CEVA Thought Leadership article featuring insights from INSEAD Professor Emeritus of Technology and Operations Management, Luk Van Wassenhove.
Expanding markets mean exposure to new global sources of revenue, but they also bring new risks, chief among them being how to comply with new global regulations. In particular, new rules designed to mitigate climate change and social disruption must be complied with, all while transitioning to a carbon-free economy and seizing the opportunity for growth.
The logistics industry is reinventing itself, moving from pipelines to platforms, from manual to digital as it facilitates the movement of the global supply chain. In this environment, traditional metrics such as profitability and asset valuation do not sufficiently show the state of business as they fail to incorporate the real cost of externalities into managers’ key performance indicators. This can have direct consequences on both sustainability and longer-term sector growth.
CEVA spoke with Luk Van Wassenhove, INSEAD Professor Emeritus of Technology and Operations Management; the Henry Ford Chair of Manufacturing, Emeritus; and Academic Director for the INSEAD Humanitarian Research Group.
CEVA Insights: Professor Van Wassenhove, how is the logistics sector managing the challenges of globalization while maintaining ethical practices?
Professor Luk Van Wassenhove: Today the logistics industry is vulnerable to uncertainties unknown just five years ago: the COVID19 pandemic, wars in Ukraine and Gaza, rapid global economic shocks, and more. Companies also have to deal with higher levels of uncertainty that can have huge consequences in complicated global networks (e.g., the Houthi rebel attacks on shipping). So, companies need to work on good vigilance— identifying potential issues and building resilience for them.
But today’s complex global networks often have little redundancy because of strong cost minimization objectives and can therefore be very sensitive to even relatively small shocks. As a result, our systems have become very vulnerable and ambiguous, and the costs attributable to our complex global networks' vulnerability have come to the forefront of logistics operations.
Now, what to do about this? First, try to figure out how much of the complexity is self-created, and try to forecast future problems. Decentralized decision-making will enhance agility and can improve resiliency. Resilience itself requires simplification, localization, agility and some redundancy, which often means higher costs near term because alternative solutions come at a cost. It is easy to see the challenges: you need razorblade prices due to fierce competition and you need to be able to create miracles when there is a hiccup.
CEVA Insights: What are the three most daunting challenges the logistics industry faces in today's globalized economy?
Professor Luk Van Wassenhove: First, technology– not just how and where to deploy it, but how to interpret the data in order to find better solutions to challenges. Basically, how to actually use data. For example, artificial intelligence (AI) can suggest something that seems odd or different from your traditional way of working. Rather than blindly following the results of the algorithm, find out how AI reached this idea. Backtrack. You may find new and unexpected ways to increase efficiencies while reducing costs.
Regulations are another challenge. Industry sustainability initiatives and third-party certification programs to track companies’ progress on the goal of carbon neutrality have become a huge administrative and bureaucratic machine, with entire corporate departments allocated to filling out forms. I’m a bit cynical on this topic, because the focus should be on making logistics better, not just look better on paper, and audits won’t necessarily change actions. So, you need to fill out the forms, yes, but you must also align your reporting with your actions. That means clearly explaining what you’re doing and why, how you measure it, which resources you’re deploying, etc.
The third challenge is transport. This is a tough one because transport involves heavy, long-term investments: vehicles and infrastructure with a 50- to 60-year lifespan for example, so it’s tough to make changes. And there are other factors to consider: if you are using heavy emissions trucks in Africa and want to change them, where does the money come from? Is the local government willing or able to help? Proper use of technology and data can help with fleet monitoring and provide insights into operations and maintenance. But when the financial focus predominates, it’s tough to think long-term in this fiercely competitive, small-margin business.
CEVA Insights: How can the industry devise and implement sustainability-focused performance metrics? What should be measured?
Professor Luk Van Wassenhove: The logistics sector is a huge carbon emitter, so measuring environmental impact effectively is very important because today social issues arising from business are also increasingly visible and increasingly of concern to investors, legislators and consumers. These stakeholders want to know if companies are living up to their sustainability claims. All this has to be part of the measurement framework.
Ideally, in addition to explaining the positive effects of the business, you want companies to explain the cost of their externalities on society and the environment and how that cost is being offset. Companies can no longer say, “We don’t want to look at this.”
Companies must really understand what they’re doing. This makes transparency, good accounting, and strong partnership management important, as global companies rely a lot on regional or local operators, despite being able to improve management by using technology. The right metrics will influence decision-making and encourage managers to explore new value-added sustainability initiatives.
CEVA Insights: Companies like CEVA use technology to move from static to dynamic optimization by digitizing transportation flows and monitoring and measuring fleet use and warehouses. We can see how technology affords better business control and can increase operational efficiencies and mitigate disruptions or exceptions. But how can technology help achieve sustainability goals?
