from Uber-style approaches new entrants in the form of start- Customer expectations are increasing to last-mile delivery, to more formal ups make a bigger impact. The most greatly. Both individuals and businesses JVs and partnerships at corporate challenging and costly last mile of expect to get goods faster, more flexibly, level, the whole sector is redefining delivery, in particular, becomes more and – in the case of consumers – at low collaboration. But much of this fragmented, exploiting new technologies or no delivery cost. Manufacturing is is hampered by inconsistencies like platform and crowd-sharing becoming more and more customised, in everything like shipment sizes, solutions. These start-ups collaborate which is good for customers but hard processes or IT systems. The Physical with incumbents and complement their work for the logistics industry. Add it Internet promises great things for the service offers. all up and the sector is under acute and sector, coming along with increased growing pressure to deliver a better standardisation in logistics operations. Complex competition: here the service at an ever lower cost. competitive set evolves in a different Possible futures direction, as large industrial or retail It can only hope to do this by making customers and suppliers become players maximum and intelligent use of What will the logistics marketplace look in the logistics market themselves, not technology, from data analytics, to like in five to ten years? That’s still a just managing their own logistics but automation, to the ‘Physical Internet’. very open question. We took a closer turning that expertise into a profitable This promises lower costs, improved look at how some of the key disruptions business model. efficiency, and the opportunity to make facing the industry may interact. The genuine breakthroughs in the way the future scenarios we explore involve Scale matters: and finally, in this industry works. But ‘digital fitness’ combinations of these four factors, scenario, the current market leaders is a challenge for the sector, which is weighted according to how important compete for a dominant market position currently lagging many of its customers specific trends become: by acquiring smaller players, achieving in this respect. Attracting the right skills scale through consolidation, and is one issue, but developing the right Sharing the PI(e): the dominant innovation through the acquisition of strategy is even more crucial. theme in this scenario is the growth of smaller entrepreneurial start-ups. collaborative working, which allows the An increasingly competitive current market leaders to retain their We hope this paper will help you assess environment is another big factor in the dominance. This could for example see the trends and developments most likely mix. Some of the sector’s own customers a greater use of ‘Physical Internet’ (or to affect your own business, and start to are starting up logistics operations of ‘PI’) solutions, based on a move towards develop a strategy to ensure continued their own, and new entrants to the more standardised shipment sizes, profitability through this time of intense industry are finding ways to carve out labelling and systems. change. the more lucrative elements of the value chain by exploiting digital technology or new ‘sharing’ business models, and they don’t have asset-heavy balance sheets or cumbersome existing systems weighing them down.
The future of the logistics industry 3 Introduction Logistics companies are facing an era of unprecedented change as digitisation takes hold and customer expectations evolve. New technologies are enabling greater efficiency and more collaborative operating models; they’re also re-shaping the marketplace in ways that are only just beginning to become apparent. New entrants, whether they be start-ups or the industry’s own customers and suppliers, are also shaking up the sector.
The race is on to define the industry’s For the logistics industry, we start future. And with an estimated US$4.6 by taking a closer look at some of trillion1 of revenues at stake, companies the key disrupting factors: changing can’t afford to sit back and watch; they customer expectations, technological need to adapt to changing markets breakthroughs, new entrants to the proactively. industry, and new ways to compete or collaborate. These disruptions We’ve developed a transformation have very different implications for framework to describe how megatrends2 individual companies, depending on affect a given industry, taking into which segments they operate in, their account the key disrupting forces type of ownership, and where they that create uncertainties for every are located. They also don’t exist in a organisation in the sector. Based on vacuum: in each case, the interactions these uncertainties, we outline distinct between them are equally, if not more, scenarios to explore possible futures important. Government intervention for the sector. This framework will help and trade flows between regions and you plan for this uncertain and volatile territories are influencing the industry future.3 too, but very much depend on national politics and geography.
1 https://www.plunkettresearch.com/industries/transportation-supply-chain-logistics-industry-market-research/ Note: various estimates available, high variance, distinct approaches, difficult to measure given insourced and outsourced portions of the total market 2 https://www.pwc.com/us/en/faculty-resource/assets/symposium/2014-megatrends-overview.pdf 3 At PwC, we are analysing potential futures for various industry sectors and some papers are already published (see list on page 20).
4 Shifting patterns Defining ‘Logistics’ for this paper
There are a number of distinct business models in the industry, although they can overlap, and individual companies may operate under more than one model. In this paper, we consider logistics service providers (LSP), carriers, and courier / express / parcel (CEP) companies. Postal operators, too, are relevant players in the context of logistics and CEP.
Not only business models but profitability and margins differ considerably. In contrast with other industries, profits in logistics are relatively low. Yet, within this sector, EBIT margins generally range from -1% to 8%. While carriers find themselves close to zero profit, sometimes even in the red, the large CEP companies end up being the most profitable group, sometimes reaching double-digit profit margins.4
Customers in the logistics industry comprise of both B2B and B2C segments. The major part of the total market can be linked to B2B transactions, with LSPs and carriers accounting for the biggest portion of industry revenue. CEP represents a smaller, but faster growing segment; and just about a third of CEP revenues can be attributed to B2C.
