Here’s an interesting feature of the logistics industry: The same technologies have been predicted to change everything over a decade. Really: A list of innovations that people are excited for now is little different from a list drawn up in 2006.
“Technology is reinventing scale curves, giving smaller companies the ability to compete from the very beginning”
That’s not to say that we haven’t been talking about more ideas: Amazon’s marketing around drone deliveries have made the general public more interested in logistics. In addition, the “Internet of Things” is a term that’s being talked about more often in the industry.
But while these may be game changers in the future, they remain at the level of trendy buzzwords. For all the excitement about drone deliveries, the Federal Aviation Administration has not approved them for commercial use. And let’s consider previous forecasts. Predictions about technological changes in tracking devices, port technologies, and data integrations have largely not panned out.
I’m optimistic about the future, but unsurprised about the lack of technological adoptions in the past. I submit that the reason we’ve seen few big breakthroughs is because our industry is too dominated by big firms.
Because of scale effects, our industry is especially dominated by big companies, which are precisely the players most resistant to new technologies. I want to explain why we should expect that breakthrough technologies are unlikely to emerge from larger companies.
Short Term Focus
In principle, we expect larger organizations to have longer time horizons. The government, the art museum, and the big corporations all expect to operate for decades or more. In practice, we see that their time horizons are quite short. The government pays too much attention to election cycles; the art museum rarely thinks about its next big exhibit; and the big company is too focused on hitting its quarterly sales numbers.
Let’s dig deeper on big companies. There, short term focus starts at the top. No CEO wants to displease the board that sets his salary and can take back his appointment. So we get short term goals like “15 percent EBIT in 2015.” The message then trickles down the organization. The result? Cost cuts, postponement of investment, and protection of existing profit pools. It may look good for the short term, but in the long term underlying businesses lose their momentum. This behavior allows new competitors to enter the space with innovative propositions targeted at the profit pools of big companies. Why should big companies be eager to adopt new technologies if it’s so easy for them to continue what they’re doing while it seems to work fine?
Too Many Layers
When he interned for IBM in 1990, Marc Andreessen discovered that he was 17 levels removed from the CEO. After some thought he decided that it was unlikely that he’ll get very far at IBM. “They were incredible to me, I had a great experience, and I met a lot of very bright people there,” he says. “But it was essentially like working for the Soviet Union.”
Every additional layer removes the management further from the people on the work floor. As a result, great product ideas rarely make their way up to management. More layers increase the chance that new ideas will be stuck or vetoed. To make matters worse, layers create institutionalized fiefdoms that fight change when they threaten vested interests.
The Soviet Union may have developed some really awesome large machines; but it didn’t invest in the innovations that made the lives of ordinary people better. Why should we expect the management of big companies to adopt new technologies if they are not on the front lines of dealing with the issues of customers?
Companies benefit from scale when they grow. This means that they leverage their fixed cost base to reduce costs per unit. But past a certain stage of growth, big companies become too complex. They impose matrix decision making structures, add management layers, and set up risk management processes. At some point all these things slow down decision making so that the costs of complexity outweigh the benefits of scale. Why should we expect new technologies to emerge from big companies when it’s so hard for new ideas to reach the right people?
The Virtues of Being Small
The logistics industry is dominated by large companies because of scale effects. It makes sense for air, trucking and ocean networks to be able to cover as large areas as they are able to. . The same logic applies to every sector derivative of the supply chain.
Unfortunately, the reasons I’ve outlined, that’s exactly the tendency that make the industry slow to adopt new technologies. It’s why heralded technologies that were supposed to change everything haven’t made a big dent yet.
That’s why we see that change comes often from small groups in the form of startups. You’ll find that founders and CEOs typically have long term value creation goals. Software is rapidly changing the role of management by eating up layers and replacing them with well structured work flows and performance management systems. On top of that, technology is reinventing scale curves, giving smaller companies the ability to compete from the very beginning. To overcome the problems of resistance to innovation, Flexport has integrated with technology since the very beginning. We’re bringing visibility to every part of the supply chain: Pickup from manufacturers, consolidation and customs clearance, long haul freight transportation, customs clearance, delivery to fulfilment centers, and last mile delivery. This starts with using structured data at the very beginning of shipments. We’re moving from no visibility to Real time global visibility. We offer not only just container tracking, but also SKU level tracking, no more Excel-based reconciliation, but full inventory visibility and no more use of inefficient EDI integrations since your data is available via API. Instead of going through the struggle of convincing various vested interests to adopt new practices, we’ve adapted technology into our company from the very beginning, delivering real value to customers.
All of this is possible if you built your company on the basis of technology. It’s a lot easier to adopt these things when you’re not too big to innovate.