DeliveringE-Commerce

The retail world

is in upheaval

over e-commerce

- can transport

carriers be far

behind?

by Satish Jindel

Deliveringn recent months, the Internet has had an enormous,historic impact on the stock market in many different ways.Real-time access to stock prices and lower transaction costhas increased trading by small investors, causing stock pricefluctuations not seen in the past. The influence of the Interneton other industries will be of similar proportions. Because ofthe new dynamics created by the buying and selling of goodsover the Internet, the global transportation industry will feelmuch of the impact of electronic commerce through thechanges in the retail sector.

Only recently, even the most enlightened transport operators viewed the In-ternet merely as a tool for doing business. But the rapid growth of on-line com-mercial business promises far greater changes that are already being felt in theUnited States and will soon have a similar impact in other parts of the world.

The retail sector has undergone a few structural changes in the last 50 years.Each development has had major impact on the transportation sector. Althoughit is too early to quantify the impact of Internet-driven e-commerce, it promisesto bring a monumental change for both the retail and transportation sector.

Already, the ability to reach consumers directly is changing the relationships

24 AirCargoWorld March 1999

E-Commeroebetween retailers and some of the large manufacturers suchas Nike and Levi Strauss that have created virtual outlets onthe World Wide Web. The flow of goods between manu-facturer and consumer will alter dramatically. (See Table 1)

Direct SalesThrough the Internet, sophisticated manufacturers will

gain access to the consumers for direct delivery to busi-nesses and households. Depending on the product mixand characteristics, and the logistics capabilities of themanufacturer, consumers will bypass the retailers forlower prices, more choices and more efficient delivery.More businesses will be able to order their regular quanti-ty of office supplies, janitorial supplies, and so on, direct-ly from the manufacturers.

The Internet revolution will give small businesses,and even the individual consumer, the ability to createa virtual just-in-time delivery system and eliminate thenon-value added handling and transportation costs that

are built into so much of retail trade.And it will do to the major retailers what they have

done to the "mom and pop" retail stores.A successful case study of the direct retail channel is

Dell Computers, with $17 billion in annual revenue. TheInternet represents 20 percent of Dell's total revenue,triple what it was a year ago. By selling directly to busi-nesses and households, Dell is able to offer lower pricesdue to elimination of retailers and reduced assembly cy-cle time. Dell is growing faster and achieving higher prof-it margins than its competitors, forcing companies suchas Compaq to follow a similar model or risk losing evenmore of its market share.

With more industries following the Dell model, therewill be huge growth opportunities for logistics and parcelcompanies.

Modal ShiftsThe Internet-driven manufacturer/consumer retail

March 1999 AirCargo World 25

DeliveringE-Commerce

model will result in shiftsin the kinds of transportsellers use and increasedspending on transporta-tion. Large shipments frommanufacturer to distribu-tion centers will be con-verted into smaller ship-ments delivered directlymore frequently to con-sumers, both businessesand households.

The new retail modelmay also result in majormodal shift for transconti-nental movement ofgoods. For instance, theelimination of intermediate stepsmay either generate more air expresstraffic or shift some existing air car-go to ocean carriers.

The elimination of some whole-salers and retailers will trigger manychanges in the economy with majorimplications for the transport indus-try. It will:

• Reduce cycle time for getting prod-ucts to consumers, which will re-sult in elimination of additionalhandling and transportation offreight by wholesalers and retailers.

• Increase sales through lowerprices due to the elimination ofhuge markup by wholesalers andretailers. The stock market hasdemonstrated this phenomenonwith $5 broker commissions andreal-time access to stock pricesthat has fueled more transactionsby investors.

• Provide additional revenue for themanufacturers to cover the highershipping and handling cost ofsmaller shipments delivered morefrequently to consumers.

Wholesaler/Importer

TL/Air/Ocean

1960's & 197O's

— -̂ Broker —

TiyLTL

1980's & 1990's

Retail Store

Table 1

Consumer

Manufacturer Distribution Retail Store •+ feCenter

TL/Air/ TL/LTL Auto/

Consumer

Manufacturer

TLVAir/Ocean/LTL

2OOO and Beyond

Large Retailer/Distribution Center

Consumer

LTL/Parcel

LTl/Parcel

• Offer higher margins to the man-ufacturer to push more rapid im-provements in the products.

The Internet will create interna-tional shopping malls that will erasenational boundaries for businessesand households around the world. Itwill eliminate retail channel stepsthat do not add value and permitbusinesses to buy products at moreattractive prices directly from manu-facturers in other parts of the world.