Segment Business Customer Model LSP Freight forwarders, 3rd and 4th party Manufacturers, logistics service providers wholesalers, and retailers Carriers Trucking, rail freight, sea freight and LSPs B2B air freight companies CEP Courier / Express / Parcel companies Retailers, manufacturers, and other companies
B2C CEP Courier / Express / Parcel companies Private consumers
Our four logistics scenarios for the • Complex competition: here the Together these logistics scenarios map future of the industry are based competitive set evolves in a different out a range of possibilities for the primarily on the different ways direction, as large industrial or retail context in which every company will collaboration and competition could customers and suppliers become need to compete in the future. That evolve within the sector: players in the logistics market in turn provides a basis for evaluating themselves, not just managing how resilient and ‘fit for growth’ current • Sharing the PI(e): the dominant their own logistics but turning that strategies and plans are. theme in this scenario is the growth expertise into a profitable business of collaborative working, which model. Regardless of whether one logistics allows the current market leaders to scenario comes closest to the truth retain their dominance. This could • Scale matters: and finally, in for your segment of logistics and for example see a greater use of this scenario, the current market geographical environment, or whether ‘Physical Internet’ (or ‘PI’)5 solutions, leaders compete for a dominant your future combines elements from based on a move towards more market position by acquiring smaller several, each company will need to standardised shipment sizes, labelling players, achieving scale through adapt their current strategy to cope. and systems. consolidation, and innovation That may mean reassessing business through the acquisition of smaller models, the operating model and • Start-up, shake up: in this scenario entrepreneurial start-ups. capabilities, HR strategies, financial new entrants in the form of start- performance, and the organisation’s ups make a bigger impact. The most purpose. We suggest some possible challenging and costly ‘last mile’ directions in our final chapter. More of delivery, in particular, becomes detailed views on particular regions, more fragmented, exploiting new segments and capabilities are still to technologies like cloud platforms come in later articles. and crowd-sharing. These start-ups collaborate with incumbents and complement their service offers.
4 Strategy& analysis (peer groups of listed companies in each segment; average EBIT margins of the past 5 financial years) 5 The term ‘PI(e)’ is here built into the phrase ‘Sharing the pie’, but also alludes to the Physical Internet, often referred to as ‘PI’; for more detail see page 9
The future of the logistics industry 5 Disruption and uncertainty
All this has huge implications for Shippers aren’t generally part of a Changing customer transportation and logistics. LSPs – in branded retail experience. Most private expectations particular 3PLs and 4PLs – need to end-consumers are what we call integrate data analytics and social ‘shipper-agnostic’: they don’t care who Like individual consumers, supply chains to provide much delivers their goods, as long as they industrial customers now better traceability and predictability get them reliably, quickly and cheaply. expect to get shipments faster, (not to mention lower costs); smart Many want more flexible delivery – more flexibly, and with more warehousing solutions will become whether in terms of when or where transparency at a lower price. essential. The implications are clear: they get their goods - and most aren’t ‘digital fitness’ is becoming a must for willing to pay for shipping: they expect No surprise that across the every logistics company. it to be free, though they are prepared to industry, both operating pay a premium for additional services, models and profitability are B2C: New shopping patterns such as faster delivery for high-value under strain. And the pace items. There’s also currently a low Many logistics companies also serve B2C acceptance of dynamic pricing for of transformation for large customers. Consumers went digital long manufacturing and retail parcels; customers expect to pay the before many of the retailers, and some same price for shipping regardless of customers may turn out to be parts of the sector are still struggling seasonal capacity constraints faced by even faster than for private to keep up. The leading players are their shipper, with the exception of final consumers. adopting what we call ‘total retail’, surcharges for same day, overnight or which is an operating model across expedited service. bricks and mortar, online mobile and B2B: Striving for efficiency and other retail channels.6 Total retail is transparency complemented by ‘connected retail’, Manufacturing industries are facing far where retailers aim to create a seamless greater expectations around efficiency brand experience for the customer and performance than ever before. Their across personalised marketing, the customers expect faster time-to-market, physical store, the digital experience, reduced defect rates and customised and the payment options, all of it driven products. Ultimately, the result may by a strong coherent brand.7 What be a goal that was once impossible: a are the consequences for the logistics ‘lot size of one’, where each product is industry? manufactured to the specifications of a specific end-customer. The advent of the industrial Internet of Things and what other research refers to as ‘Industry 4.0’ is allowing manufacturing companies, whether they make industrial equipment, cars, planes, or consumer goods, to redefine everything from the way they interact with customers to how they structure supply chains.
