1. Introduction

"Digital transformation" has become a cliché across industries, even impacting traditional logistics. Despite numerous attempts from startups, major corporations, and even non-logistics global tech companies, there hasn't been a clear-cut success story in global logistics' digital transformation. Instead, news of startups facing liquidity issues raises concerns. Is digital logistics really the way forward?

2. Persistence of Challenges and Opportunities

Despite this, challenges persist. For instance, in 2023, major Korean IT companies like the three largest telecom companies and Kakao Mobility entered the freight transportation platform market. Why then are many still venturing into "digital logistics"? What possibilities are they envisioning? Alongside these reasons, the text outlines three trends in the 2024 digital logistics strategy. These insights are shared by Professor Song Sang-Hwa from Incheon National University's Northeast Asia Logistics Institute.

3. Exploration of Trends

Drawing from global logistics and IT companies such as UPS, XPO, Uber Freight, Flexport, and Amazon, the text forecasts the direction of digital logistics in 2024. The first trend is the spread of digital waves reaching SMEs, followed by digital services encompassing indirect costs beyond direct expenses. Lastly, the anticipation of a digital logistics alliance is discussed, detailing what each trend signifies.

4. Conclusion

While there isn't a definitive answer to digital logistics yet, the anticipated "expected value" of digital logistics hasn't diminished. The text suggests pondering the goals and focus of the ongoing endeavors toward digital logistics. It encourages understanding the fundamental value driving these efforts.

CHAPTER 1

If someone asks about the longstanding challenge in logistics, one could point to the synchronization of 'demand and supply.' Whether it's freight transportation, logistics center-based fulfillment, or forwarding, every logistics service needs sufficient logistics supply—infrastructure and networks—to handle customer demand proactively.

However, customer demand can always surge beyond prepared infrastructure and networks. In such instances, freight transportation service companies need to dispatch additional vehicles. 3PL companies urgently need to replenish part-time staff. Forwarding companies must swiftly secure additional container slots, resulting in added logistics supply at higher costs than usual.

Of course, if logistics infrastructure and networks were pre-secured on a sufficient scale, the story might differ. However, those in the industry, more than anyone else, know that this isn't as easy as it sounds. Pre-investment in logistics infrastructure and networks incurs substantial fixed costs. Bearing these investment costs, especially when anticipating demand beyond the prepared supply, can be burdensome.

Particularly as the business landscape grows complex, demand volatility in logistics services has increased significantly. For instance, due to the quality competition in services, companies' order lead times have shortened. Variables influencing demand predictions have multiplied as 'direct online selling' has surged and small-scale, frequent sales have become common. Marketing activities like promotions can drastically multiply existing order volumes, posing challenges across various companies linked within the value chain, not just one entity.

Companies have sought to minimize their own logistics investments in response to these costs and volatility issues. They've adopted flexible logistics supply operational strategies, relying on various external partner company resources. Yet, evaluating the capabilities of partner companies to match the service level desired by a company and securing their supply is not straightforward. Even after managing this process somehow, managing increased collaborating companies and binding partners with different service levels to provide consistent logistics services is a demanding task.

The rise of 'digital logistics' stems from this background. Companies sought to secure foundational data necessary to balance demand and supply processes through digital transformation. By efficiently analyzing this data, they aimed to construct a logistics system capable of actively responding to uncertain fluctuations in logistics demand.

Digital logistics was anticipated to bring 'benefits' to both shippers and logistics companies. Shippers could easily identify various logistics companies and utilize appropriate ones as needed, leading to cost reduction and improved service quality. Logistics companies hoped that through digital transformation, they could not only enhance their own logistics but also utilize various partner companies' logistics infrastructure and networks comprehensively to offer flexible services.

Based on this vision, numerous domestic and international companies are currently making significant efforts toward 'digital transformation.' Startups like Uber Freight and Flexport have rapidly grown in the digital logistics service domain, opening the gates in the market. Traditional logistics companies such as Maersk, UPS, Kuehne+Nagel, and CJ Logistics are strengthening their capabilities in digital platforms. Additionally, big tech companies like Amazon, Google, Microsoft, and Naver have started providing SaaS (Software as a Service) solutions in logistics and SCM (Supply Chain Management) areas.

