Wolfgang Lehmacher, a global thought leader in the world of supply chain and former head of supply chain and transport industries for the world economic forum. During his career, he has been heading and supporting country, regional and global innovation, expansion and investment projects of Fortune 500 and other leading companies, as well as startups, social enterprises, and not-for-profit organizations. Thats why we’re proud that Wolfgang found time to answer questions with a more macroeconomics perspective on container logistics and shipping in Container Session #10.
In one of your interviews you mention that a performant supply chain, transport and logistics sector is a prerequisite for growth, prosperity and peace – What challenges do you see ahead of us that pose a risk to future growth in logistics?
The challenges in supply chain, transport and logistics are broad. I would like to mention five: 1- the shifting global trade landscape, 2- the adaptation to the digital economy, 3- the efforts required to fight climate change and deal with other environmental consequences of our industrial world, 4- the physical-cyber risk, and 5- the shortage of talent, specifically in the industry and generally in the field of digital transformation.
Short-term, the trade wars are reshaping global value chains. Even if the trade wars were to stopp tomorrow chains would not bounce back to the state they were before they started. People have been reminded of the benefits of geographic diversification. As the result of supply chain redesign, India, Malaysia, Thailand, and Taiwan saw upticks in exports to the US. US imports from Vietnam have risen by 40 percent in 2019. “Mexico picks up exports where China slips” wrote Bloomberg, as newly established Chinese factories in the NAFTA member state boost Mexico to US exports. This redesign of value chains causes new fears and costs that will be borne by the consumers.
More important is that over some time already, supply chains have been undergoing longer-term structural changes through the impact of digitization. The next phase of globalization is digital. The trade services market already exceeds that in goods when measured in value-added terms and is growing more than 60 percent faster than goods trade globally. Telecom, IT, and business services are even growing two to three times quicker according to a McKinsey study. Digital strongholds like the San Francisco Bay Area, London and Singapore leveraging their powerful ecosystems for digital innovation. The vibrant Scandinavian hubs like Hellerup (Copenhagen), Espoo (Helsinki), and Solna (Stockholm) are the new centres. China is banking on 17 tech hubs across the country to transform from a manufacturing-reliant economy to one led by tech and innovation. Digitization is becoming the new mantra. However, the shifts require enormous energy and effort, and take their time to show impact.
The IMO 0.5 percent global cap on Sulphur dioxide (SOx) content in fuels for shipping will enter into force January 1st, 2020. The compulsory switch will affect at least 60,000 vessels and is estimated by shipping executives to cost up to $50 billion industrywide. The electric vehicle revolution indicates the challenges that come with new side-effects. The innovations and improvements required to achieve the COP21 and industry targets need a new quality and level of collaboration across the ecosystem to for instance agree on the standards that will comfort manufacturers to make the investments in developing clean solutions which are not available today.
In many countries, the logistics industry struggles to attract talent. Singapore’s logistics industry transformation map (ITM) includes the building up of a strong pool of talent – specifically for the logistics industry. Digitization has helped to make the supply chain, transport and logistics industries more appealing, but the communication of the shift has not yet been communicated sufficiently.
Especially governments play an important role in defragmentation of the supply chain. What processes need to be deregulated by governments and what else can be done by politics to support the logistics sector?
Reasons for market fragmentation are for instance diverse customer needs and wants, lack of product innovation, product customization, and limited scalability. Sometimes market look fragmented but are de facto aggregated and controlled by strong intermediaries, like brokers and unions and associations. In this case, reforms are required to fragment the market and increase competition.
However, many instruments and process need rethinking. Structuring questions need to be raised. Are we really in need of a bill of lading (BoL) or a letter of credit (LoC)? Is the future border geographic or rather digital? Shouldn’t shipping documents and financial instruments be just datasets. Today’s paperwork is overwhelming. Goods can be cleared at any point between departure and arrival. Governments, but even more so international organizations and associations need to drive transformation. Public private collaboration is required to work out the digital procedures and processes to lift the supply chain, transport and logistics industries to the next level.
This requires innovative ecosystems, linking various stakeholders ranging from corporates, to start-ups, financial institutions and academia. The role of government is to establish the frameworks which allow innovators and operators to collaborate, financial institutions to fund initiatives, and academia to provide knowledge and ensure that enough talent is available. Singapore’s logistics industry transformation map (ITM) includes an assessible innovation ecosystem, with specialized research capabilities paired with supply chain decision makers. Dr Lam Pin Min, Senior Minister of State, Ministry of Transport & Ministry of Health has announced in April 2019 that the Singapore Maritime Institute (SMI) will prepare “the Singapore Maritime R&D Roadmap 2030 to optimise R&D efforts and resources for greater value co-creation within the maritime industry”. Port Authority of Singapore (MPA) grants funding to digital start-ups. Next-generation facilities with high-specification units encourage the co-location of companies and drive the use of advanced technologies. An example worth studying.