6 http://www.pwc.com/totalretail 7 PwC, Connected Retail: Reshaping tomorrow’s operating model and metrics, 2015
6 Shifting patterns Cloud technology can enable platform themselves as ‘advanced’ on digitisation Technological solutions, which in turns makes it was just 28%. Some of the industry’s breakthroughs possible to use new business models, customers are already well ahead of such as ‘virtual freight forwarding’. this – 41% of automotive companies and Technology is changing It can also provide flexibility and 45% of electronics companies already every aspect of how logistics scalability, as well as standardised see themselves as advanced. The lack of companies operate. ‘Digital and harmonised processes across the a ‘digital culture’ and training is thus the fitness’ will be a prerequisite whole organisation. That’s especially biggest challenge for transportation and for success: the winners will important for those LSPs or carriers who logistics companies. T&L firms are in have grown through acquisitions, and line with other industries in planning to be those who understand how currently rely on a patchwork of legacy invest 5%9 of their revenues per annum to exploit a whole range of systems. until 2020, but the next few years will new technologies, from data be critical: companies that don’t start analytics to automation and The potential is huge, but the industry soon risk being left behind permanently. platform solutions. Those who has thus far been slow to seize it. In don’t, risk obsolescence. But our recent Industry 4.0 study, the percentage of T&L companies that rated with so many technologies competing for management attention and investment, defining a clear digital strategy that’s integrated Figure 1: Lack of digital culture and training is the biggest into business strategy will be challenge facing transportation and logistics companies critical.
Digital is still a challenge for the sector
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f a the next five years than transportation i o n g n d i o e t i a t c c i l a and logistics – 90% in T&L compared u b v s is r t u it e o s s m in ig 8 e D d er ss 3. n to an average of 83%. The sector has D a t a c c y a ce du it ta ss pro il & b never had access to more data. There A pa na ca are vast opportunities here to improve 50lytics as co%re performance and serve customers better, and LSPs who are part of a digitally Lack of digital culture and training integrated value chain can benefit from Unresolved questions around data security and data significantly improved forecasting to 38% scale capacity up or down and plan privacy in connection with the use of external data routes. Adding machine learning and High financial investment requirements 38% artificial intelligence techniques to data Lack of a clear digital operations vision and 33% analytics can deliver truly dynamic support / leadership from top management routing. Insufficient talent 26%
Slow expansion of basic infrastructure technologies 23% Business partners are not able to collaborate around digital solutions 22%
Unclear economic benefit of digital investments 21%
Lack of digital standards, norms and certification 17%
Concerns around loss of control over your company’s intellectual property 15%
Note: Included as one of three possible responses
Q: Where are the biggest challenges or inhibitors for building digital operations capabilities in your company?
Source: http://www.pwc.com/gx/en/transportation-logistics/pdf/transportation-logistics- key-findings.pdf
8 https://www.pwc.com/gx/en/industries/industries-4.0/landing-page/industry-4.0-building-your-digital-enterprise-april-2016.pdf 9 Ibid.
The future of the logistics industry 7 Automation could reshape the processing and optics now allow tasks to We’ve mapped out some of the most workforce be automated which were once thought important technologies in the table too complex – like trailer loading and facing this page. The rate of adoption Labour is a critical element of any offloading at acceptable speeds. of any of the technology opportunities logistics operating model, and up till discussed here will not be limited by now there’s always been a trade-off Package delivery could also make more technical advancement rate. Instead it between service levels and costs. But use of automation, through innovations will be driven by the rates of regulatory automation breaks down this equation, like autonomous vehicles or delivery and customer acceptance. allowing firms to offer better service drones. Google has already started and save money at the same time. working on self-driving lockers and Some of the industry’s most labour- the trucking industry is partnering intensive processes are on the way to with OEMs on partially automated being fully or partially automated, from truck convoys. Even if more radical warehousing to last-mile delivery. solutions are a long time coming, other technologies which could make drivers Automated solutions in the warehouse more efficient are in the offing too, like are already being implemented and augmented reality solutions that give their level of sophistication is increasing. drivers more information about their For example, automated loading and environment and the packages still on unloading systems are already available, board. but in the future these are likely to be able to bypass obstacles and adjust routes automatically. Advances in data
The technology10 The impact The uncertainties
• Social expectations around data privacy and security may • Improved supply chain transparency, safety and change Physical Internet efficiency • Regulation around data security and privacy may increase (based on the IoT) • Improved environmental sustainability (more efficient or be enforced more stringently resource planning) • The sector’s willingness and ability to invest in collaboration • Whether international bodies will drive standardisation