CHAPTER 2

However, alongside these diverse challenges, some companies in the current digital logistics market are experiencing difficulties. Especially noticeable are the startups that raised massive investments to boost their company value but now find themselves on the 'judgment seat' of profitability.

For instance, Convoy, a US freight brokerage platform that garnered over 1.2 trillion KRW in investments since its 2015 founding, was valued at over 5 trillion KRW. Despite generating notable achievements in technology development and business model establishment, its profitability deteriorated due to low service transaction fees and extensive tech development investments, leading to a complete service shutdown in October 2023.

Similarly, Flexport, valued at over 10 trillion KRW after its Series E funding in 2022 and receiving approximately 1.3 trillion KRW investments in 2022 alone, is facing challenges. Flexport expanded its service scope by acquiring the fulfillment startup Deliverr from Shopify in 2023. However, the declining profitability led to the resignation of a professional manager in 2023, with the founder returning. Subsequently, they faced difficulties in cost control, massive layoffs, and restructuring.

This showcases how, despite substantial investments, digital logistics struggles to secure profitability. One reason could be found in the 'fragmentation' of logistics service providers. Logistics services typically involve numerous small businesses collaborating to form the entire process. Consequently, there are significant management costs associated with building trade relationships between companies and operating services.

Additionally, individual logistics service providers find it challenging to secure their own technological development capabilities. This could present an opportunity for IT companies with digital technology development capabilities. However, it's essential to consider the difficulty in ensuring profitability for small-scale providers who might lack willingness to pay for technology.

As a result, current digital logistics services used in the market appear to be utilized restrictively by some shippers and logistics companies. Nevertheless, it's evident that many companies, regardless of being startups or large enterprises, continue to challenge themselves toward digital logistics.

With no clear solution apparent yet, which direction will digital logistics services take in the future? In this content, based on the challenges faced by various global digital logistics service companies thus far, I aim to summarize and predict the trends of the 2024 digital logistics strategy into three streams.

CHAPTER 3

The Expansion Strategies of Traditional Large Logistics Companies can be summarized by the keyword 'Economies of Scale'. Initially, these companies invested significantly in logistics infrastructure and networks. Subsequently, they aimed to attract 'large shippers' dealing with substantial quantities, primarily through 'low-cost operations'. While this resulted in decreased profitability for logistics companies, it eventually led to establishing a profit-generating structure by sustaining economies of scale.

As a result, tailored digital service development attempts by logistics companies targeting long-term relationships with large shippers were relatively visible early on. For instance, UPS, since the early 2000s, developed and introduced optimization systems for logistics center processes and vehicle routing systems for operational efficiency. More recently, in 2020, they developed 'Supply Chain Symphony,' a portal integrating supply chain data, aiding shippers in real-time anomaly detection within the supply chain.

XPO, a leading player in the US contract logistics services market, introduced the 'XPO Connect' platform in 2018, integrating logistics data and providing it to shippers. Subsequently, in 2022, they developed the 'XPO Assist' digital logistics service platform, automating shippers' quotation requests and service-related inquiries. Particularly for large shippers entrusting massive volumes, they provide customized digital services through their in-house consulting and development resources.

Conversely, small and medium-sized shippers seemed relatively sidelined in this digital transformation trend from the logistics companies' perspective. In recent years, observations have surfaced of global companies creating separate digital service subsidiaries or platforms targeting small and medium-sized shippers.

For instance, UPS segmented services for large and small shippers. They continued providing tailored digital services directly to large shippers, while for small and medium-sized shippers, they established the digital logistics platform 'Ware2go,' offering online services but with standardized open quotations, unlike the exclusive negotiated rates with large shippers. Ware2go maximizes UPS's existing logistics infrastructure and network but handles services with simplified contract structures for small and medium-sized shippers.

