Is digital transformation the key to environmental sustainability in logistics?
Climate change and digital technologies are undoubtedly two of the most defining features of our civilization. Both present huge challenges, which could have unimaginable consequences for the human specie, and promise great rewards to those who will find a way to effectively tackle their negative consequences. Hence, it comes as no surprise that digital transformation and environmental sustainability have been two of the hottest topics in the economic world for several years now.
In this article we analyze the links between digital transformation and environmental sustainability by looking at the logistics industry. This vertical is known both for its tremendous environmental impact and for lagging behind in its process of digital transformation compared to other industries. These features make it the perfect vertical to explore the potential impact of digital innovations in reducing our environmental footprints.
This article is longer than average as its goal is to provide the reader with a complete picture of the state of sustainability and digital transformation initiatives in the logistics industry. To help the reader navigate through the content, it was organized into 4 sections, which can be accessed directly from here:
The broad diffusion of digital technologies in the last two decades has greatly influenced our lives. The advent of ecommerce has turned us into digital consumers, who can source products from anywhere in the world and compare prices online in a few seconds. As a result, everyday 85 million packages and documents are delivered around the world, driving the growth of the logistics industry.
However, digital consumers have also become much more demanding than their predecessors. Higher customer expectations pose a difficult challenge to logistics businesses, who always suffered from significant inefficiencies. Consider for example that 50% of trucks travel empty on their return journey after making a delivery.
As more and more customers demand deliveries within 24 hours, logistics companies currently face a high price pressure. They are forced to improve their degree of efficiency in order not to loose their margins. Further, this trend is reinforced by the entry of new tech players in the industry, who attempting at the “uberization” of the sector.
So far, digital transformation has been the only solution identified to tackle this issue. Indeed, 74% of transport companies consider digitization to be their biggest challenge in the coming years.
However, this is not their only critical challenge. The logistics industry is undoubtedly a major polluter. In 2016, this vertical was the primary producer of greenhouse gas emissions in the U.S., accounting for 28.5% of total U.S. greenhouse gas emissions. Clearly, there is a lot of room for improvement, especially if you consider that fossil energy fuels 95% of the global transportation industry.
Such dependency on petroleum-based fuels exposes the industry to the fluctuations of oil prices, which remains one of the main vulnerabilities of the industry. The harm for the transport sector is even larger, as such oil-addiction has turned it into one of the main targets for society’s growing environmental concerns.
Still, digital transformation is also the biggest opportunity for transportation businesses: an analysis by the World Economic Forum found digital transformation is expected to provide logistics players with $1.5 trillion of added value and to produce societal positive externalities for further $2.4 trillion by 2025.
Despite progressing at a slower pace, it would be a mistake to think the logistics industry has not made any effort to strategically adopt new technologies. Actually there is a large number of technological wonders that have been applied to logistics in various ways:
- autonomous forklifts can already be easily spotted in many modern warehouses, airports, ports and other supply chain locations. Brands like Mercedes and Volvo are currently pioneering digital trucks. PWC forecasted that self-driving trucks will eliminate any trace of truck drivers from highways within ten years. According to the World Economic Forum, in the coming decade autonomous trucks will have a $30 billion economic impact on the industry as a result of savings in fuel costs, maintenance costs, employee costs and insurance;
- as a result of autonomous trucking, human drivers will only be required in city areas or for local deliveries. Probably, however, for not too long. By taking over last-mile delivery services in both rural and urban areas, drones are expected to achieve $20 billion of business impact;
- 75% of German logistics players believe the vast majority of warehouses will use data goggles before the end of the coming decade;
- Amazon and other players have already started delivering goods though drones and regulations are currently the only obstacle stopping drones from disrupting the transportation industry;
- blockchain has been cited several times as a solution to improve the customer experience by increasing transparency and security for customer;
- Artificial Intelligence and Advanced Analytics have a huge potential to radically transform the logistics vertical, as supply chains are data golden gooses and the Internet of Things is allowing companies to collect even more data for insightful real-time analysis;
- new business models are appearing thanks to the success of new Internet platforms that enable startups and small firms to sell their products and services globally and improve demand-supply matching.
Digital transformation in logistics has been linked to a long list of potential improvements along the whole value chain. The benefits logistics players can get from digitization and digitalization range from costs reductions on inventory holdings to real-time full-transparency along the value chain. Digital transformation allows for connected processes and decentralized, autonomous management and favors the adoption of elastic logistics, which implies enhancing a company’s responsiveness to market conditions.
Big data analytics is currently the field that offers the biggest competitive advantage as it allows for better decision-making and has a high optimization potential which generally translates into reduced costs, increased margins and more cost-effective, environmentally friendly operations. In its report about the digital transformation of logistics, the World Economic Forum explicitly encourages companies to improve their collection of data from all along their value chain and make sure they are able to analyze big data streams and use all that information to improve operational efficiency and launch of new services, such as last-mile delivery.
Still, despite the presence of some early adopters and forward-thinking organizations, the majority of logistics players still lags behind in their process of digital transformation. Few businesses have developed concrete strategies to adopt new technologies. The German Federal Association for Information Technology (Bitkom) reports that only two percent of German transport companies are ready to use drones for their internal organization.
However, as we saw earlier, such a low level of adoption is not due to a lack of interest in the technology. In some cases, legitimate doubts remain regarding the practicability of certain solutions; in others, technologies are not fully understood. Regardless, issues actually rarely stem from the technology itself. It rather seems like transport companies do not feel ready.
Often, the main barriers come from regulations, which either are lacking, either are very restrictive, and from the inability of different stakeholders to collaborate and trust each other. For instance, in most applications of big data analytics, the exchange of data between players in the supply chain could be much smoother if they agreed on a common standard and on how to deal with data security.