Global ImplicationsThis information revolution will

benefit manufacturers with the lo-gistics capabilities to take orders andship products directly to consumers,particularly to businesses around theglobe. For instance, manufacturersin China, Taiwan and South Koreawill have the opportunity to selltheir products directly to retailers orconsumers in the United States andother parts of the world and lookvirtually the same to the buyers assellers down the street.

Moreover, they will be able to

eliminate the traditional markup ontheir products by the brokers andwholesalers.

The shipping and handling tasknow performed at the retailers' distri-bution centers will shift to the manu-facturers' plants. The lower cost of la-bor in the exporting countries willmake it attractive for some manufac-turers to perform these logistics func-tions with their people. Althoughtranscontinental movements willcontinue to occur in large shipments,distribution at the destination coun-try will result in smaller shipmentswith greater frequency delivered di-rectly to retail stores or consumers.

Here are some of the implicationsof these changes for select trans-portation sectors:

Logistics CompaniesThe companies with global scope

stand to benefit most from thesechanges. In the best position arecompanies prepared to handle theincreased shipping and handlingfunctions at the retailers' distribu-tion centers or the manufacturers'

26 AirCargolAforld March 1999-

DeliveringE-Commerce

plants and which have the capabili-ty to design a totally integrated dis-tribution solution.

The logistics companies have theopportunity to help manufacturersestablish a shipping and handlingoperation that can assemble smallershipments of multiple products fordelivery to the final consumer. Insome cases, that may involve merg-ing products manufactured at differ-ent plants, cities and even countriesinto a single delivery either in transitor at the final destination.

Hence, companies already posi-

mcan

Reliable direct serviceto and from

West & Central Africa!

AIRAFRIQUE

We do more and more every day!Sales: 718 723-5699

Reservations: 718 723-5684Toll-Free: 800228-4950

28

tioned to meet these challenges andtake advantage of these changes areFDX Logistics, UPS Worldwide Lo-gistics and the new Danzas/DeutschePost combination. The push by oth-er logistics companies to establishglobal capability via alliances andacquisitions of parcel carriers ap-pears to be driven by such futuregrowth opportunities.

International FreightForwarders

These companies are big playersin the international movement ofgoods from manufacturers to distrib-ution centers. With logistics changesat both the manufacturer site and inthe destination country, these com-panies will get increased competi-tion from logistics companies withgreater capabilities.

The transcontinental modal shiftbetween air and ocean transportprovides opportunities for freightforwarders to add value to the de-sign of a totally integrated distribu-tion solution.

However, with more shipmentscrossing international borders morefrequently, the customs clearanceactivities will become more chal-lenging. Hence, the brokerage exper-tise of freight forwarders will makethem attractive merger/acquisitiontargets for some global logistics com-panies. Companies such as Air Ex-press International and Kuehne &Nagel with strong customs experi-ence could be early targets.

IntegratedExpress Carriers

These carriers could gain signifi-cantly from this development if theyenhance their international capabili-

AirCargoHiforlti

ith Internet-based

tracking systems

all the rage in the

freight world,

transport carriers

are looking for

new ways to fill

the demand and

inology firms are lining

up to help them. Looking for

business from smaller operators,

Atlanta-based software developer

Datatrac says its new Internet-based service brings pickup anddelivery companies of all sizesinto the Internet tracking loop.This will allow freight forwardersand couriers without the full-fledged information systems oflarger competitors to track thestatus of their shipments frompickup to final delivery.

Under the system, when pick-up and delivery companies up-date on their computer systemthe status of jobs, the informa-tion is automatically forwardedto a central data warehouse forimmediate access and distribu-tion. The same concept also ap-plies to participating couriercompanies, allowing their cus-tomers to retrieve and browseup-to-date tracking informationoff the Internet.

Datatrac plans to have the newservice up and running by April.

Forwarder Eagle USA Airfreightis even trying to look beyondsuch Internet tracking, offering asoftware program called E(<*GLEADVISOR that uses "extranet"technology to get customers toEagle's tracking Web site without

arate browser softwaresep,

March 1999

DeliveringE-Commerce

ty to handle increased shipping ac-tivity efficiently and reliably. The in-tegrated carriers will see tremendousincrease in total volume of parcelsand lower weight shipments. Thiswill increase the so-called density, ornumber of shipments going to oneaddress, of business deliveries andreduce operating costs.