Furthermore, UPS transitioned from a customer acquisition strategy primarily centered around large shippers to a competition strategy based on digital logistics service capabilities, named 'Better not Bigger,' announced in 2022 as 'Better and Bolder.' This strategy aims to secure profitability by providing digital logistics services to medium-sized shippers, not only focusing on large shippers, utilizing the economies of scale they have secured over time.

UPS's moves aim to mitigate the risk of excessive reliance on large shippers like Amazon, their direct competitor, and seek profitability by enhancing accessibility to lucrative small and medium-sized shippers through digital logistics services.

A similar dual-channel strategy catering to large and individual small shippers is observed in CJ Logistics' freight transportation platform 'The Unban' in South Korea. While traditionally targeting corporate customers for freight transportation services, they secured a digital foothold for shippers of any scale through The Unban, a digital service platform.

CHAPTER 4

The next significant trend to watch for is the emergence of digital services that go beyond direct costs to incorporate indirect transaction costs. Previously, shipping companies tended to recognize only the 'direct costs,' such as trucking fees, container transportation charges, and fulfillment service fees, for each logistics service transaction. Consequently, the strategy for shipping companies was to engage with companies offering lower-priced services through bidding processes.

The issue that arose from this was 'information asymmetry.' Beyond the visible 'unit price,' it was challenging to assess and evaluate the partner logistics companies' service levels and capabilities. Even in the contract phase following negotiations, the imbalance of information made selecting suitable partners problematic. As a result, shipping companies sometimes struggled with establishing relationships with companies offering lower logistics service costs but suffering from lower service quality. Problems also emerged due to operational inefficiencies caused by overcharging for services compared to their quality level.

In this scenario, digital logistics platforms are expected to evolve beyond merely monitoring the freight charges of various logistics services. They are anticipated to advance to a level where they can 'evaluate' individual service levels. This would enable efficient digital service provision not only for exploring logistics services but also for subsequent negotiation and contract phases for shipping companies.

For example, the freight brokerage platform Uber Freight initially secured freight shippers and transport service providers participating in their digital platform by utilizing low fees and swift settlements. They provided a 'service exploration' perspective by matching these shippers and providers.

Now, Uber Freight is progressing from exploration to 'evaluation.' They have collaborated with dominant ERP (Enterprise Resource Planning) solution companies like SAP and Oracle. Uber Freight integrated freight carrier and pricing information, registered in their platform, in real-time with freight shippers' ERPs.

Through this collaboration, freight shippers can search, evaluate, and request services from registered freight carriers on the Uber Freight platform directly within their existing ERP systems, without the need for additional installations. Uber Freight has been expanding these efforts since 2020 and showed positive signals for business model growth by improving profit margins until 2022.

Such endeavors are not only limited to Uber Freight but are spreading across various platforms. Ultimately, the role of digital logistics services in minimizing the costs of the entire service transaction process, considering not only directly comparable service unit prices but also indirect costs, is expected to grow.

CHAPTER 5

The final trend to observe is the solidarity among digital logistics service companies. When examining the transaction phases of logistics services from the perspective of shipping companies, it's evident that they extensively utilize multiple logistics services in various transactional stages: service exploration, information gathering, negotiation and contracting, service operation, and monitoring. For instance, they simultaneously contract with several forwarding companies providing international logistics services, domestic 3PL (third-party logistics) firms for inventory storage and e-commerce delivery, specialized delivery services for same-day and early-morning deliveries, and solution companies for supply chain optimization.

This, in itself, can be cumbersome for shipping companies. It is expected that in the future, there will be a spread of the trend of providing one unified 'digital logistics service' that integrates various fragmented services. While individual companies might opt to directly develop an entire logistics service, a more effective approach could involve multiple companies with diverse digital capabilities coming together to construct services through partnerships.

During this process, larger logistics firms may strategically invest in companies possessing digital capabilities they lack. Conversely, companies with logistics service needs, such as those in IT or distribution, may establish mutual cooperation through investments or equity exchanges targeting logistics firms with operational capabilities.