• Enabling collaboration horizontally • Companies’ willingness to adopt is uncertain due to data IT standards • More efficiency and transparency security concerns
• Rate of development of data processing capacity is unclear • Improvements in customer experience and • Question marks around data security operational efficiency in operations • Social expectations around data privacy and security may Data analytics • Greater inventory visibility and management change • Improved ‘predictive maintenance’ • Regulation of data security and privacy may increase or be enforced more stringently • Development of costs unclear (once a certain scale is • Enabling new platform-based business models and Cloud reached physical data centres still tend to be cheaper) increasing efficiency • Uncertainties around data security • Enhanced supply chain security (reduction of fraud) • Reduction in bottlenecks (certification by 3rd parties) • Rate of adoption uncertain Blockchain • Reduction of errors (no more paper-based • Unclear whether one or two dominant solutions will emerge documentation) or multiple competing solutions • Increased efficiency • Reduction in human workforce and increased Robotics & efficiency in delivery and warehousing (including • Speed of technology development unclear automation sorting and distribution centres) • Lower costs • Regulatory environments not currently in place in most countries Autonomous • Reduction in human workforce • Liability issues not yet clear vehicles • Increased efficiency in delivery processes • Ethical questions remain especially in relation to emergency situations • Regulation in most countries not sufficient for commercial • Increased cost efficiency (use cases: inventory, use in public areas like delivery UAVs / Drones surveillance, delivery) • Safety and privacy concerns may hamper market • Workforce reduction acceptance
• Lower transportation demand • Speed, scale, and scope of uptake by customer industries 3-d printing • Transported goods would mostly be raw materials still unclear
10 For a list of PwC publications on these technologies please refer to page 18
8 Shifting patterns approach and helps people to get The industry’s own customers may New entrants to the things transported within their city also become significant new entrants. industry by connecting them with registered Amazon is an obvious example: it’s drivers.13 Norwegian start-up Nimber looking to expand its in-house expertise Platform technology has given matches commuters and travellers with in warehousing as well as develop its rise to new business models, consumers looking to ship something, own delivery capabilities. Hence its often driven by start-ups that whether it be a piano across the country acquisition of a warehouse automation enter the logistics industry. or a skateboard or document across specialist, now part of its Amazon New ‘sharing’ business models town.14 Robotics business unit. The company has leased 20 aircrafts to handle more of its could have as much of an How are traditional logistics companies own shipments15, and is piloting a ‘Prime impact on the sector as new countering these developments? They Air’ 30-minute delivery offering using technology. And the industry’s know they need to explore opportunities drones.16 Bloomberg has also reported current customers and for new products and services – a field that Amazon has plans to launch its own suppliers may end up being the where start-ups have a clear advantage logistics offerings, a project, allegedly biggest new entrants. given their freedom from outmoded referred to as ‘Dragon Boat’. processes and hierarchical structures. Yet investments by traditional LSPs in In Asia, Alibaba is trying to improve Start-ups drive new business digital logistics start-ups only constitute delivery services for its sellers by models around 6% of overall venture capital setting up Cainiao, a JV with several Most of the new entrants to the flows. logistics companies, a department store, logistics sector are start-ups, and an investment firm and a company many of these are looking to use new Start-ups aren’t the only new with port logistics operations.17 The technology to enter the industry. To entrants main advantage for network members date most of these are in ‘asset light’ constitutes the access to a logistics Major players from other industries may parts of the value chain; for example, data platform, which helps them to have even more potential to shake up virtual freight forwarders. These asset- achieve efficiencies in order fulfilment the industry’s competitive dynamics. less or asset-light businesses exploit by leveraging their capacity and Autonomous vehicles are one possible 18 digital technology to offer interactive capabilities at a large scale. And the example: technology players, or benchmarking of freight rates, or match company is trying out new ideas too, technology-automotive collaborations shippers with available capacity. like an app that allows consumers to may enter the industry, especially request a pick-up of a return or package with ideas like self-driving lockers, or 19 Many of the new entrants in freight from delivery personnel in the area. machine-to-machine parcel-station forwarding are basing their offering loading for last-mile delivery. Crowd- on more agile pricing. Some enable sharing platforms may also emerge from carriers to bid on loads, allowing them autonomous vehicle development, or to lower their bids in order to fill up independently. As car-sharing increases, capacity. They’re also providing quotes so may the use of the storage space more quickly and increasing price available in these vehicles as a flexible transparency – for example, by linking way to expand capacity. via API directly to a large number of carriers, and providing customers with their negotiated rates for each of the Figure 2: Venture capital flows into digital logistics startups carriers they use so they can compare since 2011* directly.
