Back to the Future: What’s in Store for the Logistics Market?

2019 was turbulent time for the logistics industry. There was only a 1.2% growth in merchandise trade volume growth. "Stagnant global economy, trade disputes, geopolitical uncertainties, and environmental regulations,"[1]  created a lull. Come 2020, this scenario worsened with the pandemic outbreak. In early 2020, industry experts predicted a logistics nightmare with “transportation prices and inventory levels [taking] a negative turn.[2]” Many prominent retailing stores filed for bankruptcy. Specific stockpiling of products like sanitizers and tissue paper, created out-of-stock situations. In all, it was a nightmare, for a while at least.

How has Pandemic Disruption Affected the Market?

The Logistics Management Index (LMI), which assesses the growth of the industry in 8 areas – “inventory levels and costs; warehousing capacity, utilization, and prices; and transportation capacity, utilization, and prices,[3]” reached 51.3 in April – an all-time low. But slowly and steadily as restrictions eased, the industry grew again. While it was not a marked increase that was similar to the growth observed in early 2019, the LMI was 63 in July. This meant that the growth while akin to the rates in early 2019, was still completely strengthened. While lockdowns and restrictions brought about by the surge in cases tightened the growth, the industry sustained.

In fact, the need for contactless delivery in the light of pandemic disruption, has bought the logistics industry to the forefront. Earlier considered a background function, logistics has now proven fundamental for the sustenance of other businesses. It is, to a certain extent, determining production, sales and marketing.

Constant fluctuation of market demand has increased supply chain disruptions, created travel challenges that hinder easy delivery, and resulted in unpredictable circumstances that have disrupted planning and decision making. Furthermore, the pandemic has also highlighted the need for digitization in the logistics industry to keep up with real-time oscillations in market demand and supply, but how many businesses would be able to swiftly employ the needed changes? What are the ways in which the pandemic has altered the course for business? What does the future hold in store? And most importantly, what are the methods aiding post pandemic recovery? We’ll address these questions through the course of the article.

Focusing on Last Mile

More people are staying at home and physically distancing themselves in lieu of safety during the pandemic. This has resulted in a steep rise in internet adoption for commerce. More customers are preferring e-commerce to physical shopping, but options like same day delivery, for instance, help facilitate a near retail store experience, as much as possible.  

An Oracle study found that “13% of consumers would never order from the retailer if the delivery is late.” Most consumers look for same-day deliveries and benefits like Premium Membership which offers hassle-free delivery experiences. To meet these needs, businesses are also looking at investing in micro-warehousing, local warehousing as well as delivery systems that enable a last mile delivery – creating an overall ‘delightful’ shopping experience for the consumer.

Fundamental Aspects of Last Mile Logistics

1 in every 4 consumers are ready to pay a little extra for same-day delivery, and same-day delivery is touted to reach a 25% market share by 2025.[4] The spike in e-commerce is the major contributor to this uptick. The need for faster fulfilment is an added catalyst. And the pandemic has completely altered the pace of this growth.

As a Dmagazine report notes, “According to Adobe Analytics, total U.S. online purchases in June were up 76% from last year, for a total of $73.2 billion for the month. Since the start of the COVID-19 pandemic, e-commerce sales on everything from groceries to backyard furniture have boomed.[5]

Specifically, COVID-19 has increased the need for hyper-local deliveries, given that travel restrictions are constantly fluctuating between restricted and relaxed. By connecting with third-party logistics, delivery models are able to access smaller areas.

The need for social distancing has also brought about the need for contactless delivery. Many are powering their delivery systems with AI and data science-backed solutions to digitize operations – be it warehouse management, packaging, OTP-driven deliveries, or automated payment, to keep up with the health and safety regulations.

In all, the crisis has turned the limelight on the process of streamlining frictionless order-delivery setups. A fundamental aspect needed to accomplish this goal would include setting efficient Last-Mile Logistics processes, as they are crucial for a wholesome user experience. However, they are also the most challenging functions to streamline. Studies show that, “Last mile logistics is the least efficient stage of the supply chain and comprises up to 28% of the total delivery cost.[6]” When it comes to shipping too, “last mile delivery costs are substantial — comprising 53% overall.[7]”  

If companies are looking to optimize cost and ensure a frictionless, delightful shopping experience for customers, they should focus on better last mile logistics.

To ensure that this process flows smoothly, setting up a Last-Mile Logistics Centres is pivotal. By following these few functions, firms can cater to the challenges faced by last mile delivery and save up to 20% of operational costs.

