In its recent 2016 Commercial Transportation Trends white paper, PwC authors Dr. Andrew Tipping and Andy Schmahl offered strategies freight carriers can use to defeat disruptors.
Based in Chicago, Dr. Andrew Tipping leads the U.S. transportation practice and specializes in organization and change leadership. His is also Managing Partner of the Chicago office.
Andy Schmahl, partner, strategy, is a Principal in the Pwc Chicago office and part of the Engineered Products and Services team.
In conversation with Canadian Shipper, the authors said they wrote the article after seeing a lot of interesting changes afoot in transportation.
In the North American context, Schmahl noted, one of the most important changes lies in the area of distinguishing between asset heavy carriers and asset light distribution companies.
In the past, very rarely did the two meet. There was a host of reasons why these distinctions existed.
Nowadays there’s been a bit of a crumbling of the wall between asset heavy and asset light players.
“There’s a greying of the lines between the different organizations,” Tipping said.
There’s a blurring of roles, so whether players are competitors or collaborators is a much greyer distinction than in the past.
With asset light companies, there isn’t really any secure capacity. When it comes to peaks, it’s difficult to serve their customers.
Says Schmahl, before, shippers had more scattered sources of consumption and required someone who could move something from Manitoba to Toronto easily.
“What we’ve seen though, especially with companies as influential as Amazon, is that distribution centres are now hyper local, within just miles of the general population.”
This enables shared warehousing with which to do it.
Shared warehouse concepts, and dedicated warehouse management are a new and growing thing, enabled by technology.
With hyper-local distribution, the national carrier becomes a “quaint relic of the past.”
You have companies that can very easily move from one part of the city to the other.
Now when you’re doing it more in bulk, those last mile type things are becoming more local, he said.
Tipping said the long distance, overnight sortation carriers were more relevant with distribution centres that were far apart.
The strategy of most legacy carriers, said Schmahl, is that getting effective goods movement across distances is important.
With nearshoring, offshoring, and the advent of 3D printing, this also changes ideas about where things are going to be sourced.
“Globality will always be important but it opens up the potential for the little guys to move in, like the crowdsourcing fillers,” he said.
“Shippers are looking more at a “where should A be, if I have to get something to B, and the need for optimizing scale to reduce the total bill. They need more handholding than some of the big guys can do. Crowdsourcing is there because many companies just need ad hoc transportation.”
It will be a long way to overcome trust factors but technology and tracking will help small entrants live with the incumbents, Tipping said.
“Technology is so long overdue as to be farcical as are the number of paper documents that are still used, printed documents, keystrokes etc. -it’s kind of ‘mind-blowing’ to other industries,” he added.
Improving technology will be key to not disrupting yourself.
“If you’re only going to play a small role, play it well. Don’t try to be all things to all people. There’s a need for a change in philosophy about your role and the way to challenge the status quo,” Tipping said.
The concept of digitization around the trucking space can’t be underemphasized.
“With mergers and acquisitions there is a huge uptick in interest among foreign companies looking to enter North America, and private equity investment in logistics startups. If you are a legacy carrier and comfortable doing things the way you have been doing them, maybe this time it’s really different. You’re starting to see where the little guys could leverage technology and crowdsourcing to synthesize and play bigger than they really are,” Tipping said.
“Timing also comes up. Our crystal ball is no better than anyone else’s but when you look at disruptors there’s technology, economics, and legislation. It’s not an economics problem usually- a huge amount is regulatory change, varying in each country to country environment. Regulatory limitations are one of the biggest pace setters,” said Schmahl.
Five trends have been identified as changes that are affecting dynamics for shippers in more complex supply chains:
The supply chain is fracturing into “expanding nodes”. There is recognition among shippers that transportation and logistics can yield a competitive advantage for them-it’s a strategic consideration that is based on customer expectations, sales volume and product mix.
There is an expanded presence of high-margin shippers requiring exceptional handling, security, reliability, and tracking procedures from their transport companies.
Disruptive events have also become more frequent and have greater magnitude: higher demand peaks, geopolitical uncertainties are causing shippers to re-evaluate their procurement tactics and efficacy of networks.