Last-mile delivery has also seen a wave Flows from Private equity flows legacy logistics of start-ups in recent years. Some of > US$150m companies these companies are using technology 11 http://techcrunch.com/2015/01/08/uber-cargo/ 12 https://rush.uber.com/how-it-works/ 13 http://chicagoinno.streetwise.co/2014/08/13/chicago-startup-dolly-is-the-uber-for-moving-your-stuff/ 14 https://www.nimber.com/ 15 http://www.reuters.com/article/us-air-transport-sr-amazon-com-idUSKCN0WB1LA 16 http://www.amazon.com/b?ie=UTF8&node=8037720011 17 http://technode.com/2013/05/28/alibaba-officially-launches-the-csn-logistics-program/ 18 http://hsprod.investis.com/ir/alibaba/2016_Alibaba_20-F.pdf 19 Ibid. The future of the logistics industry 9 Redefining Collaboration and Other new types of collaboration collaboration standardisation would increase There are many other less radical ways efficiency for logistics companies to use assets Horizontal collaboration is For many industries, the standard more efficiently by collaborating. already happening, especially assumption is that a larger number of For example, by sharing fleets and in last-mile delivery, but it’s competitors is beneficial for customers. networks, and establishing agreements similar to the airlift purchased by postal hampered by inconsistencies. However, in certain logistics sectors, there are substantial benefits in having agencies from commercial couriers, or Higher levels of efficiency more consolidation, not less. According the code-sharing used by airlines. DB could be achieved by more to one estimate, a 10% to 30% increase Schenker, for example, recently signed a consistent standards, defined in efficiency in the EU logistics sector five-year contract with the online freight through the Physical Internet would translate into €100-300 billion exchange provider uShip, to develop a in cost savings for European industry.20 platform to connect truck drivers and and increased collaboration, 21 The Physical Internet could help address shipments more efficiently. whether in the form of this ‘grand challenge’ by drastically alliances, joint ventures or increasing co-operation between Many companies in the sector are M&A. companies and across transport modes also turning to M&A, joint ventures, through greater standardisation (see and alliances as a way to achieve Building on last-mile partnerships info box ‘From manifesto to reality’). collaboration. In 2015, M&A deal value nearly doubled compared to 2014, There are already notable examples of For the Physical Internet to work in with much of this activity driven by market players operating collaboratively. practice, though, companies would need large players looking to expand their Companies like FedEx and DHL have to be willing to collaborate far more international operations and service been partnering with national postal extensively than they do today. Most of offerings. But with disruption on the companies and small local players for the 535,000 distribution centres in the horizon, there may be opportunities to many years. But with the advent of new US are standalone operations owned use deals to enhance capabilities in key technology, collaboration can become by different companies; imagine the areas too; digital is a good example. much more dynamic. savings if they were all connected, and physical workflows were standardised However, fragmentation, accountability, for maximum efficiency. and a lack of consistency make collaboration more difficult. For example, each company has its own labelling system, and some companies are wary of farming out the crucial last mile of the journey to an operator that may not reflect its own brand and service levels. And aside from the last From manifesto to reality: defining the mile, partnering agreements are the Physical Internet exception, rather than the rule. Take freight forwarding. While containers are The term ‘Physical Internet’ (PI or π); was first a standard size, the packages that go coined by Professor Benoit Montreuil of the into them aren’t. Nor are the forms and Georgia Technology Institute in 2011. It’s based digital entries used to clear customs. on the idea that physical objects can be more Contract logistics companies co-operate efficiently moved around if they become more extensively with shippers, but often standardised and share common channels, don’t share resources with competitors. like data packets on the internet. That requires modularisation and standard interfaces and protocols. In addition, hubs and networks across transport modes will need to be better synchronised, and IT applications and networks will also need to operate together. Montreuil’s manifesto proposes π containers in standard dimensions that can be efficiently stacked together, potentially with sensors if appropriate, and sealable for security purposes. To make the most of these, π movers and π loading systems will need to be developed too, as well as more efficient transport models. 20 http://ec.europa.eu/research/transport/news/items/alice_lauch_en.htm 21 http://www.wsj.com/articles/db-schenker-signs-on-with-uship-online-freight-platform-1467235737 10 Shifting patterns Logistics scenarios What will the logistics marketplace look like in five to ten years? That’s still an open question. In this chapter we take a closer look at how some of the key disruptions facing the industry may interact. We have done this by describing four logistics scenarios. In each of these, technology plays a key role, but affects the market in different ways. In two of the models, new entrants are the primary drivers of change, while incumbents retain a dominant position in the other two. The nature of market dynamics, especially the level of collaboration versus competition, also varies between the scenarios. 2. Start-up, shake-up 1. Sharing the PI(e) New entrants become significant players and take market share from Incumbents increase their efficiency the incumbents through new business and reduce their environmental models based on data analytics, impact by collaborating more, and blockchain, or other technologies. developing new business models, One or two become dominant in such as sharing networks. Research specific segments. Last-mile delivery around the ‘Physical Internet‘ becomes more fragmented, with (PI) leads to shared standards crowd-delivery solutions gaining for shipment sizes, greater modal ground. These start-ups collaborate connectivity, and IT requirements Data analytics with incumbents and complement across carriers. their service offers. Physical Internet Cloud standards Logistics Blockchain IT standards Logistics scenarios Robotics and 3-d automation printing 4. Scale matters Incumbents increase efficiency 3. Complex competition by streamlining their operations Autonomous Big retail players expand their and taking full advantage of new Drones vehicles logistics offerings to fill their own technology. They fund promising needs and beyond, effectively moving new technologies with venture from customers to competitors. They capital cash, and attract new staff purchase small logistics players with critical skills and expertise in to help cover major markets, and competition to create a dominant draw on their deep understanding market position. Major players merge of customer behaviour to optimise to extend their geographical scale and supply chains. Technology firms who enhance their cross-modal coverage. used to be suppliers to the industry Access to capital to fund these enter the logistics arena too, offering investments becomes increasingly logistics services and turning into important. competitors. 