One thing, for sure, is the development of a digital layer on logistics. How can we move this relationship-based industry into the digital sphere and how can traditional players compete with technology companies entering the sector?
The digital awakening happened. My assessment based on many discussions with decision makers in the public and private sector in all parts of the world is that today 80 percent of the decision makers know why they should digitize, 40 percent know what to digitize, and 20 percent know how to do it. The next step is experimenting and scaling the proven innovative solutions across companies and ecosystems.
Digitization is about driving foundational proof of concepts (PoC) that have good chances to become levers for the entire industry. One example is the global trade identity (GTID), a brainchild of the World Economic Forum expert group of the Blockchain for Supply Chain initiative that I am part of. Realizing the GTID concept requires public private collaboration. In need are three to five governments for two simple PoC, one around the identity and the other for architecture, like connectivity and interoperability of trade single windows (TSW). This TSW angle would require including data-exchange into the original concept – which brings international organizations into the play.
In the supply chain and logistics industry, the digital layer has been there already for some time. It would be extremely hard to move cargo without information about weights and dimensions, origins and destinations, and the value of the goods. What is really missing today are coherent and inclusive platforms that help participants to digitally interact across the supply chain ecosystem. Platforms standardize datasets and digital processes. The European Union (EU), together with partners is working on a pan-European architecture and platform aiming to include solutions that are certified. This will allow digital companies to expand their reach, as requests and offers posted on the individual platforms will instantly also be visible on European level – and so will be the broad range of functionalities of the underlying connected solutions. Of course, only, if the companies will permit the sharing. However, why shouldn’t they?
On company level, the teams need to work on developing their strategies and approaches towards digitization. Develop the tools to either become a digital platform or to connect with the digital organizations and tools around them. Companies need to understand their pain points and strategic goals in the digital age. Then, map the innovation ecosystem and select the best suitable solution. The new generations will bring new digital tools to the business environment – like apps and emojis, videos and games. In Hong Kong, Flexport for example uses emojis to ease sorting. Handlers just need to look for the emoji printed on a label affixed to each box and they know where to place the cargo. “One device that can do everything,” said Evan Garber, chief executive of EVS, a firm that develops warehouse management systems that uses iPhones, iPads and other smart devices, is what appeals to the millennial workforce – a growing percentage of warehouse staff and managers. The time for action is now. The incentive and the potential are high, as the average level of supply chain digitization is 43 percent – the lowest of five business areas assessed by McKinsey.
Platforms are the future. A study of the World Economic Forum estimated that two-third of the value for economy and society in the coming 10 years will be created by platform-driven business models
A recent trend in logistics are b2b platforms that help companies collaborate with each other more efficiently. How can SMEs in logistics benefit from platforms and will we see the same in B2B that has already happened to B2C (Facebook, Amazon, Google etc.)?
Platforms are the future. A study of the World Economic Forum estimated that two-third of the value for economy and society in the coming 10 years will be created by platform-driven business models. Seven of the world’s 10 most valuable companies operate a platform-based business model – among these players are Amazon, Google, Alibaba and Tencent. The logistics industry’s first unicorn, the digital forwarder Flexport, is also a platform-based business. The future economy and society will be interacting and transacting on platforms. Yes, Google, Uber and Aribnb indicate the future of the supply chain, transport and logistics industries.
Small and medium-sized enterprises (SME) can benefit from digital hubs and platforms. A digital trade hub can consist of a SME trade platform, a free data port and fintech and other intellectual property (IP), as suggested by Tan Chin Hwee and Sangeet Paul Choudary. Digital platforms, such as Amazon and ebay, Alibaba and Tencent allow SME to participate in global trade without the need to invest in building their own supply chains. Even control over trade may well be gradually shifting from countries to these platforms. Singapore’s virtual banks are targeting Southeast Asia’s small and medium-sized companies. A 2016 report by the McKinsey Global Institute estimated that of the 39 million SMEs operating across Southeast Asia, just over half were either not being catered to by credit services or were being underserved. With the combination of range of efforts, the island state is about to become the region’s hub for e-commerce.
To enable data sharing, transparency and foster collaboration people often times refer to Blockchain technology. Do you think the challenges in logistics can be solved through technology or is it the culture/people behind it that need to change?
The people that are working in the supply chain, transport and logistics industries are great problem solvers. Unresolved are topics like end-to-end visibility, demand forecasting and the $1.5 trillion global financing gap, mainly in the Asia-Pacific region and the SME segment. Solutions come in stack and not in isolations. Digital platforms, internet of things systems, distributed ledger technology like blockchain, and analytics based on artificial intelligence are the components of the answers to our tedious industry shortcomings. However, it is us that build, deploy and operate these digital solutions. Leadership and talent are bottleneck and differentiator. Indeed, company cultures and people must adjust to the digital world. But this will come naturally with the arrival of the new generations.