Moreover, household deliveriesmay prove unprofitable unless theoperating model and pricing struc-ture is revised to handle this growth.FedEx's 1997 acquisition of CaliberSystem and its RPS package sub-sidiary allows FedEx to capitalize onthese developments. The GlobalPackage Link and domestic PriorityMail services of the U.S. Postal Ser-vice (with planned service enhance-ments) are also positioned to benefitfrom this development. The interna-tional expansion of postal authori-ties in the Netherlands and Ger-many also puts them in an excellentposition to capitalize on the trend.

It is still too early to estimate theimpact of growth by segment, butthe total spending on logistics andtransportation services will be signif-icantly higher with more direct ship-ping and streamlining of the retaildistribution cycle.

U.S. marketIn the world's largest domestic

delivery market, the United States,the transportation industry will seesimilar modal shifts as smaller andmore frequent direct deliveries ofproducts go to businesses andhouseholds. Full truckload move-ments may convert to less-than-truckload and LTL shipments maysee bundled hundredweight ship-ments become parcels. Moreover,

ne new retail site on the World Wide Web is starting upwith the delivery strategy as a key part of its businessmodel. WorldSpy, which is creating something of a vir-tual department store on-line, has already set up inven-tory management and transport agreements as it negoti-ates for productions from manufacturers and whole-salers. Less than a year into its development, the worldspy.combusiness has "built a very sophisticated back office that allows

manufacturers to be involved in e-commerce," said company PresidentAlan Clingman. The company its site to become a kind of ultimate brokerby setting up deals with banks, manufacturers and inventory managers sothat "we never touch the money and we never touch the merchandise."

r\i -a tTThe company signed a contract with UPS Worldwide Logistics to man-age the warehouse and distribution operations that put the goods in con-sumers' hands in a promised three days. That is an attempt to build cer-tainty into delivery to overcome a weakness Clingman sees with other,more prominent electronic retail sites.

"Using focus groups, we found that among the largest complaintsabout Internet commerce were that buyers could not get accurate deliver-ies," said Clingman. "They did not know when the goods were comingand misdeliveries were too common."

But the management pact with UPSWL does not include a bias towardUPS delivery, he said. Instead, a purchase will trigger an electronic searchwithin the WorldSpy computers for the best routing and cheapest priceto achieve three-day delivery. Buyers can request faster delivery andWorldSpy will then search out the cheapest price to meet the buyer's dmand. The buyer can then track and trace shipments from the WorldSp)Web site.

Clingman said he and a partner seized on the plan after researchingtheir own investment options. "What we saw occurring was the disinter-mediation of the retail supply chain, and we wanted to be at the fore-

•ont of that," he said.Cl

iiiei-

the final leg of the retail distributionchannel is really now performed bythe consumer in a personal vehicle.The Internet retail channel will re-place this transport link with directdelivery by a parcel carrier. For busi-ness deliveries, the impact on thelocal delivery and courier industrywill depend on the evolving shapeof the retail channel.

The prospects for the LTL indus-try will be determined by these car-riers' ability to handle a decline inthe shipment weight and deliver

heavy parcels and lighter shipmentsto residences. With the growth ofresidential deliveries, the distinctand unique logistics requirements ofthe residential consignee will resultin more changes in the transporta-tion sector.

Business-to-HomeThe domestic business-to-resi-

dence parcel delivery represents $5billion in revenue in the UnitedStates. This market is primarilyserved by parcel carriers, with the

3O Air Car go World March 1999

DeliveringE-Commerce

I lion's share handled by UPS Ground[Service and USPS Parcel Post. WithI changes such as zoned pricing for ex-I press services and the growth ofI home-based businesses, Priority MailI and the express services of UPS andFedEx are becoming a bigger factor inthis market.

With e-commerce, this market willgrow at the expense of deliveries toretail stores. The retail industry usesseveral modes of transport, but mostof them are surface operations. Dis-count retailers such as Wal-Mart,with annual revenue of $135 billion,use huge private fleets of trucks.When such retailers see a shift of re-tail sales to direct delivery to theconsumer, the impact will surely befelt by all segments of the transporta-tion industry.

In the United States, domestic in-tercity freight trucking amounts to$200 billion in revenue and the retail

Isector represents 20 percent of this[traffic, or $40 billion. With a 25 per-cent shift of retail sales to direct con-Isumers, $10 billion in intercityI freight trucking revenue would con-|vert to residential deliveries.

This figure could more than doubleI due to the difference in unit trans-portation costs between truckload de-

scry to a large retail store and parcelI deli very to consumer. Hence, consider-|ing the normal growth factors and

nodal shifts, the business-to-residenceI market could reach $25 billion in an-Inual revenue by 2004.• This explosive growth represents

numerous challenges for the entire|U.S. transportation industry, but(mostly for the parcel carriers.