12 Shifting patterns 1. Sharing the PI(e) Incumbents increase their efficiency and reduce their environmental impact by collaborating more, and developing newbusiness models, such as sharing networks. Research around the ‘Physical Internet’ (PI) leads to shared standards for shipment sizes, greater modal connectivity and IT requirements across carriers. What’s driving this scenario? Several forces converge in this scenario. With customers demanding Sharing the PI(e)’ cheap, green and fast supply chains, the incumbent logistics companies Customer expectations New entrants look for ways to create unique value • More sustainable • Incumbents play a propositions. Some major industrial supply chains dominant role in directing customers still want the comfort of • Willingness to explore and using shared dealing with one logistics partner, yet new kinds of collaboration networks they look at new ways of partnering. with their LSP • Minor role of new entrants At the same time, new physical and digital standards emerge, most Technology Collaboration vs. competition • ‘PI’ standards lead to new • Increase in collaboration, significantly in relation to the ‘Physical Internet’, making it easier for companies solutions for loading and based on consistent packing physical standards to share space within one container and • Consistent, shared • Incumbents focus on to connect across transport networks. communications standards defining unique value This is supported by more consistent and data exchange propositions standards for communication and data exchange. Governments also encourage greater vertical collaboration across the industry and fund initiatives such as EU-driven programmes to increase ‘synchromodality’ (connectivity between ownership of some fleet assets. Sea B2B customers may consider investing shipping modes and across shippers).22 freight and trucking companies are in transportation assets, and thereby likely to benefit the most from the secure superior service and rates from What are the implications for new ‘PI’ standards, which make it a trusted long-term partnership with logistics companies? easier to fully use their capacity, and their LSP. Usually, service levels and increased profitability is likely to reduce efficiency are higher in urban areas. As networks become more fully the pressure for consolidation in this Isolated rural communities are often shared, CEP companies will focus sector. Warehousing will benefit from served only by national posts with their competitive edge on customer cost efficiencies too, as automated universal service obligations. The expectations. Companies which can loading and picking systems based regional focus of CEP providers will build on a strong brand profit from on ‘PI’ standards are implemented. enhance the service level for customers, improved margins, by partnering with Cybersecurity will be a crucial issue especially in isolated areas along less other firms to cover less profitable for companies that shift to new data profitable routes. delivery routes. National posts, on the standards and greater data sharing. other hand, may struggle as they are forced to cover these routes and lose What are the implications for volume in more profitable regions. customers? 3PLs, 4PLs and freight forwarders begin Increased efficiency leads to lower costs to establish collaborative partnerships for LSPs, and they have to decide how with major customers, who take over much of this benefit gets passed to their customers. 22 http://www.etp-logistics.eu/?page_id=79 The future of the logistics industry 13 2. Start-up, shake-up New entrants become significant players and take market share from the incumbents through new business models based on data analytics, blockchain, or other technologies. One or two become dominant in specific segments. Last-mile delivery becomes more fragmented, with crowd-delivery solutions gaining ground. These start-ups collaborate with incumbents and complement their service offers. What’s driving this scenario? Technological innovation and changing customer behaviour are key here. In Start-up, shake-up’ the CEP space, start-ups take advantage of consumers’ growing interest in the Customer expectations New entrants sharing economy to develop new crowd- • Low-cost personalised • Start-ups drive technology sharing solutions, sometimes linked service with real-time visibility development and with car-sharing. E-marketplaces for • Choice of delivery channels innovation transportation and logistics services • Participation in sharing • App developers become emerge, targeting specific industry economy full-on integrators sectors with great success. Start-ups which began by offering individual apps Technology Collaboration vs. competition in the freight, parcel or last-mile space • Crowd-sharing platforms • Collaboration between also expand to become independent increase start-ups and incumbents platforms, aggregating access to • Blockchain technology • Start-ups complement shippers and carriers. Logistics solutions gains ground and facilitates incumbents’ service offers, based on blockchain technology collaboration particularly around are developed by start-ups and gain last-mile delivery and momentum in areas such as digitised supporting functions trade documents, chain of custody, customs clearance, and trade finance. What are the implications for its trustless peer-to-peer network, costs as well as lower service levels, logistics companies? thereby reducing delays, human error, though the idea is more likely to be and transaction costs for interactions accepted by B2C than B2B customers. Forwarding becomes more fragmented, between supply chain partners – Consumers who participate in crowd- as newly emerging ‘hub specialists’ begin for example, in the processing of sharing solutions earn extra cash for to dominate specific legs of trade routes. international trade documents. trips they take anyway. They have a high In the contract logistics space, start-ups flexibility in how they can contribute to (including 4PL start-ups) complement What are the implications for platform-based logistics solutions – with and enhance the services provided by customers? opportunities from a temporary part- 3PLs, focusing on their most profitable time role all the way to a full-time job. customer segments. Operators in Industrial customers benefit from Supply chains become more transparent, CEP have to compete with start-ups advanced logistics services based on with blockchain-backed services offering which may have a clear cost advantage high-end