How can digital help logistics be more sharing?
Developing shared logistics capabilities can reduce operating costs by boosting utilization rates of warehouses and vehicles.
The sharing economy has already transformed several industries through the popularity of apps such as Uber and Airbnb. The sharing economy will also bring benefits to logistics as it allows all participants to share fixed costs, enabling companies to make several smaller investments rather than a single large investment. In this theme – shared logistics capabilities – we look at the main applications for logistics, which will be in sharing cost-intensive physical assets, notably warehouses and freight-transporting vehicles.
Shared logistics capabilities is one of five themes that we believe will be central to the digitization of the logistics industry over the next decade. The other themes we examine are information services, logistics services, delivery capabilities, and circular economy.
Shared transport capacity
There are two main ways in which logistics companies can share transport capabilities. Firms can split vehicle capacity simultaneously (for instance, by ride-sharing) or over time (for example, by truck-sharing). Both ride-sharing and truck-sharing allow the cost of the journey to be divided.
The importance of shared transport is growing, as it is a crucial strategy for reducing emissions and mitigating the transport sector’s impact on climate change.
Shared transport also has the potential to improve last-mile delivery services as shipments can be brought forward with shorter waiting times to fill up a vehicle shared by several companies. Shared transport capabilities also allow firms to reduce overall operating expenses, by reducing transport costs per kilogram and cutting maintenance and personnel costs, as fewer assets are needed.
Sharing transport capacity could also bring significant environmental benefits. There is particular scope to reduce carbon dioxide (CO2) emissions from road freight, which account for around 75% of all emissions from freight (see Figure 1).
Coyote is an example of a company that matches demand for client shipments with available carriers. The system specializes in scheduling shipments to travel on carriers’ return trips (backhaul). Currently trucks travel empty on up to half of all return trips, so there is huge potential to improve efficiency. Coyote says that in 2014 it eliminated 31 million ’empty’ miles and avoided 56,300 tons of CO2 emissions¹.
Shared transport capabilities should improve utilization levels, creating a win-win for the industry and the society. This initiative could allow the industry to save $30 billion in operating costs and help in reducing emissions by 700 million metric tons. At the same time, the newly created platforms could earn $20 billion in operating profits.
Shared warehouse capacity
Sharing warehousing between different companies allows these firms to benefit from cost synergies and greater flexibility. One of the advantages of this arrangement is that all the warehousing and information technology (IT) costs can be shared across the customer base at a particular warehouse. This mitigates the risk of having a large fixed cost base, making cost per unit easier to control.
Sharing warehouse space could allow companies to carry out order and distribution consolidation in several locations, rather than just one, providing a better cost-to-serve ratio and reducing road miles due to improved drop densities.
Nestle and PepsiCo
Nestlé and PepsiCo are two companies who share warehouse capabilities. Through this arrangement they share the storage, packing operations and distribution of fresh and chilled food products destined for their retail customers in Belgium and Luxembourg. They selected STEF to be their logistics service operator while TRI-VIZOR acts as the independent agent guaranteeing the neutrality of their joint operation and its adherence to competition rules. The earnings from any synergies are shared on the basis of an equitable formula².
Shared warehouse agreements provide companies (customers of logistics companies) an opportunity to reduce their logistics costs by as much as 12 to 15%. We estimate that companies implementing these agreements could save close to $500 billion in operating costs, but this could have a negative impact to the tune of $35 billion in operating profits for logistics companies. However, shared warehouse capacity could benefit the society through reduction in emissions by 1.3 billion metric tons.
Logistics is one of six industries (along with automotive, consumer, electricity, healthcare and media) that have been the focus of the World Economic Forum’s Digital Transformation of Industries (DTI) 2016 project. An overview of the DTI program can be found here.
Our in-depth findings about the digital transformation of the logistics industry are available in a white paper, which can be downloaded here.
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