In order to benefit from thisvth, the carriers will need to

nodify their operations to handle

Buy Direct From

The Manufacturer

& Save $$

NEW ITEMS!Water-Absorbent MatsTempkraft InsulatedShipping Containers

for Seafood

Plastic Pallet Covers (LD-7, LD-3, M-1, etc.)All Sizes All Colors

Stretch Wrap All Gauges

Corrugated Boxes (E, EH, D Cont.) All Sizes

Tapes (Plain, Printed, Customs)All Styles • Strapping

i

I

FAA-Approved Rope (ALWAYS in Stock)

We Cany All Shipping & Warehouse Supplies

FREE Freight Anywhere in The U.SJL

Servicing 75% Of All Airlines National

800-240-5288Ask For Charles

29 Warehouse Locations throughout the U.S.

DeliveringE-Commerce

Table 2Characteristics of Commercial and Residential Deliveries

Serviceattributes

Commercial Residential Business atDelivery Delivery Residence Delivery

Preferred receiving hoursPickup frequency —,Consignee signature upon delivery DailyClaims exposure with deliveries "•"••

Weekend deliveryGuaranteed delivery commitmentParcels per delivery stopAverage revenue per delivery stop

the specific characteristics of thebusiness-to-residence (including res-idence-based business) deliverymarket segment.

Parcel CarriersThe operations of parcel carriers

is based on requirements of busi-ness-to-business shipping. Asshown in Table 2, this model is notsuited to handle business-to-resi-dence deliveries.

• The deliveries are made early inthe day when most residentialconsignees are at work. Hence, thepackage has to be either left at thehome, increasing claims exposure,or requires costly return trips bythe drivers.

• Pickup service is not user-friendlyfor returns from residential ad-dresses.

• The information system does notautomatically provide parcel datato the consignee. Recent pricingchanges by UPS, including feesfor certain services and area deliv-eries, partially address the cross-subsidies among consignees.However, the overall pricingstructure needs to be revisedbased on the business-to-resi-dence operating model.

32

8 to 12 noonDailyDailyVery Low

Not requiredRequired2.5$14.00

4 to 8 p.m.RarelyRarelyHigh

DesirablePreferred1$5.20

8 to 8 p.m.InfrequentOccasionallyLow

Not requiredRequired1to2$8.10

The growth in business-to-resi-dence volume will improve opera-tional density, but service needs forresidential deliveries are unlikely tochange. Although some businessesmay permit employees to receive de-liveries at offices, the approach hasmany shortcomings:

• In large corporations, it will addsignificant cost and logistics chal-lenges for a) accepting increasingnumber of parcels, b) responsibili-ty for loss or damage claims, c)distribution to employees' workareas, and d) storage of parcels forout of town employees.

• For employees commuting viamass transit, or parking at remotelots, this option will be no betterthan buying from a retail store.

The successful parcel carriers andlogistics companies will be thosethat realize the differences in thebusiness-to-business and business-to-residence operating models and es-tablish operations that deal withthose variations and make the ser-vice more attractive for the business-to-residence customers.

OpportunitiesThe logistics companies and par-

AirCargo World

eel carriers that position their busi-nesses to handle this change in theretail channel and the shift in ship-ping and handling operations fromretailers to manufacturers will standto benefit in the future. The oppor-tunities are already there. With Dellexperiencing phenomenal benefitsfrom the Internet in terms of salesand profits, companies in broaderconsumer industries such as Proctor& Gamble, Gillette, General Electric,Johnson & Johnson, and so on, willnot be far behind in developing thiscapability.

It used to be that blue jeans werenot available at all in the SovietUnion. Soon, consumers anywherein the world will be limited only bythe ability of transport companies to Ireach their homes.

The manufacturer-to-consumerretail channel not only provides formore growth for logistics and parcelcarriers, but also an opportunity for Ihigher margins because they will be Iable to squeeze cost from the sys-tem through reduced handling.This transition will increase thenumber and average weight ofparcels for delivery to businessesand households.

The global and domestic carrierswho are slow in responding tothese challenges will miss a tremen-dous growth opportunity. Hence,the impact of e-commerce on thetransportation industry will be amixed bag of good and bad news,depending upon how the individ-ual segment and carrier responds tothe developments.

Satish Jiiulel is a former parcel industryexecutive who is now a principal in SjConsulting Inc., based in Pittsburgh, Pa.

March 1999