technology, provided by easy authentication of shipments. if their people are independent collaborating incumbent 3PLs and start- contractors rather than employees. ups. Retail customers enjoy greater Transportation and logistics is among choice of last-mile providers, and the top industries to replace labour lower delivery costs as a result. At the with automation – but the time frames same time, service offers based on the for implementation vary. Sortation and sharing economy might result in lower picking, for example, will be automated much quicker than last-mile delivery. Blockchain technology also fosters automation and efficiency through 14 Shifting patterns 3. Complex competition Big retail players expand their logistics offerings to fill their own needs and beyond, effectively moving from customers to competitors. They purchase small logistics players to help cover major markets, and draw on their deep understanding of customer behaviour to optimise supply chains. Technology firms who used to be suppliers to the industry enter the logistics arena too, offering logistics services and turning into competitors. What’s driving this scenario? The competitive landscape changes markedly here. Online retailers expand Complex competition’ their own logistics offerings. In some cases, this reduces their use of external Customer expectations New entrants providers, but doesn’t replace it entirely. • Customers rapidly digitise • New entrants are Others use their own sophisticated supply chains predominantly major analysis of customer data to increase • Autonomous vehicles players from online retail, logistics efficiency substantially. In become accepted by and technology-based order to fully use their capacity, players customers industries like the large grocery chains and big- box retailers begin offering their own logistics services, and look to combine Technology Collaboration vs. competition • Warehouse robotic • Major retail and logistics their bricks-and-mortar and online supply chains. solutions increase in platforms compete for sophistication dominance • Autonomous vehicles • Retailers initially develop Suppliers to the industry may also enter achieve market maturity logistics capability to support the business of logistics operations. • 3-d printing-based own operations, but gradually If warehousing solutions – using manufacturing gains scale move into 3rd party provision advanced robotics, drones and self- driving repositories – become more sophisticated, logistics service providers may no longer be able to provide staff with the right skills to operate these What are the implications for What are the implications for assets. Technology suppliers may offer logistics companies? customers? logistics services based on their own CEP companies face decreasing volumes, Online retailers that start their own particular expertise. making it more difficult to fully use logistics operations reduce their capacity. They also struggle to keep dependence on LSPs, and gain a Manufacturing based on 3-d printing up with rapid advances from industry competitive edge over retailers that gains momentum and lowers the ‘disruptors’ operating primarily in the don’t manage to do this. Further overall demand for transportation. To last mile. 3PLs may need to consider improvements in warehouse robotics compensate, LSPs experiment with new partnering with robotics companies and automation drive down logistics business models, like developing 3-d to improve warehouse services. Some costs for industrial customers. Fierce printing hubs, 3-d printing capabilities carriers shift from working with current competition among incumbents and new at customers’ sites, or offering platforms incumbent CEP companies to emerging entrants drive down costs. Consumers with 3-d blueprints. LSPs will thus new competitors, but the net impact is will benefit by getting a better service become competitors to some of their essentially neutral. from big online retailers who integrate customers. their logistics activities. The future of the logistics industry 15 4. Scale matters Incumbents increase efficiency by streamlining their operations and taking full advantage of new technology. They fund promising new technologies with venture capital cash, and attract new staff with critical skills and expertise in competition to create a dominant market position. Major players merge to extend their geographical scale and enhance their cross-modal coverage. Access to capital to fund these investments becomes increasingly important. What’s driving this scenario? Technology continues to improve, but its development is dominated Scale matters’ by incumbents’ own research and their acquisitions of new entrants in Customer expectations New entrants specific technology areas. Network • Customers expect • New entrants are acquired size and efficiency continue to be key efficiency, speed, and by incumbents as soon as sources of competitive advantage, and digital fitness they develop promising consolidation accelerates. The key to • They want higher levels of technologies or business success in this model is buying the right user friendliness and models start-ups at the right time: too early and comfort they will be too speculative, too late and Technology Collaboration vs. competition the price will be too high. • Technologies such as data • Competition heats up analytics enhance between incumbents, What are the implications for efficiency in large logistics putting pressure on margins logistics companies? networks • Scale is a necessary • Corporate-led incubators condition to achieve the Access to capital becomes a key and venture arms drive efficiency to remain differentiating factor, both to drive technology development competitive in-house R&D and to fund efficiency- enhancing technologies such as data analytics, blockchain, and automation. Carriers look to establish dominant positions, accelerating M&A in the trucking and sea freight segments. CEP companies increase efficiency in the last mile by introducing new technologies like drones (for remote markets) serving both their B2B and B2C customers, striving for unique selling points in a highly competitive market. What are the implications for customers? Customers benefit from the growing network size of LSPs, and gain better delivery speeds and efficiency, supported by new and more sophisticated technologies in delivery and customer interaction, thereby enhancing their user-friendliness and level of comfort. 