Article written by Harry G. Broadman
It is widely believed the major economic fallout from the Covid-19 pandemic is that the era of globalization has run its course. That is a myth.
If anything, the seizing up of international markets earlier this year when China, commonly referred to as “the world’s factory,” shut down in order to insulate the country’s population from further exposure to the coronavirus, is actually spurring businesses around the world to further diversify international supply chains to re-double their efforts to mitigate risks while continuing to exploit growth opportunities across global markets.
The fulcrum for such strategies to succeed is an ever more extensive geographically integrated and cost-effective global logistics sector. As a result, firms in the logistics industry are under tremendous pressure to rapidly expand capacity, diversify routes, enhance network agility and resilience and reduce costs.
It is no secret the achievement of such results will turn on how quickly and comprehensively logistics firms’ operations embrace automation and digitalization.
If the economic incentives stemming from greater globalization were not enough for the logistics sector to transition to an automated form, Covid-19’s threats to public health and the resulting imperative to engage in social distancing, are making such a transformation virtually inevitable.
Indeed, except perhaps for the “first-” and “last-mile” of distribution networks, where human interaction is all but inevitable, end-to-end automation and digitalization of the international logistics sector, including of backend processes, will be crucial to maximize value added to logistics firms’ customers.
The result? The diminished competitive edge of traditional versus automated logistics networks means the latter are slated to become a permanent fixture of the global economy. Logistics firms who fail to automate and digitalize system-wide or do so only partially, rather than throughout their entire network, will quickly become relics.
Innovation has always been the key driver for growth in international logistics, an industry with which I became intimately familiar—and fascinated by—when I served as the lead U.S. negotiator for the establishment of the General Agreement on Trade in Services (GATS) (which covers cross-border transactions for all services sectors) as part of the founding of the World Trade Organization (WTO) in 1995, and earlier in when I had the analogous role for the negotiation of the North American Free Trade Agreement (NAFTA).
As has been the case throughout the history of the sector, today the main drivers of the transformation toward a globally automated system of digitalized logistics networks are that the industry’s customers—both senders and receivers—are increasingly demanding instantaneous information on their shipments; greater speed in sending and delivery; and lower costs of shipping.
At the macro level, those demands are driven by globalization’s innate characteristics, especially greater visibility on, and closer access to, the panoply of economic activities underway around the world that otherwise were “distant.”
In turn, that has intensified competition, unleashed a drive to lower costs, and created the imperative to increase the speed and efficiency of conducting transactions.
Of course, automation of logistics has been underway for some time. It is the more recent advent of digitalization of the industry that is engendering its revolution concomitant with the maturation of globalization.
The distinction between automation and digitalization is critical.
The former implies utilizing mechanical means to accomplish a task otherwise carried out by humans: it enables people to use the time previously expended on the task to engage in other activities if they so desire. Think of getting your airline boarding pass at an airport kiosk (or from your home computer) rather than waiting in line to receive it from a ticket agent.
Digitalization employs automated processes in such a way that only economizes on time but also generates added value. Think of utilizing a travel software program that allows you on your own within several minutes at your desk to build and compare various itineraries with different flight times and air fares, hotel options, car rentals etc.
For the logisitics sector, a major enabler of rapid digitalization is the deployment of the internet of things (IoT), where otherwise traditional devices are becoming connected to the internet and have the ability send and receive information.
IoT enables the rapid exchange of information between all parties involved along a supply chain. That is energizing the move toward greater competition and the desire for greater speed and reduced costs.
Indeed, the advent of IoT means both logistic firms and their customers are able to benefit from enhanced control, planning, and monitoring.
IoT’s real time access to information is itself directly reducing operational costs and improving decision-making on both the demand and supply sides of the market.
The transformation underway is already fostering an entirely new cycle of innovation, not only within the logistics sector per se but also in the industries attendant to the sector as well as among producers and consumers who are logistics firms’ direct customers.
It would not be an understatement to say that this revolution could well fuel a new regime of global economic growth; indeed, perhaps usher in a wholly new phase of globalization.
At the same time, the adoption of digitalization has been driving—and will continue to drive—a fundamental restructuring of the logistics industry along several dimensions.
At the most basic level, the industry’s restructuring process will help shape what constitutes a “logistics firm.” The dominant form will surely be characterized as the traditional logistics enterprise that innovates through systemic adoption of digitalization, whether through the organic introduction of digitalization into existing methods of doing business or the acquisition of firms that have established digitalized platforms.
An example of the former is the transformation of DP World, which has had a long history operating ports, terminals and other elements of logistics infrastructure in more than 80 locations throughout the world, into a state of the art global digitalized logistics company.
Recently, DP World established the Digital Freight Alliance (DFA), an online association of that brings together globally operating freight forwarders into a single digital platform. DFA synthetically created for freight forwarders ready access to a network of routes and services, as well as new operational tools, that otherwise were non-existent in a unified fashion.
At the same time, the company acquired three pre-existing digital platforms—SeaRates, AirRates and LandRates—which provide to cargo movers the ability to directly compare rates and contract for space across the three delivery modes for different origin and destination markets for specific dates of departure and arrival.
DP World has also begun to integrate the management of its container terminals and feeder companies with those of TradeLens, a blockchain-based digital container logistics platform developed by A.P. Moller-Maersk and IBM.
In many respects, at the other end of the spectrum are younger, technology firms, such as Flexport, FourKites, and Haven. Their operations largely are the provision of proprietary data platforms for digitalized supply chain management and freight forwarding across various modes of delivery—air, land and sea.
To be sure, digital logistics technology companies—who, in essence, are generally in the business of matching supply and demand—have tended to be more agile and innovative than traditional logistics firms, which have legacy systems and structures. Nevertheless, they often are short on industry expertise, long-standing partner relationships, and large customer bases.
In addition, of course, they do not operate ports, terminals and other elements of transport infrastructure. However, they clearly are playing a powerful role in disrupting the traditional logistics landscape.
The digitalized restructuring of the logistics industry is also likely to change the location of service delivery. As the process of 3-D printing matures, the production of an item otherwise shipped from a plant afar, may well take place near the end-user. The result would be a downsizing (or even possibly the elimination of) the need for transport and warehousing.
At the same time, as drones become more widely utilized in the logistics industry, it is conceivable that delivery of even the “last mile” can be carried out digitally, with little to no human interaction required. Depending on how Hyperloop evolves, it too, may achieve a similar result.
In these types of cases, there are of course important implications for the role of workers otherwise employed in the industry as labor intensity declines. Such an outcome may well prompt governments to enlarge social safety nets over the transition in order to ameliorate negative economic fallout at local levels.
The nature of the restructuring of the logistics sector that digitalization engenders, depending on how it affects the intensity of competition among industry participants, will both affect the pattern of pricing behavior as well as be shaped by it.
As seen in other sectors in recent years where network economies of scale and scope can become more pronounced by advances in technology, weak incentives for pro-competitive pricing practices may call for certain public policy initiatives to ensure there is congruence between the private and public interest.
Original Source: https://www.forbes.com/sites/harrybroadman/2020/06/30/digitalization-is-upending-global-logistics-now-augmented-by-covids-social-distancing-imperative/#5e4a1440313a