1. Setting up distribution and logistics centres:

E-commerce retailers require about thrice the space that a traditional store would. And given that the range of last mile deliveries vary from anywhere between 50 to 100 miles, setting up a distribution and logistics centre at the right location is ideal for making same day delivery possible. By gathering data, optimum locations for logistics centres can be determined, keeping in mind ideal delivery time, customer location, complexity of product to be delivered (easily assembled, requiring multiple parts to be shipped, etc.) and the delivery vendors who are available.

Here are 4 challenges that businesses are likely to face in setting up high-performing logistics centres, along with the solutions to resolve the issues:

Challenge – Picking the right warehouse space

Solution - Revamp traditional brick and mortar stores

As of 2018, “the average cost per square foot of warehouse space was $7.79, a marked increased of $6.53 in 2017.[8]

To streamline last mile delivery, having well located last mile warehouses are necessary – but prime locations imply rise in costs. Setting up a warehouse from scratch comes with its own set of challenges. However, renovating is relatively faster and less expensive. In that regard, the most fitting solution lies in revamping traditional brick and mortar stores into last mile warehouses.

A CBRE[9] report showed that 13.8 million square feet of retail store space has now been converted to over 15 million square feet of industrial space. While COVID-19 accelerated this change, it has already been in effect since 2017. The report noted that underperforming brick and mortar stores are ideal to be made into last mile warehouses. “[These stores] are often located within population centers, connected to utilities and have large parking lots with multiple points of ingress and egress. Many are also freestanding big-box stores with existing dock doors and clear heights compatible with industrial use. Those without compatible design formats are typically demolished and replaced with modern warehouse facilities.[10]

The right space to be revamped can be chosen by collating historical data on capacity requirements, predicting future inventory levels based on market trends and ensuring that the warehouse is able to match up to those requirements. Also, by analyzing the attributes of the products being stocked, the storage capacity and facilities needed for each of the items can be identified.

Challenge - Labor costs

Solution – Data-driven labor management

Labor costs tend to make up 50%-70% of a typical warehouse’s budget.

Managing labor practices efficiently can keep morale high, maintain top-notch quality of work and make efficient use of resources. Collect data on the work done at the warehouse to determine the present and ideal ways of working. Identify the bottleneck points, repetitive tasks, processes with high/low productivity. By monitoring the work doled out and analysing the optimum effort/time taken to complete tasks while keeping team morale high, these costs can be channelled effectively to keep operations moving, seamlessly.

Challenge: Maintaining inventory

Solution: Inventory management systems

34 % companies have shipped orders late because they “inadvertently sold a product that was not in stock.[11]

Last-mile delivery’s sole focus is on making products available as swiftly as possible to customer. However, stockouts can prove extremely detrimental to this endeavour.   

Prior to the pandemic, many logistics systems were opting for the ‘Just In Time’ setup and inventories were stocked based on market demand, with just enough to ensure smooth operations. But in a marketplace defined by pandemic disruption, demand is constantly oscillating. ‘Just In Case’ setups where customer delight is key, with swift delivery processes and well-stocked, strategically planned warehouses, it is more possible to provide the product/service the customer wants, in as streamlined and agile a manner as possible.

Aligning product availability with market demand is a challenging task. In fact, an average retailing company in the US “has an inventory accuracy of only 63%.[12]” By setting up data-driven, analytically-powered inventory management systems, businesses can accurately forecast demand and stock the required amount of inventory.

When stock piling behavior was at its peak, stockouts were a major concern for retailers online. But big data can reduce the possibility of stockouts by calculating lead times and historical sales data and recommend the optimum amount of safety stock. Just by minimizing stock-outs and overstocks, overall inventory costs can be reduced by 10%.[13] In the event of slow-moving products, cross-selling can be made possible. 

Challenge: Energy consumption

Solution: Energy management systems

Energy costs usually make up approximately 15% of a warehouse’s operating budget.[14]

By setting up efficient energy managements systems, past usage of energy can be compared with current requirements. Areas of highest and least usage can be identified and energy resources can be managed effectively. Analytics can also help project future energy loads, and plan warehousing budgets, accordingly, keeping in mind geographical, economic and market conditions. Sensors, actuators, and controllers collect valuable data on energy usage. Analyzing this data will bring forth a plethora of insights about consumption patterns, not just for overall warehousing activities, but specifically for individual devices and their rate of energy consumption. Not only will this help predict energy usage and control demand charges, but fluctuations can help identify depreciation in machinery well in advance and save costs by employing preventing measures.

2. Route Optimization:

Cargo movement and route optimization are going to be the need of the hour to build supply chain resilience. Having multi-modal transport options, setting up regional warehouse options will help supply chains move faster, reduce reliance on one transport provider/warehousing facility and decrease pressure on systems in events of disruption. Analyzing transport trends, traffic rates and latest updates on the most preferred routes can help in identifying the most efficient methods of cargo movements.