Professor Luk Van Wassenhove: Let us remember that technology does not solve problems; people do. And in some countries, technology isn’t very reliable, and sufficiently trained personnel may not be available locally. Deploying technology such as robotics can increase safety and efficiency, but it can also cost manual laborers their jobs, so you solve one problem and create another. In this case, the negative impact can be offset by employee training or closer collaboration with local partners.
On the positive side, the logistics sector has already done an awful lot, and the massive shift to digital ecosystems creates brand-new business opportunities in the logistics space by squeezing out inefficiencies and helping detect opportunities by giving industry players greater visibility on business processes and enabling the creation of new business models.
Another positive with technology is increased transparency. Clients are very keen on seeing what their impact is, including that of their logistics providers, to meet their own sustainability goals. So, using technology to help clients measure and reduce their own impact is an important offering.
CEVA Insights: What impact do governmental regulations have on logistics operations and profitability?
Professor Luk Van Wassenhove: Governments can impose constraints that make business more complicated, but that has always been the case. The big change in the past 10 years, in particular, because of the COVID-19 pandemic, is that Mother Nature has become more visible as a stakeholder and will impact regulations on logistics companies even more than in the past.
As a result, governments, regulators and consumers today much more demanding of environmentally and socially responsible systems (i.e., equity, inclusion, working conditions). Investors are also putting increased pressure on companies for transparency. Money speaks! Sustainability has become a business fundamental as the connection between sustainability and business practices becomes more apparent, internalizing sustainability becomes unavoidable.
Now, you can look at this as a problem: increasing constraints making business harder and margins smaller; or you can see this as an opportunity to create a competitive advantage by being proactive, perhaps even creating a new playing field with huge possibilities for smart companies.
So, companies need to look beyond the quarterly bottom line and consider the environmental and social value they add or destroy because nature and natural resources are the new business stakeholders, and can drive or tank their business.
CEVA Insights: What new kind of partnerships and collaborations are you predicting between shippers, logistics providers and carriers to help face new challenges that can support business and increase sustainability?
Professor Luk Van Wassenhove: The 2030 Agenda for the UN Sustainable Development Goals (SDG) provided a blueprint for shared prosperity in a sustainable world, but with just six years to go, I wonder if we are really on the right path. The traditional business model shows that as companies see healthy profits from their business, they tend to grow their profits and asset valuation by investing in ways to expand their operations.
However, if they continue to do this without taking environmental externalities into account, their profits and valuation could soon start to decline as critical resources start to decline. And they will still fall short of the 2030 SDG deadline.
Clearly, global logistics companies already rely on a huge network of local and regional players who know the local conditions. Taking this a step further, they could look at their competitors and see where there is overlap in the logistics space where they could collaborate rather than duplicate, and choose more precisely where they want to be competitive.
For example, inter-regional transport could use the same providers, sharing information on sustainability and externalities via technology platforms, and differentiating their service offerings elsewhere. In other words, you choose which areas you want to compete: what do you want to do alone, and where do you want to collaborate within the transport ecosystem? For instance, while companies compete in the forward part of the supply chain (deliverables), it may make a lot of sense to collaborate in the return and back end (end-of-life, removals and disposals).
CEVA Insights: What changes can you foresee in the logistics industry in the next decade?
Professor Luk Van Wassenhove: Logistics will remain a tough business with added demands and regulations around carbon emissions, social impact, equity, inclusion, and so on. These challenges are both political and technical and involve numerous stakeholders negotiating how best to allocate resources under multiple constraints and in an environment of high uncertainty. Companies need to find their way in all this, integrating these relatively new demands into the way they do business.
Working in complex ecosystems with many partners and trying to align them in an efficient and effective way will be the key challenge, and vigilance will be crucially important in this uncertain environment. There will continue to be different and opposing trends and forces, evolving from geopolitical developments, as well as environmental and social demands from consumers, governments, and investors. In other words, instead of primarily looking inside-out, companies would be well-advised to also strongly look outside-in, to develop good antennae for proper vigilance of what is happening in a broader context around them.
Regional and local businesses will become more important since the pandemic exposed some of the problems inherent in supply chains that travel halfway around the world.
But the logistics industry, and its multiple stakeholders, are moving towards platform-enabled ecosystems, featuring an increase in sensor-generated data. The digitization of physical assets and their management will give stakeholders clearer visibility on business processes across the logistics life cycle.
This will not come about with “silver bullet” technologies, but through creating a more collaborative logistics ecosystems in which necessary changes can be made to elevate sustainability in tandem with increased profitability.