Nonetheless, logistics service providers (LSP), carriers, courier/express/parcel (CEP) companies, and any other company in the logistic industry must step up their digital transformation if they don’t want to face life-threatening risks. Those who will be capable of developing tailored transformation strategies will survive in the market, those who will not adapt fast enough will perish.
Logistics contributes 13% of all emissions globally and its impact keeps growing, as more and more goods are exchanged around the world. The U.S. Environmental Protection Agency published a report in 2016 which indicated that greenhouse gas emissions from road freight transport in the U.S. had increased by 76.3% since 1990. And while road transport remains the largest contributor to global warming within the transport sector, the impact of aviation and ship transport is also frightening.
The World Economic Forum’s report raises some key questions concerning the future of logistics. One of these questions directly relates to the huge impact this industry has on the environment:
“In light of the COP21 Agreement in Paris, how can industry stakeholders quickly agree on developing safe and trustworthy approaches to more environmentally friendly technologies such as autonomous trucks and drones?”
The question is as critical as complex, and the report only limits itself to highlighting the issue without proposing solutions. However, given the increasing interest in sustainability issues from the business community and society in general, several organizations have attempted answering this fundamental question.
Accenture estimated digital transformation could lower pollutant emissions of the logistics industry by as much as 3.6 billion metric tons by 2025. That is a 10% reduction in a ten years time frame. However, they also stress we have not yet found a way to break the link between economic growth, emission growth and resource use. Not updating current business practices will lead to a global gap of 8 billion tonnes between the supply and demand of natural resources by 2030. In financial terms, this means losing $4.5 trillion of economic growth by 2030.
Hence, sustainability in logistics is not only a matter of ethics. It has a critical economic impact as well. As more and more executives realize this, more and more companies claim sustainability is one of their most pressing priorities. Unfortunately, in most cases, those statement are not followed by any strategic action.
There are nonetheless some examples of successful sustainability initiatives, and many are tied to new digital technologies. New business models, such as green and reverse logistics, which applies the principles of circular economy to logistics, are now easier to adopt thanks to return management apps and automating inventory solutions. New platforms such as Uber Freight, Convoy, or Transfix, help improve the overall efficiency of a supply chain by cutting out unnecessary intermediaries, thus lowering both the costs and the environmental impact of the trucking industry. Telematics applications, i.e. the integrated use of telecommunications and informatics for application in vehicles, has been found to improve drivers’ behavior and route optimization, thus reducing the environmental impact of the trucking industry.
Some companies are gaining huge business advantages by using new digital technologies, such as Internet of Things, advanced robotics, and advanced big data analytics to improve the way they collaborate with players across the supply chain. Shared transport capacity has been indicated as a crucial strategy for reducing greenhouse gas and other emissions and mitigating the transport sector’s impact on climate change. Sharing warehouse space provides a better cost-to-serve ratio and reduces road miles by improving drop densities. Businesses like 3M EMEA have achieved up to 35% cost reduction and 50% lower carbon footprint thanks to this cooperative approach.
The IoT allows to track and trace assets to identify optimised patterns and potential breakdowns in the supply chain, which also contributes to logistics players’ CSR initiatives. Indeed, big data analytics and Artificial Intelligence provide companies with the knowledge and insights to reduce freight costs and better match the supply and demand for underused assets and products. When combined with machine learning, these technologies also enable decentralized, autonomous decision making. Big Data lets suppliers improve performance and minimize risk. In the maritime logistics industry, using data to optimise vessel speeds and paths reduces waiting times in ports and, therefore, CO2 emissions.
Sustainability issues and new digital technologies are undoubtedly reshaping the world of logistics. Refusing or failing to consider the environmental impact of a business’s operations or to implement a process of digital transformation means exposing a company to life-threatening risks. While the logistics industry still has many steps to go in order to become a modern, digital and environmental-friendly vertical, the evolution has started. The business advantages of digitization, digitalization and green logistics, on one side, and the social pressure to reduce the negative externalities tied to transportation, on the other, make this change process irreversible.
Further, while both are radical transformations, they also reinforce each other. New digital technologies can substantially affect the environmental impact of logistics, either directly or indirectly, in a number of ways. Every executive should evaluate which technologies would fit best their organizations and develop a digitalization strategy that helps reduce their environmental footprint.
Nonetheless, many barriers are still hindering the adoption of new digital tools in logistics. ICT can be perceived as too complex and sometimes requires to collaborate with other actors in the industry, which can still be challenging. However, frequently, executives indicate the lack of financial resources as the main cause for the lack of digital transformation initiatives.
This is partially true, as overrated forecasts and a high price volatility made it harder for logistics companies to manage their cash flows. However, while an initial short-term investment is definitely required, long-term savings coming from sustainability practices vastly surpass their initial cost.
One way to overcome this issue, would be through government disincentives and subsidies. For instance, businesses could be asked to pay for part of their externalities, while receiving money if they invest in new greener digital technologies. Government regulations and policies providing economic incentives, either for digital transformation initiatives, either for sustainability measures, could really impact the logistics industry.
Unfortunately, this solution has some drawbacks. The major downside is that regulations take relatively long time to be changed, especially in fields like energy and fuel, where companies are known for investing lots of resources into lobbying activities. Further, it was previously highlighted how certain regulations currently block the spread of some technologies in the industry, which suggests policy-makers might not be ready to actually solve this issue.
In conclusion, as climate change requires to act quickly and collectively, policies and regulations might not be the best way to promote digital transformation and sustainability in logistics. While there is no doubt digital technologies can help us fight climate change, only the future will tell whether the digital transformation of global logistics will happen fast enough to win the fight.