As manufacturers and retailers have established and entrenched relationships with suppliers and customers in faraway locations, transportation flows facilitating that demand have resulted in logistics networks characterised by key transportation corridors which link key trade and production hubs with end-users. For much of the last few decades, those hubs and corridors have been relatively stable, allowing contract logistics providers the opportunity to build scale and make services profitable.
But the underlying forces that drive the shape and characteristics of these networks have changed in terms of mix, speed and significance, with three in particular converging around current contract logistics provision.
When the wider economy slows, focus shifts to cost savings, short-term efficiency gains and lower inventory holdings. For logistics providers, that tends to mean shippers require more frequent movements of smaller consignments. Having spoken to players throughout the European market, Ti is increasingly seeing LSPs reacting to this shift in demand amongst shippers as concern about the trajectory of economic growth spreads.
e-commerce and buying behaviour
e-commerce has already transformed entire sectors, and it’s pushed and pulled consumer demand and logistics provision in many directions. The revolution is not over and as yet we don’t have a clear picture of what logistics networks or services will be needed in the future.
So far, we’ve seen a premium placed on logistics property near population centres, significant development of and investment in warehouse automation, and complete transformation of the drivers in express and last-mile delivery. Perhaps a less visible, though, is how it is changing demand for logistics services which operate along established corridors and trade lanes. The need to hold sufficient inventory close to consumers to meet demand and provide rapid delivery is increasing demand amongst retailers and their suppliers for flexibility. A set transportation schedule, based on guaranteed volumes between known locations, is increasingly less likely to fit the needs of a retailer with unpredictable and declining store volumes and expensive and growing e-fulfilment operations.
Perhaps the most significant trend within digitalisation is the emergence of digital freight platforms. Fundamentally, these platforms serve to match demand with supply when and where it exists. This provides the flexibility, responsiveness and level of service shippers require.
The model also threatens to undermine one of the key tenants of outsourcing that has driven the contract logistics market over the last several years. A number of LSPs have grown very large and enjoyed a sustained level of success, in no small part by helping their clients remove significant cost from their balance sheets and by providing access to shared economies of scale via their owned warehousing networks and workforces. This, however, comes at the expense of flexibility, with fixed assets that link established centres of gravity. While the networks have provided huge efficiency gains and created significant value, they must now react to the changing profile of demand, likely requiring vast investment.
In the ongoing transformation of logistics, shifts in forces that drive the contract logistics market are coming into sharper relief. A slowing economy always serves to tighten budgets and sharpen focus on cost savings. Less obvious, though, are the new business models, connections and practices that emerge as the old economic and commercial structures become reductant, making a return to ‘normal’ impossible. Similarly, flexibility is becoming fundamental to retailers’ strategies for meeting consumer demands and generating profitability. It is also a shift that digital freight platforms are positioned to meet – the matching of supply with demand when and where it occurs is a compelling offer.
So, a logical question to ask is, are we looking at a future in which fixed assets, logistics and contracts are replaced by on-demand capacity from the spot market that meets demand in real-time? Not entirely, but contract logistics providers face a complex and challenging landscape if they are to meet shippers’ demands. They must react and transform as digital freight (and warehousing) platforms threaten to disrupt (in the truest sense, for the purists) their offer. Contract logistics providers also appear to be facing this imperative at a time of impending economic constraint. This is a significant challenge, but contract logistics is at the convergence point of major shifts, and it will not have a normal to return to in five years.
Source: Transport Intelligence, August 15, 2019
Author: Nick Bailey
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