China sourcing: The Future of Logistics and Technology – Part One

Here at CPG, we have been discussing the changes occurring in China sourcing and what the future may hold for the import/export industry. We also discussed the system enablers in the sourcing community. In this two-part series, we’ll switch gears and explore the logistics industry’s current situation, and provide insight into its future.

This blog is inspired by a recent article in The Economist about the digitalization of the global logistics business whichpoints to the high cost of current logistics and what lays ahead.   A great article, I recommend it to those who care about logistics. It points out that the Munich Maersk, for instance, is an example of technology and transportation being brought together in perfect harmony, using high tech and minimal manpower to lower costs.  However, it is also a symbol of what still needs to be done when it comes to the logistics business.

In 2014, the Global logistics businessboasted revenues of $14.3 trillion. But the economic slowdown has taken its toll on the industry. The supply of freight exceeded the demand resulting in freight rates droppingbetween 2012 and 2016.  However, overall, costs are still high although today’s logistics industry is quite antiquated. All this strongly suggests that it is getting ready for a shakeup.

The real revolution in logistics is taking goods from factories directly to consumers and doing it cheaply. This requires a complete re-focus on higher efficiencies and better technology. To do this, data is key. Demand for more information has increased and real time data on where shipments are at all times is becoming possible. To manage this process—although AI (Artificial Intelligence) would seem to be the answer—the real solution actually lies in data management and information technology. The leaders in this field—companies like Alibaba and Amazon—are taking over the logistics business and changing it forever. They are moving goods from international factories directly to the consumer’s doorstep.  Only time will tell how this will impact the logistics industry in the long run.  But you can be sure there will be an impact.

Express shipping companies like UPS, FedEx, and DHL have all improved their data management systems, however they still cost exponentially more than sea freight. This means that importers who buy more than a single package-worth of goods are still going the more traditional route—using containers and freight forwarders to transport goods, mostly by sea, from the factory to a warehouse and distributing them from there.

Costs today are high partially because of antiquated paperwork and processes, along with a lack of incentives to change them. The containers on each ship generate a lot of paperwork and this is slow, cumbersome, inefficient, and expensive. You would think documentation could be sent via email to meet the cargo at its destination, but today most of this paperwork is still being faxed. And when it does not catch up to the goods in time, it causes delays and more expenses.  The middlemen handling the customs clearances, transfers between warehouses, and various other tasks don’t complain because they are taking up a fifth of the logistics industry’s revenues—a fifth being trillions of dollars. Freight forwarders are not helping either, because they normally charge a percentage of the total shipment. This gives them little to no reason to lower costs.

In Part Two of this series, we’ll discuss changes in the logistics industry that will make up the frame-work for the future of logistics to be built on.

What do you think about costs and changes in the logistics business?  Share your thoughts with us in the comments below and stay tuned for part two next week!

 

By Jocelyn Trigueros