Mastering the post-pandemic logistics revolution

Being Agile

The interconnected infrastructure of supply chains through which logistics companies move goods has become the foundation of the global economy. But that foundation was shaken to the core when the COVID-19 pandemic hit.

While initial measures to reduce its spread halted the flow of many goods, the pandemic has also shaken up demand. Manufacturers of certain goods saw an abrupt drop in orders while others witnessed an explosive increase.

Yet all in all, the logistics sector has been remarkably resilient despite the upheaval. A shining example of the industry’s capacity for rapid innovation came late in 2020 after the approval of two coronavirus vaccines in North America and Europe. United Parcel Service ramped up dry ice production at its hubs to preserve the medicines on their trips from pharmaceutical plants to health care institutions.¹

This is no surprise to us. The global logistics sector has had to evolve rapidly amidst the e-commerce revolution of the last three decades, a span in which e-commerce’s share of total retail sales in the world’s biggest market—the U.S.—nearly tripled from 6.4% to 16.0%.² There is no doubt that online retail stalwarts such as Amazon, Alibaba and Wayfair have shaken up the $9.6-trillion global distribution and logistics sector.

The pandemic certainly has slowed the supply chain traffic. Global merchandise trade plummeted by a historic 27% year-over-year in the second quarter and 5% in the third quarter, with forecasts for the global value of trade to drop 7% to 9% for the entire year^3, 4 (see Figure 1).

But the slowdown of goods is not the only story. There have also been moments of delivery surge. Before the Christmas holiday, soaring demand for shipping packages to U.S. consumers was projected to create a shortage of freight capacity and delays of one to two days for parcel deliveries.⁵ In the 34-day peak period between Thanksgiving and Christmas, demand was projected to outstrip delivery capacity by 7 million parcels daily—more than twice the number of the 2019 holiday season.

In the interim, logistics companies have made a number of innovative moves to increase capacity, including:

• Bringing in new partners like auto rental companies to support last-mile delivery capacity.
• Shifting some cargo shipments from trucking lines to rail freight and helping railroads set up intermodal parks for short-haul lines.
• Increasing space at railyards near seaport terminals to handle overflows in shipping containers.

But it’s important to note that these moves are urgent short-term fixes to three longer-term challenges for logistics providers: consumers’ rising expectations for e-commerce service, the growing impact of distribution companies on the environment and the emergence of new and innovative logistics players. (On the latter point, one only needs to look at Amazon’s logistics moves over the last decade to recognize this, including its purchase of warehouse robot maker Kiva, the launch of a $1.5 billion air freight center in Kentucky for opening in 2021 and the embrace of aerial drones for delivering packages.⁶)

What should logistics providers do to deal with these fundamental forces of change? We believe the place to begin is to understand more deeply what’s wreaking the havoc.

Three Supply Chain Disruptions

As we see it, the pandemic has accelerated systemic changes that have been going on for some time. Three trends are most important:

1. The rise of digital native players in the transport of goods—both B2B and B2C—that are upending existing relationships and business models. In America, the big disruptor is Amazon, which has built a vast fleet of planes, trucks and delivery vans. These investments not only reduce the company’s shipping costs but also increase on-time deliveries to its Prime subscription customers, an estimated 126 million people in the U.S. in the fall of 2020 (and 65% of its total U.S. customers), a three-fold rise since 2014.⁷ While Amazon delivered fewer packages than FedEx in 2019 (2.5 billion compared to 3 billion), the e-commerce giant is expected to surpass FedEx’s volume by 2022.⁸ In June 2019, FedEx announced it would no longer provide U.S. express delivery of Amazon packages.⁹ Amazon has its sights on logistics providers, too. It launched a new trucking service in May that lets other retailers use the service, not just Amazon, according to one publication.¹⁰

2. Eroding service quality as demand soars. With so many consumers ordering home deliveries, logistics providers face increasing risks of delayed packages, missed deliveries, damaged or mishandled packages. Online shoppers have come to expect the delivery as part of the purchase experience. Disappointing them can erode a retailer’s relationship with them—and with the logistics companies that failed to deliver the goods according to expectations.

3. The increasing pressure to institute sustainable business practices. Logistics companies face ongoing pressure to seek efficiencies at every point in their operations, from fuel consumption, to the transport capacity management and reductions in carbon footprints, to be more sustainable organizations.

These three trends now force distribution and logistics companies to make major changes this decade:

While numerous logistics companies have made big investments in data and analytics, each of the above moves require an even greater reliance on collecting, processing, analyzing and using digital data. When they possess such data and the capabilities to exploit it, logistics providers can better sense fast-changing market dynamics and respond more quickly to customer needs.

Focus on the Customer Experience—Especially the End Customer

In a shifting landscape, the fundamental question for logistics company leaders is this: Who owns the customer experience—the logistics company, the retailer or the firm that made the goods? In the days when consumers bought the overwhelming majority of their products at stores, the answer was simple: The retailer. But that has changed given that for the online shopper, the delivery of products to their homes has become as important as the in-store retail experience.

This is an extremely important concept to recognize. In a store, shoppers are in control. They select the package and walk out with their purchase. The logistics company is not part of the customer experience.

When a product is delivered to the home, however, if a logistics company consistently mishandles consumers’ purchases, damages their packages or delays their deliveries, they will eventually hear from the retailer. Sellers will ultimately be forced to choose shipping partners not on price but rather on the quality of the service delivery and positive customer experiences.

This is to say that until the last decade, logistics companies have not owned the entire customer experience. Even if their names were on an envelope or box, they were doing the bidding of the retailer, the seller. But now with players like Amazon becoming a bigger presence in shipping—and sellers evaluating shippers based on the experience they provide customers—logistics companies must make service quality a competitive differentiator. This is the case for both their B2B customers (the sellers) and end consumers.

So how can logistics providers improve their increasing piece of the customer experience? Mastering digital data is at the center of it. These moves have become table stakes:

• More rigorously tracking deliveries, including placing QR codes on package labels. That lets end customers scan the code on their smartphone and send immediate feedback to the shipping company. Such input can help shipping companies identify hard-to-track inefficiencies—unproductive drivers,unreliable transportation equipment and more.
• Making websites, mobile apps and other online channels to customers much easier to use. More intuitive user navigation and faster response time on queries like delivery status updates can go a long way to getting a retailer and its customers to favor your delivery service over the competition. Take UPS, the $74 billion (revenue) logistics giant that ships products globally. Its 5,200+ U.S. stores use a system that generates package labels and tracks shipments.¹¹ In the future, many UPS customers may prefer creating their own labels online or through the app instead of standing in queue at the store, especially during peak season. Putting this work into the hands of consumers gives logistics companies the opportunity to develop their own relationships with end customers.
• Revealing their delivery performance to retailers and other business customers. With statistics in hand, a logistics firm that’s on top of its game can show off its performance to retailers and other B2B customers: its data on shipment volume handled in a given period to show the quality of its services, low percentages of mishandled incidents and claims filed, and so on.

These actions are crucial. But they aren’t enough. Rethinking the entire business model may be necessary, too.