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High-speed transformation

Digital transformation, climate change, dwindling resources and political uncertainty –the logistics industry is subject to constant change. Nevertheless, it has strong prospects of once more outpacing the growth of the broader economy in 2019.

However, the industry first has several hurdles to clear. It did post strong figures in 2017, and there was decent growth in 2018, as well. “The German economy is experiencing a solid upturn despite protectionist trends in the global economy”, said the German Federal Ministry for Economic Affairs at the close of the third quarter of 2018. Still, the mood has taken a sombre turn. Many firms, forced to plan today for the impending changes of tomorrow, have been rattled. As service providers, it is a particularly thorny task for logistics companies to anticipate future developments without running off the economic rails by setting the wrong targets and making the wrong investments.

Political uncertainty and the spectre of trade conflicts have tempered the prospects for growth. These factors combine with trends that impact economic performance – the imperative to increase sustainability, demographic change, digital transformation and the modernisation of infrastructure. When viewed as issues to be addressed in the medium-term, these areas of concern make it clear that the industry faces some whopping challenges down the road. 

Economic outlook for 2019

We begin by presenting several unvarnished figures from analysts. The council of experts advising the German government and dedicated to assessing macroeconomic developments predicts the real gross domestic product (GDP) growth rate will increase by 1.6% in 2018 and 1.5% in 2019.“The uncertain future of the global economic order and demographic change have thrown up major obstacles for the German economy”, said the council of expert’s chairman Christoph M. Schmidt in November 2018. “We are therefore facing important economic policy decisions.”

The joint diagnosis delivered by five German economic institutes to Germany’s Federal Ministry of Economic Affairs and Energy was only marginally more optimistic: “On average, following growth of 1.7% in 2018, economic output may expand at rates of 1.9% in 2019 and 1.8% in 2020”, according to the prognosis of September 2018. Roland Döhrn, chiefeconomic forecaster of the RWI-Leibniz Institute for Economic Research, concurs: “The German economy’s upward swing is losing momentum. International demand has slackened, and at the same time it is apparent that companies are increasingly encountering problems finding enough employees for their production.” In 2019, freight transport is also likely to 
see large gains. The German Federal Office for Goods Transport prepares a“rolling medium-term forecast for freight and passenger transport” for the German government. Its current forecast states that crude steel production will hold steady, crude oil consumption will remain nearly staticand sales of coal will fall off, translating into less traffic. At the same time, however, it predicts that freight transport will nevertheless experience powerful growth in revenue (2.3%) and transport service (3.1%). This can be attributed to rising construction investments, production of main construction trades and industrial production.

Growth

The industry, however, is about far more than just freight transport – it is Germany’s third-largest economic sector, with more than 3 million employees and revenue of EUR 267 billion in 2017. The “Logistikweisen” (German for logistics sages), a group of well-regarded experts hailing from various industries and sectors, examined the industry’s prospects. According to the results the committee published in autumn of 2018, “growth of 1.7% by euros is forecast for 2019”. In the following year, this figure is expected to climb to as much as 2.2%. However, the Logistikweisen have an important statement to make: Some of the growth consists of more tonnage, but most of it is attributable to higher prices. Logistics services are therefore becoming more expensive.

The German economy is experiencing a solid upturn despite protectionist trends in the global economy.

-The German Federal Ministry for Economic Affairs and Energyat the end of the third quarter of 2018

Trends

But what is driving the logistics industry in 2019? What are the major issues that consignors and service providers will have to grapple with this year and in years to come? “There are two major bottlenecks: the shortage of skilled workers and the development of capacity on the road”, says Wolfgang Stölzle, professor for logistics management at the Institute for Supply Chain Management of the University of St. Gallen in Switzerland. Stölzle, who is also a member of the Logistikweisen group, is bullish about 2019. However, “there’s a prevailing impression that a long-lasting cyclical peak could slowly come to an end. On both sides of the equation, the logistics industry benefits disproportionately from economic shifts”.

Skilled employees

The logistics industry is running out of skilled employees, which is constraining transport capacity even today. Without the train drivers, transport service providers, dispatchers and lorry drivers they need, increasingly complex supply chains will no longer be able to function. There are too few employees in all of these professions. Estimates indicatea current shortage of up to 45,000 lorry drivers. Railway companies also lack skilled employees. DB Cargo, for example, hired more than 1,800 newemployees in 2018. They will become train drivers, shunting locomotive drivers and wagon inspectors, as well as planners and dispatchers in production. In addition, the age distribution among current employees will exacerbate this shortage in the coming years. “The effects of demographicchange are now hitting with full force. During my talks with logistics managers, the shortage of skilled staff was always something looming on the horizon. Now it’s affecting everyone”, says Professor Stölzle.

Infrastructure

Moreover, there is a limiting factor that the Logistikweisen have named very clearly: “The requisite replacement or repair of road and rail infrastructure will give rise to numerous construction sites, some of which will be in existence for too long. Also, the foundation for smart traffic management is lacking. Furthermore, the infrastructure system is still dilapidated. That leads to losses in efficiency, longer timelines and rising costs in logistics”. 

For example, nearly half of all highway bridges were built between 1965 and 1975. Today, they need to be at least thoroughly overhauled or rebuilt,as determined by the German Economic Institute back in 2017. The number of infrastructure deficiencies on waterways is even more striking. Approximately 600 locks and weirs have reached an average age of 70 and 65 years, respectively. These old facilities are often rendered unavailable, and they are too small for today’s ships.