E-commerce is experiencing double digit growth and making inroads in the b2b arena, where shipment complexity is higher and transparency and tracking requirements are greater.
As a result of these trends, new demand patterns are being created. Freight traffic growth has stalled even though fuel costs have declined.
The study finds many companies have used M&A for growth but that assuming a strategic approach is a better option.
Local network builders buck the conventional model of centralized warehousing and expansive transportation networks for distributed, localized structure, exploiting the benefits of speed and dynamic flexibility at a competitive cost.
Third party logistics consolidators are an example.
Another disruptor could be called the “crowdsourcing fillers”. These are companies that leverage the fundamentals of social networks offering shippers supply chain flexibility and agility.
Their success “is not a foregone conclusion”, the study said, but their very existence suggests that a creative and flexible model that addresses today’s workforce challenges, such as driver availability and unionization, eventually will succeed.
The third disruptor, “startup simplifiers”, target new and small shippers that don’t offer enough volume to warrant the attention of larger carriers.
Their elevator pitch is that they view shippers as more than just high-margin customers to be harvested by a specialized sales force. They see shippers as a distinct customer segment requiring specific and differentiated products and services. Their offerings often go beyond shipments to a broader set of logistics activities, like website design and online channel management.
The fourth disruptors are the big data manipulators. They use a strategy that harnesses digital capabilities and the power of analytics to satisfy shippers that require more consumer-like buying experiences and greater control over their shipments. These services, managed well, can also yield substantial cost savings for the carriers and logistics companies providing them. These savings can be reinvested in extending their digital competence.
The fifth disruptors, hybrid carriers, seek to balance the traditional divide between asset-light and asset-heavy models.
They have a combined ground network with the best of both services: a base load of fully controlled, owned equipment plus a portfolio of instantly available, non-owned equipment that can be contracted to manage demand fluctuations.
These niche value offerings will not likely come to dominate the commercial freight transportation and logistics industry but are already reshaping the sector, said the study.
How do you defend against disruptive business models?
Through developing a set of capabilities that address changing customer needs, that are sufficiently flexible to shift direction to match changing customer preferences, and importantly, that take advantage of the deep specialization that the firm excels in while improving operating efficiencies to drive optimum performance.
What should executives of established commercial transportation and logistics companies do to defend against these disruptive business models, and how can you strengthen your market position in the current environment?
As “pathways to success”, the authors advocate creating a “better balance between customer needs and operational efficiencies.”
Frontline employees should be empowered and encouraged to address shippers’ challenges within the framework of their daily duties.
They should be able to provide shippers with greater visibility and maneuvrability with respect to the timing and mode of shipments. They should automatically aid shippers with global, cross-modal solutions.
They should enable supply-side vigilance and strategic deal making and integration in mergers and acquisitions.
For example, companies should seek to understand how customer needs are being addressed by any competitors. When product and capability gaps are identified, companies consider acquiring companies that fill in those holes in your business model.
In itself, mergers and acquisitions is not a sufficient strategic response to the shifting demands of shippers, the authors said. M&A can be an excellent tool for obtaining capabilities and fleshing out product and service portfolios, but only if you have an effective tactical plan for meeting customers’ needs.
Fully deploy data analytics and digital management: this includes tools needed to capture and store data effectively, the analysts who unlock insights from data, and the pathways needed to transform those insights into operational realities. Integrate this data with your customers’ systems, and with the systems of other third-party firms they work with. Design and implement advanced customer-facing digital tools.
Enhance network agility and support capacity management. Develop your own local shipping networks or use third-party networks, bypassing traditional hub-and-spoke operations and taking advantage of more dynamic approaches to pickup and delivery of goods. These local networks can be more flexible than national systems because their packages travel only a short distance. They can promise overnight delivery even for pickups as late as 10 p.m., which gladdens many shippers because most Internet orders are placed after dinnertime. Moreover, local networks can support the effective management of supply chain disruptions and of large variations in demand on a daily, monthly, and annual basis.
Together, adopting these capabilities -or the right combination of them for your company’s business model and customer base -can help carriers and logistics companies respond to the shifts in shipper demand that have opened the door to disruptors emerging within their markets. “That’s a much more palatable option than sitting back and watching as your position in the marketplace erodes,” said the study’s authors.