Technology and Culture
The Cultural Obstacles to Better Logistics
Zvi Schreiber | CEO, Freightos
A version of this article originally appeared in The Journal of Commerce (August 6, 2016)
When Apple released its pocket-sized personal computer, promising unprecedented connectivity, the industry got excited. Five years later, production of the failed Newton PDA was canned.
Fifteen years later, when Steve Jobs launched the iPhone, the reception was dramatically better.
Technology and receptivity to technology don’t always move in lockstep.
Technology has never been more critical for logistics than now. Plummeting freight rates mean that under 50% of logistics providers turn a profit on ocean shipping, while threatening competition from industry newcomers like Amazon and Alibaba spell out unprecedented challenges for the logistics industry.
DHL seeded its empire by moving ocean documentation faster than cargo ships. You would think by now flying pieces of paper around the world would be obsolete. But bills of lading are still physical paper. And while air cargo is a bit more advanced, only 37% of air shipments use electronic air waybills.
According to Don Norman, Apple’s user experience guru:
“Technology changes rapidly, but people and culture change slowly…It can take months to go from invention to product but then decades – sometimes many decades – for that product to get accepted.”
Technology is, in many cases, no longer an obstacle to logistics automation. Instead, there are a number of deeply ingrained cultural practices holding the industry back.
1. Leadership vs Consensus
Real innovation depends on risk-taking. And risk-taking generally requires strong leadership. Lacking a strong leader, the safe (and later sorry) option will generally win. Irving Janis’ research shows that group decision-making can prevent people from assessing viable alternatives. According to Silicon Valley legend Peter Thiel, Hewlett Packard is a prime example. After growing revenue from $9 billion dollars in the mid-90s to $135 billion in 2000, the company’s board decided to capitalize on existing products instead of innovating. By 2012, the company was worth just $23 billion.
2. Risk Aversion
Risk aversion also plays a powerful role in preventing technological implementations. Folding containers aren’t a new idea. But even though 150 million shipping containers are moved empty every year, at a cost of over $5 billion dollars, and the financial benefits are clear, no large carrier has adapted collapsible shipping containers.
Risks should of course, be contingent on opportunity and ability to execute. DHL’s digital backbone overhaul could have been hugely advantageous but poor implementation ultimately cost the company nearly a billion dollars. On the flip side, when Expeditors decided in the 90s to be a digitally-focused forwarder (and ensured the ability to execute), they saw their stock soar by 6000% in 25 years, compared to the Dow Jones’ growth of 570%.
3. Decentralized Organizations
While decentralizing decision-making can enhance organizational flexibility, companies must preserve an element of centralized strategic decision-making. However, at many of the world’s largest freight companies, different regions, countries or even departments use individual freight rate management systems. While this is possibly effective on a department level, the end cost to the company as a whole is high. For example, when Freightos tried to compare freight quotes from a top forwarder during a mystery shopping experiment, ocean and destination charges took only 30 minutes. The pickup charges took three days, mostly a result of communication between the forwarder’s offices.
4. Sunk Costs
Many large companies have invested significantly at some point in their history in a major IT shift. Keeping those systems current, however, can be expensive. Band-aid patches to update legacy software end up costing far more to companies, with the core obstacle to upgrading being the perception that since so much was invested in the system, it’s worthwhile to continue to invest. This doesn’t only impact companies; the same sunk-cost mentality kept Air Force One’s internet speeds limited to 1990’s dial-up internet speed until only a few years ago.
Overcoming the Cultural Hurdles
Logistics isn’t doomed to outdated technology. Slowly but surely, a war is being waged on inefficiencies, with innovators at the vanguard. Here are four ways logistics companies lead the charge.
1. Teaming Up With Logistics Startups
Logistics companies are experts at moving freight around the world. Moving data is a whole other kettle of fish. While 86% of logistics providers are relying on technology to improve operations, they don’t necessarily have the in-house expertise or bandwidth to focus on developing and implementing new solutions. Even those with good in-house IT may not have the skills to create modern software.
DB Schenker’s cooperation with uShip, announced in June 2016, is a good example of such a team. uShip has proven that it can automate domestic trucking in the US; importing those capabilities may keep DB Shenker ahead of the curve without developing from scratch.
2. Going to the Cloud
Between 2015 and 2016, the average number of cloud-based Software-as-a-Service (SaaS) platforms used at companies increased by 50%. With more accessible B2C user interfaces and less time spent on installations, it’s becoming increasingly easy to switch between providers, lowering transition costs and making sunk costs less of a barrier for new platforms. There’s a reason that nine out of the first ten freight rate management platforms appearing in a simple Google search are cloud-based.
3. Living on the Edge
Avoiding risky decisions can be risky in its own right. When Kodak invented the digital camera and then decided it would be too risky to aggressively pursue it, they were digging their own grave. Companies like Kuehne+Nagel embrace risky decisions, moving their LCL sales online and encouraging other logistics startups with an accelerator program.
UPS once calculated that saving every truck driver one minute per day adds up to $14.5 million saved annually. In an industry that relies on scale and demands relentless efficiencies, technology holds the keys for better profitability. Now that technological sophistication has caught up with logistic complexities, strong leadership, educated decision-making and an openness to new processes will determine which 20th century logistics providers survive and thrive in the 21st century.