The situation on the tracks is similar: Nearly 10,000 railway bridges date back to before World War I. Today, the railway bridges in Germany have an average age of approximately 56 years. There is a great need for renovation here, too. The German government wants to extend political support to the railways by expanding the rail network. Twenty-nine additional rail projects have been designated as “first priority”. Twenty-twoprojects involving new construction and upgrades, six upgrade projects for railway junctions and measures for the use of 740-metre-long trains have been assigned the highest level of urgency.  “We are putting additional railprojects on the track, which are a real win for the entire rail network and the regions. They are a means for us to eliminate bottlenecks, create morecapacity and provide infrastructure for the Germany-wide integrated regular-interval timetable”, said Andreas Scheuer, the German Federal Minister of Transport. A large amount of money is now being invested in modernising the infrastructure. However, many construction projects take years to complete, and many projects are currently making infrastructure even less usable than it was before at an inopportune time.

“There is no possible way for infrastructure to keep pace with traffic growth. That applies to all areas of transport”, said Professor Stölzle of the University of St. Gallen. “So far, the age-old demand that economic growthbe decoupled from growth in transport has not been met. On the contrary, the economy is becoming more and more transport intensive”.

However, an international comparison is worth noting in this context. 2018 marks the third consecutive year the World Bank has placed Germany at the top of its list of 160 countries on the Logistics Performance Index. The rating takes into account assessments by important main trade partners and international logistics providers. They ranked Germany number one in the category of “quality of trade and transport infrastructure”.


„Even today, digitalisation is leading to greater transparency; after all, we have much more knowledge about our supply chains today than we did previously.“ 

Wolfgang Stölzle, Professor for logistics management
 


E-commerce is changing the entire logistics industry

At the same time, flows of goods in Germany are changing. Supply chains are growing longer in response to a boom in e-commerce. The number of services offered for storage, order picking, transport, delivery and, in somecases, payment for products is increasing. “Companies in full-container-load transport, less-than-container-load transport and combined transport are also growing”, says Martin Schwemmer from the Fraunhofer working group for Supply Chain Services SCS in Nuremberg. Last November, the working group presented the latest top-100 study of logistics in 2018 and 2019. “Trade is changing rapidly; brick and mortar commerce has continued to open up and expand multi-channel sales”, says Schwemmer. “Many logistics providers are now clearly seeing the need to invest.” Consignments are shrinking, which makes flexibility in particular the key to success.

“It is entirely possible that rail will be able to capture a share of value added”, says Schwemmer. This mode of transport, especially combined transport, has a great deal of potential. However, Deutsche Bahn needs to offer the flexibility and the slots that mesh with distributors’ systems. Additionally, many freight forwarders have not yet had any experience with rail. This means that companies like DB Cargo need to make their product portfolios easier to access and offer customers the ability to transport small amounts of cargo more simply. 

A trend toward more sustainability

Cargo bikes, electric vehicles, artificial intelligence for planning routes and the perfectly planned use of various modes of transport are examples of how seriously logistics providers are taking the matter of making supply chains more environmentally friendly. Sustainability will continue to be a hot topic in 2019. “We see it as a relevant trend”, says Martin Schwemmer. “However, there’s no intrinsic motivation for sustainability; instead, it is external forces such as political regulations or customers calling for it”. He says that logistics providers in particular, including express service providers, are closer to end-customers and feel more pressure to put their sustainability efforts on display. Schwemmer’s view is that the need for sustainable transport solutions is an enormous opportunity for companies in rail freight transport in particular to increase their share of the modal split, because the efficient and electrified nature of rail transport mean it produces fewer emissions than lorries, for instance.

However, competitive costs are the pivotal factor. So far, sustainable supply chains have had to make financial sense”, explains Schwemmer. Railway companies’ hand is strengthened because they are sheltered from some costs, such as track access charges. Lorries, on the other hand, which are rail’s most formidable competitor, have to bear the burdens of steeper road tolls and a potential upsurge in fuel prices. The social aspect of sustainability is increasingly taking centre stage as well. In light of the shortage of skilled employees, it is essential to make the company attractive to both existing and future employees.

We are putting additional rail projects on the track, which are a real win for the entire rail network and the regions.

 - Andreas Scheuer, German Federal Minister of Transport

Digital transformation reigns supreme

Finally, we come to the digital transformation. It is predicted that digitalisation will provide technology to solve many problems at once. Automation and artificial intelligence (AI) are helping to overcome the shortage of skilled staff. AI and data analytics, together with long lorries, platooning, longer trains and self-driving vehicles, help ensure that the limited infrastructure is used efficiently, thereby boosting sustainability. This is certainly one factor which prompted Germany’s Federal Minister of the Economy, Peter Altmaier, while addressing the BVL-Logistics Congress in Berlin last October, to appeal to companies to take charge of the digitalisation process and advance the construction of digital platforms (see interview with Steffen Wagner on page 14).

“Even today, digitalisation is leading to greater transparency; after all, we have much more knowledge about our supply chains today than we did previously”, says Professor Stölzle. The result is that many companies, armed with digital services, are now forcing their way onto the market. 
However, many standards are still not in place, says Martin Schwemmer. According to Schwemmer, the range of digital tools used today is very broad, from 3D printing, localisation and tour planning to smart glasses used for picking. “This also fuels a lot of uncertainty”, says Schwemmer. Many companies are waiting it out because they are under a great deal of cost pressure.” Digital projects are not being initiated until their business cases make financial sense.

Decision time is now

The path to becoming a digital company is treacherous, however. The transformation has to take place while operations are ongoing. When all systems are running around the clock, 365 days a year, and all employees are under high pressure to perform, the capacity for innovation is understandably tight.

Digitalisation is already a difficult field for the logistics industry itself, and there are other uncertainties influencing the economy on a fundamental level. Will automation bring about growth around the world? How will climate change impact global approaches to manufacturing? And who is ina position to find good answers to these questions today?