For example, Amazon, collaborating with multiple partners, has been offering comprehensive logistics services covering international freight transportation, customs clearance, fulfillment, and inland transportation for a considerable period. Leveraging their global logistics capabilities, infrastructure, and network, in September 2023, they introduced the global integrated logistics service 'Supply Chain by Amazon,' aiming to support e-commerce sellers in managing the entire logistics process from international shipping to final consumer delivery within one service.

Another example is the digital forwarding startup Flexport, which started as a 'forwarding' service in 2013. After receiving investment from Shopify in 2022, they enhanced their capabilities to offer end-to-end logistics services, including global sourcing and e-commerce delivery. Following the acquisition of Deliverr in 2023, Flexport acquired the infrastructure enabling end-to-end service provision. Building upon this, in September 2023, Flexport introduced 'Flexport Revolution,' a service similar to Supply Chain by Amazon, offering integrated logistics services.

However, there is a prerequisite for such service constructions. For creating a unified service not confined to one company but established through an alliance of several companies, setting up a standard data system for connecting, collecting, and sharing each other's data is imperative. The establishment of 'consortiums' for this purpose is becoming increasingly active.

For instance, in the latter half of 2022, Uber Freight, Coyote Logistics, DHL, J.B. Hunt Transport, along with IT companies like Blue Yonder, e2Open, and Oracle, formed the SSC (Scheduling Standards Consortium) to efficiently share freight transportation schedule data between logistics companies. Subsequently, participating companies are progressing activities by defining data standards and sharing them via APIs. They even announced the first API standard in October 2023.

Similar efforts are being put forth in the maritime transportation market for standardization. In 2019, the DCSA (Digital Container Shipping Association) was established, consisting of global container shipping companies like Maersk, MSC, CMA CGM, Hapag-Lloyd, ONE, Evergreen Line, HMM, Yang Ming, and ZIM, aiming to introduce eBL (electronic Bill of Lading) as an available electronic document. Additionally, in 2018, the GSBN (Global Shipping Business Network) was formed, centered around China's COSCO, involving major shipping lines and port operating companies, focusing on container transportation information standardization.

A note to add is that the DCSA and GSBN were initially established during the high interest period in blockchain-based data-sharing platforms between 2018 and 2019. Initially, the focus was on constructing systems using blockchain technology. However, following the cryptocurrency market downturn and increased regulation, Musk and IBM's joint venture, 'TradeLens,' which aimed to build a blockchain-based logistics system, announced its service discontinuation in February 2023, resulting in decreased interest. Currently, both consortia seem to be emphasizing data standardization and sharing over blockchain technology itself.

CHAPTER 6

Based on recent technological advancements and business model cases in digital logistics services, I've compiled several observations regarding the future direction of digital logistics. Despite several challenges that persist, I believe the anticipated value proposition of 'digital logistics' remains unchanged.

In truth, if the logistics demand of shipping companies remains stable without significant fluctuations, there might be a question about the necessity of 'digital logistics.' In smaller value chains dealing with limited product variety and communicating with a few shipping companies, the capabilities of human administrators might suffice to achieve efficient service implementation.

However, the conversation shifts when dealing with multiple partners to communicate with, sudden demand fluctuations, and considerable changes in the environment. This has been the case even for well-established large logistics companies, which have faced difficulties. Hence, there is a point where the efficiency gained through investment in digital technology can offset costs.

Above all, the data acquired during the operation of digital logistics services becomes the foundation for quantifying demand and supply fluctuations, as well as uncertainties. This data is expected to play a significant role in advancing automation technologies, particularly represented by artificial intelligence. Therefore, focusing on investments in digital logistics services, technological development, and business model innovation becomes essential for building and operating flexible logistics services, aligning with peak demands and uncertain demand fluctuations, constituting a core competitive advantage.

Written by Song Sanghwa. He is a professor at the Graduate School of Northeast Asian Logistics, National University of Incheon.

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