16 Shifting patterns Leading through uncertainty The basis for competitive advantage in the logistics industry is changing fundamentally. An established network may become a hindrance rather than an advantage. New technologies will change the industry’s cost model and call existing business models into question. And there may well be new Change in the competitive environment approaches to dynamic pricing that puts a company’s culture to the test take capacity utilisation more fully into – especially in a mature industry like account. logistics, where it can be tough to change, even when traditional ‘ways to Although the core needs of most play’ are being fundamentally changed customers have changed very little, or even replaced. T&L companies need customer expectations are increasing to be ready for this change, and the greatly, whether those customers successful companies will be those with are consumers shipping packages or agile and flexible cultures that make it OEMs partnering with an LSP on the easier for people to work together across production line. internal boundaries. You need to put your culture to work. In the futures we have described, can a logistics company meet the growing Logistics companies also need to bring expectations of customers, remain costs down; but not only for the sake profitable and generate growth? The of efficiency. They also need to prune short answer is yes. But it’s not going to what doesn’t matter and thus free up be simple or easy. resources for the key areas of focus – such as digitisation, asset productivity, Whatever industry segment a T&L and innovation – and invest more to company operates in, it will be crucial support the company’s key capabilities to commit to an identity and develop and value propositions. So, ’cutting a clear strategy to fulfil this, focusing costs to grow stronger’ should be seen only on markets where they believe they as something closely related to strategy. have a ‘right to win’. Companies need to ask themselves whether they have Finally, with more disruption ahead, the distinctive capabilities they need companies need to anticipate how their to compete. If not, can they develop capabilities will need to evolve. The these capabilities, use collaboration to best will develop services and solutions succeed, or should they withdraw from that will create demand instead of just certain elements of their business? following it. To do this, T&L companies need to establish strong relationships Logistics companies will need to focus with key customers, have an ear on the on ‘digital fitness’, cost efficiency, asset markets they target, and actively shape productivity, and innovation if they the future. want to meet changing expectations. Building and refining these and other The above describes our concept of ‘five capabilities, and then bringing them to key acts of unconventional leadership’ scale across the enterprise, will be key that drive success by aligning distinctive as they translate the strategic into the capabilities with business strategy, everyday. and applying them consistently. This approach, defined in our recent book, Strategy that Works, spans the entire business, from developing the business model through to daily operations. In this paper we’ve taken a broad perspective. It gives hints on some ways the industry might develop, but you will want to consider the detailed implications for your specific business and operating model. Going forward, we will reflect further on how these scenarios may play out differently around the world as well as up, down and across the value chain, and supplement this broad overview with deep-dive perspectives in specific areas. The future of the logistics industry 17 Learn more Authors Further reading on the transportation and logistics sector Andrew Tipping, Strategy& US [email protected] 2016 Commercial Transportation Trends – Strategies freight carriers can use to defeat disruptors Peter Kauschke, PwC Germany [email protected] 19th Annual Global CEO Survey: Transportation and logistics industry key findings Contributors Industry 4.0: Building the Digital Enterprise – Andrew Schmahl, Strategy& US Transportation and logistics key findings [email protected] Intersections: Quarterly analysis of M&A in the global Dietmar Prümm, PwC Germany transportation & logistics industry [email protected] Transformation & logistics 2030 – A series of Delphi Dominik Baumeister, Strategy& Australia/Asia studies [email protected] Further reading on industry transformation Euan Cameron, PwC UK [email protected] Strategy that works – How winning companies close the strategy-to-execution gap? Jan Willem Velthuijsen, PwC Netherlands [email protected] New energy futures: perspectives on the transformation of the oil and gas sector Julian Smith, PwC Indonesia [email protected] The road ahead: gaining momentum from energy transformation Marc Engel, PwC Netherlands [email protected] Re-inventing the wheel: scenarios for the transformation of the automotive industry Michal Mazur, PwC Central and Eastern Europe [email protected] Glimpsing the future(s): Transformation in the chemicals industry Nigel Cinnamon, PwC UK [email protected] Further reading on technologies Stefan Stroh, Strategy& Germany [email protected] Clarity from above – PwC global report on the commercial applications of drone technology Ulrich Koegler, Strategy& United Arab Emirates [email protected] PwC’s Global Data and Analytics Survey 2016: Big Decisions Editorial and research team Navigating cloud management Anita Hagen, PwC Netherlands Organize your future with robotics process [email protected] automation Elizabeth Montgomery, PwC Germany Blockchain and smart contract automation: Why are [email protected] blockchains important? Hendrik Lemke, PwC Germany 2015 Commercial Transportation Trends – Things are [email protected] going so well for freight firms that it’s time to start worrying about the next real danger to the industry: 3D printing. Connected Car Study 2015: Racing ahead with autonomous cars and digital innovation 18 Shifting patterns When we look into the future, we see disruption, we see collisions, we see transformation, but most of all we see opportunities. What do you see when you look to the future? Global automotive Re-inventing PwC global chemicals the wheel Glimpsing the Scenarios for the future(s): transformation of the Tech breakthroughs megatrend: Transformation in thehow to prepare for its impact Other titlesautomotive available in the industry futurechemicals in sight series industry Global megatrends and disruptions are shaking up nearly every aspect of the automotive industry. This paper addresses possible impacts of two of the industry’s key uncertainties. The future of personal mobility is no longer clear – will individual use or shared mobility shape the future automotive market? Regulation and politics could have a profound impact on the industry’s direction – but which way will it go? Customer needs drive a new innovation age where chemical supply chains and materials respond to downstream developments Feedstock playing fields level out, and regional production hubs proliferate How to prepare for the technological Re-inventing the wheel Glimpsing the future(s) www.pwc.com/chemicalsTech breakthroughsbreakthroughs megatrend, and the Scenarios for the Transformation in the megatrend eight technologies to start with transformation of the chemicalswww.pwc.com/auto industry How to prepare for automotive industry the technological www.pwc.com/techmegatrend breakthroughs megatrend, and the eight technologies to start with www.pwc.com/futureinsight This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc. com/structure for further details.