When we founded CloudSort in 2019, we came to work with a bold vision: to completely reimagine how packaged goods move along the supply chain—particularly between the point of origin and the final mile. But to define the way forward, we had to better understand the past.
Beholden to an outdated system
When the global shipping industry first adopted the hub and spoke model, most notably FedEx in the 1970s, it was revolutionary: a system that promised to centralize and bring together the farthest corners of an industrializing world. Hub and spoke largely delivered on its promise, especially when dealing with large enterprises hauling lots of cargo along predictable shipping routes. But lately this model has become a barrier to innovation—especially in small package delivery, which has accelerated in recent years alongside the explosion of ecommerce.
A major weakness in today's hub-and-spoke dominated supply chain is that packages in times of high volume need to be detained at a hub, which leads to frustrating delays and expenses. Carriers struggle to keep things moving efficiently toward the intended destination because the spokes in the system are only connected indirectly through a central hub.
Hampered by structural forces
It’s true that today’s legacy carriers have tremendous advantages when it comes to scale, with worldwide networks and package sortation operations engineered to operate at peak efficiency. These networks, however, suffer from two major disadvantages: they are enormously expensive to build and maintain, and they’re closed off to innovation from third-party services built especially for emerging shipping, product, or consumer needs.
More than a quarter of FedEx's capital expenditures this year went toward sortation equipment—a 28 percent increase from last year. In a similar predicament, UPS put 38 percent of its capital expenses last year toward facilities and equipment.
Another reason why companies are hesitant to change is the high cost of transportation. This year, FedEx Ground spent half of its operating expenses on "purchased transportation". The investments required to move packages are not small, and carriers understandably want to maintain high trailer utilization rates at all times. Even a small decline in utilization can have disastrous effects on the company's finances. For example, a carrier that spends $5 billion on transportation and sees its trailer utilization rates dip from 55 percent to 50 percent will face transportation cost increases of half billion dollars. These are important considerations when adding lanes or days of service into any geography.
In response to consumer needs, carriers have added capacity for delivering small packages, but these carriers remain challenged to accurately match supply with demand. Most recently, carriers increased capacity at a rate too slow to get ahead of the supply chain breakdowns exacerbated by the coronavirus pandemic. Besides, these investments end up being marginal improvements that simply add capacity to an already poorly designed system.
Aligning incentives—for everyone
One reason legacy carriers haven’t yet radically reinvented their systems is quite simply because they have few incentives to do so. This is especially true today, with the recent boom in e-commerce shifting the balance of power even further toward the side of the carriers. Carriers have effectively raised rates, suspended service guarantees, fired low-margin customers, and levied surcharges in a complicated and selfish way.
Shippers of all sizes are feeling the pain: small and medium ones don’t have package volume to use as leverage, and large shippers, in addition to having to pay higher costs, suffer from capacity constraints, restricting the amount of volume they can ship, particularly during peak seasons.
In short, consumers, shippers, and carriers have their own, sometimes divergent, success criteria when it comes to package delivery. These misaligned incentives mean that one side tends to benefit at the expense of the other.
- Consumers expect accurately predicted delivery dates, up-to-date tracking information, fast transit times, and more sustainable practices from their favorite retailers.
- Retailers and shippers are seeking consistent capacity from a carrier, competitive rates for shipping and transit time, and customized or modular solutions that match up with the flexibility of their business.
- Carriers want to maximize returns for their shareholders, which generally means charging the maximum rate the market will support while being conservative with investment.
Recent start-ups have attempted, quite admirably, to disrupt the shipping space for the better. Technology that improves package tracking, for example, is helpful but not revolutionary. Better tracking might lead to improvements in efficiency and customer experience somewhere down the line, but its immediate benefits for the supply chain’s stakeholders are limited.
Rate shopping engines, which dynamically select shipping options based on nuanced shifts in supply and demand, are undermined by complicated pricing structures set by the carriers, some of which actually own these rate shopping engines to begin with.
Transportation brokerage services that match a shipper’s demand to a carrier’s capacity to distribute have proliferated, and are helpful in creating value for shippers by providing access to otherwise unused capacity. But the broker experience can be uneven: larger ones with higher levels of access capture much of the value. Smaller brokerages might solve a niche problem, but with fleeting benefits.
Finally, some recently launched start-up carriers are offering ambitious value propositions and competitive rates of their own. But having great rates means nothing when your carrier can’t expand into new markets or, even worse, goes out of business because they shoulder much higher costs. If you are a shipper, how do you know which of the new carriers will succeed and which ones will fail?
An untapped opportunity
While all of these solutions attempt to improve upon the old logistics paradigm, none attempt to reinvent the system entirely. Today’s world is moving toward smaller, much cheaper, and more numerous nodes—what insiders call highly distributed networks. We see these new types of networks everywhere: think about how Starlink enabled communication in Ukraine using clusters of small, low-flying satellites. Or how 5G, by using smaller and more numerous base stations, delivers lower latency and higher download speeds compared to its 4G predecessor. Can these same concepts be applied to today’s shipping conundrum? I founded Cloudsort because I believe the answer is yes.
CloudSort is a highly distributed network designed to intelligently link residual supply, such as excess industrial real estate or extra carrier capacity, with fluctuating demand from a shipper. At the core of the CloudSort offering is a package-level sortation software that uses machine learning to group and route packages in a smart way. Because it’s cloud-based, the technology can be deployed anytime, anyplace, providing our partners with a powerful tool that enables new logistics capabilities.
In our world, the use of the word ‘partners’ is very deliberate. We want our sortation ‘hosts’ to make money doing purposeful work while enabling better and, at times, more curated delivery services for shippers. This incentivizes more hosts and shippers to participate, which in turn expands the geographic coverage and causes the network to grow. Eliminating channel conflict is one of our key objectives.
CloudSort is able to accomplish this because its network depends on physical operations that are smaller, cheaper and much more numerous. This reduced capital intensity means that CloudSort can accept a much lower operating margin than a legacy carrier for the same end-to-end shipping.
We like to think that we choose clients and partners like we would choose friends, and we certainly appreciate working with organizations that have a like-minded approach. In selecting a delivery provider, we encourage shippers to think about that magic word, ‘incentives.’ How closely aligned are your incentives to those of your carrier?
Or if you need a more straightforward directive, just take the words of American businessman Charlie Munger: “Never, ever, think about something else when you should be thinking about the power of incentives.”
Together, I believe we have the potential to innovate the middle mile, decentralize logistics, and create a community based on shared values and collaboration. Instead of working against each other, let's design a solution that works for everyone. After all, that’s the CloudSort way.