What is holding back the technological advancement in logistics?
Updated: Sep 2, 2021
All founders working in the freight tech space have been confronted at least once with the natural scepticism towards new technologies inceptions.
"Actors in logistics are neither ready, nor willing to bring digitalization into their companies."
What is true in the above statement? How much of the technological delay of this sector is attributable to the inertia of the people who work there?
We believe that the tech adoption challenges are deeply rooted in the traditional industry structure. In fact, this industry has two major characteristics that influence its dynamics: fragmentation and localization. There are hundreds of thousands transportation companies in Europe alone. The vast majority of them are small players, e.g., trucking companies with few vehicles each. In this world, even at the local level, the competition is fierce and drives the margins down. Moreover, safety and regulations have deeply increased the complexity of processes and players must know how to unravel in a jungle of bureaucracy and different customs requirements.
The consequences of fragmentation are mainly two:
Low margins: although the goods traffic has been steadily growing for years [see data for road freight market in Europe], fuelled by e-commerce and globalization, the high fragmentation has led to price wars as price has traditionally been seen as the only differentiation point by shippers, companies for which logistics is a necessary evil to run their core business. On the cost side, the small scale of many operators has not allowed them to increase margins through economies of scale and has kept the bargaining powers towards their suppliers on the low side.
Low investments: low margins are not attractive to investors when other – more appealing – alternatives are on the plate. As reported by McKinsey&Company, funding in logistics is decreasing worldwide, especially in Europe.
On the other hand, localization is responsible for:
Operations and pricing complexity: the presence of customs, inspections, different safety requirements and many players (among which the public administration) is very hard to manage for local companies and impossible for “foreign” people. No doubt that putting a price tag on a journey is a tough undertaking to face.
Limited availability of homogenized data: let’s be clear, data are everywhere. However, information is distributed across logistics operators, who use various management tools (software, spreadsheet, paper, etc.) in a quite personalised way (different languages, currencies, recording standards, etc.). Furthermore, there is not a “data lake” of these uneven sources at disposal of people willing to take on the challenge to make sense of it because data is not shared.
If we put everything together, it is not difficult to guess why logistics, and road freight in particular, has not made the technological leap yet. Operators are stuck in non-data-driven decision making and fear to invest in new technologies. That is why technology has to make the first step towards them and not the other way round. To be adopted quickly and successfully, technology needs to introduce solutions that bring value and drive margins up from day zero.