Route optimization is critical to ensuring efficient last mile delivery. It is also critical to ensure cost savings. Reports suggest that the average driver in the US, idles in their vehicle for about 16 minutes a day. To put that into perspective, collectively this adds up to 3.8 million gallons of gas being burned up – which costs about $7,980,000, every day.[15]

And this is without accounting for traffic.

Traffic takes up precious delivery time, and results in loss of fuel, thereby, increasing overall logistics costs. “According to the INRIX Roadway Analytics in 2017, over the next 10 years, the most congested 25 cities of the U.S. are estimated to cost the drivers $480 billion due to lost time, wasted fuel, and carbon emitted during congestion.[16]

Using GPS tracking, deliveries can be tracked real-time – at any point that there is idling, company executives can figure out the issues that are holding up the driver and resolve it immediately to streamline the process. Also, by comparing traffic, weather, road work, large scale events, common points of congestion, etc., analytical software can identify the fastest routes to ensure on-time delivery.

In the event that a vehicle breaks down, real time insights leveraged via tracking software that connects all the ongoing delivery processes, can help determine which other driver is nearby to take on the load that is now at a standstill. Individual driver performances can also be tracked with route optimization software. Data can be collected on each of the trips taken. This data would help identify rash drivers, points prone to accidents, etc., and potentially reduce fuel costs, identify if the talent hired is efficient and help bring down driving-related delivery accidents, thereby possibly reducing insurance costs as well.

Therefore, by just optimizing delivery routes, a lot of cost savings can be made possible. It is only fitting then, that the global route optimization software market “is projected to reach $9,447 million by 2023, growing at a CAGR of 18.6% from 2017 to 2023.[17]

With urbanization expected to unfold at a rapid pace and most of the world’s population – approximately 60% - is expected to be in cities. The resulting congestion, and the fight for fuel in the years to come, warrants the need for remote-accessible delivery backed by greener transport. Utilizing drones for remote-access areas, using hybrid electric trucks for delivery, using customer-targeted API tracking, autonomous vehicles, etc., are some of the tech tools expected to create efficient delivery mechanisms. Creating unified delivery systems that best align to vehicles and manpower available will prove pivotal. Therefore, route optimization is one function that just cannot be ignored.

3. Enterprise Resource Planning:

Planning and allocating the resources needed for last mile logistics not only helps with the delivery aspect, but also enables effective accounting for operations. By employing Enterprise Resource Planning (ERP), firms can create a one-stop integrated platform for all of the logistics processes. Armed with an informed overview of day to day process, real-time actionable insights can be procured about areas conducive to cost saving, improving efficiency and effectively managing risk events. It is noteworthy that the “Enterprise Resource Planning Market is expected to exceed more than US$ 49.50 Billion by 2025.[18]

Setting ERP up in advance will enable firms to ensure supply chain efficiency, help predict possible congestions in demand forecasting, and ensure that all processes are aligned to ensure on-time delivery. The data collated through ERP can also help scale existing operations, thanks to its collation of historical data.

4. Spatiotemporal Data Analytics:

Today, close to 80% of data records created consist of spatiotemporal information. When merged with Big Data, this can provide businesses with a gold mine of insights that can used in delivery process. Visual analyses can help understand traffic patterns between hubs and various customer locations, for instance. But importantly, tracking spatiotemporal data on social media platforms can help track and analyse customer behavior and trends.

This data can be leveraged when forecasting demand and determine what products are likely to be ordered by which customer, and where are the customers placing the order from and getting the order delivered. Being able to make these sound forecasts well keep supply chains and logistics systems prepared for market fluctuations. Data collated through GIS (Geographic Information System) and coupled with tabular/attribute data can also help analyse and align with real time data insights that can guide day to day decision making processes

Building Resilient Systems

The time to transform existing systems and create buffer against disruptions is now. Supply chains need to be made more resilient and it is no easy task at that. All the different factors of the logistics network need to be mapped to one and another, stress tested, bottlenecks need to be identified and contingency plans need to be put in place and factors such as reshoring and local manufacturing facilities need to be bolstered. It is extensive and the costs are bound to reflect the same, but to sustain, companies in the logistics industry need to identify weaknesses in their operational flows, and start building resilience for any future economic disruptions and enable informed decision-making.

Creating swift operational systems are the need of the hour and setting up Predictive and Prescriptive Analytics are fundamental for this endeavor. 

Using predictive analytics can help interpret different data, analyze warehouse capacity, identify operational bottle necks, determine operations costs and saving potentials, describe asset usage, and help forecast demand better. By considering large volumes of data about market indicators, news articles, stock market alterations, changing consumer behavior, etc., it can provide real time insights that managers can leverage to ensure quick and informed decision making.

