Modern supply chain management is greatly intertwined with technology, and logistics operations are no exception. The logistics technology market has grown rapidly over the past few years, with a massive spurt in the number of software solutions available in the market. What has traditionally been a brick-and-mortar industry is now rapidly embracing digitization, partly out of compulsion in the post-Covid world and partly by choice, to streamline operations.
GROWTH OF LOGISTICS TECHNOLOGY MARKET
Whilst bigger logistics service providers are adopting technology, we have also witnessed the rise of digital freight forwarders.
It is estimated that 47.7% of goods handled in 2022 were through digital freight forwarding platforms, which is expected to exceed 60% by 2027.
The expanding logistics industry presents a lucrative market for technological solutions providers, who have introduced solutions designed to meet the industry’s unique requirements.
HIGH FAIL RATE FOR LOGISTICS TECHNOLOGY START-UPS
While the low entry barriers in the logistics technology and digital freight forwarding services have facilitated the entry of a large number of players, the intense competition, constant pressure of margins, complex operating environment, and uncertain macro-level outlook have also meant that the success rate for these technology-driven businesses is not very high.
Due to a combination of factors such as inadequate comprehension of the industry’s dynamics, inability to meet customer’s expectations, elimination of the personal touch that the traditional freight forwarder brings to the business, and general lack of awareness of the holistic benefits accruing to supply chains, a number of recent entrants have been compelled to scale down or wind-up operations.
Recent instances include Flexport, which is laying off 20% of its global workforce, while Seattle-based Convoy Inc. has confirmed that it will close operations.
While these are amongst the more high-profile instances, the list of casualties is quite long and includes mid and small-sized entities as well, such as Freightwalla, an Indian logistics technology start-up, which realized that its technology-driven business model could not cope with the intricacies of the logistics market.
COMMON REASONS FOR FAILURE AND MISTAKES TO AVOID
Logistics is one of the most consequential of the supply chain processes; optimizing it goes a long way to streamlining the entire supply chain. Technology plays a key role in that, so it is easy to jump on any available tech solution that promises optimization. However, when leveraging logistics technology, there are five major reasons for failure or mistakes to avoid:
1. Freight is a commoditized market that works on human relationships:
The transportation sector is becoming increasingly commoditized due to a combination of standardized industry-wide processes and the growing intensity of competition, which has stifled innovation. Another aspect is that the forwarding industry is a “people’s business”, where human relationships and interpersonal skills often constitute the competitive differentiator in an otherwise commoditized market. Logtech solutions reduce the human touch, which is one of the primary determinants in the choice of a logistics service provider, with customers still valuing personal contact and therefore do not quite perceive the removal of the human layer as positively as freight forwarders do. So, excessively focusing on technology at the expense of the human element is a somewhat unviable approach in the logistics industry.
2. Investor pressure to gain market share dilutes focus from product innovation:
Several digital freight forwarders and logtech solutions providers are funded by Venture Capitalists, whose objective is to allocate funds to the most high-yielding investment avenues, rather than the creation of a sustainable business model in the long term.
Their priority is therefore to ensure that business valuations rise quickly, whereafter they can cash out their investments at a reasonable profit. Given the financer’s focus on short-term profits and rapid growth, companies are compelled to adopt a sub-optimal approach, whereunder they offer substantial discounts to gain market share instead of emphasizing improving the product.
While this approach helps them gain customers in the short term, the customer base generally consists of smaller and transaction-minded customers who control low volumes with irregular flows rather than bigger customers who tend to value the quality of service and rate highly the reliability of service and long-term partnership.
Also, since these small customers are typically price-sensitive, they will shift their business if some other competitor offers a lower rate.
Due to these factors, customer churn is high, while product development is also neglected, leading to the company’s eventual downfall.
3. Failure to address real problems with innovative solutions:
Technology-enabled disrupters aim to solve real-world problems by designing appropriate solutions. While this model works in most other industries, it is much more difficult to implement in the logistics industry because of the vast number of activities, diversity thereof, and the number of stakeholders in the process. Failure to address real problems will do little to engender customer satisfaction, leading to customers turning their backs on the product
Nonetheless, solutions that do address the industry’s pain points and those of other supply chain operations, such as inventory management are gaining traction. Remember, they are all correlated. Examples of these solutions in the logistics and supply chain industry include real-time visibility solutions, big data analytics, and container tracking software.
In this scenario, vendors providing a digital interface rather than tackling specific issues are unlikely to gain acceptance in the industry.
4. Not creating capacity, but only regulating it:
To provide reliable logistics services, logistics companies need to invest in assets, such as trucks, warehouses, and cargo handling equipment, which necessitates significant capital expenditure.
If a digital freight forwarder were to position itself merely as an intermediary, relying on procuring trucking capacity from other transporters, its business model would be inherently unstable, as their core offering is reliant on procuring transport capacity externally and at viable rates. Besides, there exists the risk of the capacity owner directly approaching the customer, thereby making the digital forwarder redundant. After all the customer expectations are the same, so why not bypass the middle man?
Hence, digital freight forwarders and logtech start-ups operating on an asset-light model, and whose product offering essentially consists of a tech-enabled interface connecting cargo owners and transportation service providers, will find it difficult to hold their own as competition intensifies.
Companies like Uber, which have succeeded in offering discounts initially to lure people on its platform and subsequently increase costs to profitable levels, are better positioned to compete with incumbents than are regulators of capacity such as Convoy Inc, who had not made significant investments in capacity.
5. No consistent scalability in a cyclical market
The transportation and logistics industry is cyclical in nature, and established players have adapted their strategies to counter the cyclicity, with the intent of surviving the troughs and maximizing profits during the peaks. Their control of assets, relationships with customers, and financial wherewithal enable them to play industry cycles successfully.
Digital freight forwarders lack these advantages and instead are under pressure to deliver consistently high growth and capture market share, a task rendered difficult due to the cyclical downturns.
This divergent strategic approach can jeopardize the survival of digital forwarders, as their success parameters are not consistent with the industry’s operational dynamics.
HOW KLEARNOW USES TECHNOLOGY TO ENHANCE THE HUMAN TOUCH
As one of the pioneers of the logtech industry, KlearNow has focused extensively on developing its core products to streamline logistics processes.
KlearNow’s artificial intelligence-powered platform automates the end-to-end logistics process, digitizes customs clearance workflows, enables proactive drayage management, and provides other functionalities that enable freight forwarders to improve their efficiency.
These reduced manual work and optimized processes free up the forwarder’s time and enable their employees to focus on customers, deepening the interpersonal relationships that are vital to success.
Thus, KlearNow’s products complement the freight forwarders’ core business and strengthen the people-oriented approach rather than attempting to replace human interaction.
To find more on how KlearNow can help your business, click here.