Prescriptive analytical solutions can be coupled with predictive analytics to make the right decisions when strategizing and planning daily operations that form the backbone of reliable last mile delivery setups. Setting up ML models that enable simulations will help understand the different workings of the business and help executives experiment with operational solutioning.

Automation for Labor Optimization

Another major factor through which resilient systems can be built, is by ensuring that talent is efficiently employed and not wasted over repetitive tasks requiring unnecessary physical rigor. “Logistics automation is replacing traditional logistics processes as it helps in enhancing the overall efficiency of the industry by streamlining and automating the whole process, involving various tasks such as processing freight operations, tracking, and documentation. The logistics automation market was valued at US$ 41. 5 billion in 2019 and is projected to reach US$ 91. 7 billion by 2027; it is expected to grow at a CAGR of 11. 5% from 2020 to 2027.[19]

Automated forklifts, conveyor belts, etc. are already in place in multiple supply chain/ warehouse setups world over. Clearly, prior to COVID-19 itself, the logistics industry was actively working towards adopting tech-driven automation. However, COVID-19 accelerated the process.

An initial brake on the operation of “non-essential” services threw a wrench in the smooth operations of logistics and supply chains. Pandemic restrictions and safety measures induced reduction in labor availability. The need for social distancing meant that the warehouse facilities had to be sanitized at regular intervals, staff had to ensure limited interaction amongst one another, and so on and so forth. These factors were proving to cost businesses a hefty sum without equal ROI.

Therefore, many businesses focused on investing in automation of existing processes, especially routine tasks like packing, inventory tracking, freight consolidation, etc. Any workers who did come in could be equipped with wearables so that companies could understand how best to employ the human talent available. Additionally, storage facilities could also be equipped with sensors to track the efficiency of real-time operational data within the warehouse to identify points of improvement.

Therefore, in case companies had not yet invested in digitizing processes, the pandemic made them take the leap because tech-driven solutions were proving vital for survival.

Tech to be Leveraged for Effective Digitization

Artificial Intelligence (AI) plays a vital role in enabling digital transformation of logistics because it helps in resolving supply chain complexities. A Global Newswire survey notes, “The artificial intelligence in supply chain market is expected to grow at a CAGR of 45.3% from 2019 to 2027 to reach $21.8 billion by 2027. The growth in this market is mainly driven by rising awareness of artificial intelligence and big data & analytics and widening implementation of computer vision in both autonomous & semi-autonomous applications.”

Here’s a look at some ways in which processes are being transformed for the future with the help of technological tools and advancements, and AI:

-Tapping into IoT: Leveraging IoT technology can provide valuable insights about the logistics industry. A market forecast for 2026 published by openPR noted that “the Global IoT in Logistics Market is expected to witness growth with a CAGR of 16.4 %[20]” by 2026. By linking and collating information from various sources available online and from different technologies, we can increase supply chain efficiency by creating real-time visibility of cargo movement, and operational efficiency. Crunch points can be identified, product/packaging defects can be preempted, and issues of delay or clogged transport avenues can be identified.

-Fleet management: This technology basically helps logistics companies manage large fleets and ensure their safety and sustainability. And IOT can also help to leverage new age fleet management, decrease idling as well as fuel consumption. With IOT sensors, factors like vehicle movement speed, engine status, etc., can be determined. As a result, bottlenecks to cargo movement can be identified and improved upon to create a seamless fleet management process.

-Blockchain Technology: By implementing blockchain technology, a digital ledger of operational functions can be set up, and not only does this keep track of all operational activities, but it also helps to identify fraudulent transactions and acts as a platform for storage. Moreover, blockchain technology can be further powered by IoT inputs, help to alert misinterpreted information, and can be scalable for the sea of information that IoT will continue to bring.

-Radio Frequency Identification: Referred to as the RFID, this technology is efficient in tracking supply chain operations. By simply attaching RFID tags to products being moved along the supply chain and delivered to the customer, this technology helps to keep a real-time track of goods. The data collected is then stored on cloud, from where further insights can be derived to bolster and better operational activities.

What will Future Warehouses & Supply Chains Look Like?

Agility, Digitization and Supply Chain efficiency are the fundamental factors that will frame the success rates of future logistics systems. With the jobs of the future indicating the need for more expert insights and inputs from human resources rather than routinely labor, robotics and automation are bound to play a huge role to ‘free up’ talent. As more and more consumers move online and look for a near continuous experience that merges the physical shopping experience with the convenience of e-commerce platforms, and the more digitized the world gets, the more data can be leveraged.

The focus falls on last mile logistics, and the earlier we prepare to derive maximum insights from the goldmine of vast data that awaits, the better prepared we will be to handle future disruptions.

Associate Principal | TheMathCompany

Raghuveer TT