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Test Insight Piece

Robert Falck, CEO and founder2021.07.12

The transport system is, and probably always has been, complex. Even if we try to understand and control what happens, we’ll always end up guessing, making assumptions, and ultimately simplifying just in order to cope. Despite this difficulty in handling complexity, we’ve succeeded in developing a global system of supply chains—a bloodstream that keeps our economy alive. 

There are several fundamental, "obvious” assumptions that have evolved into basic foundations of today’s transport system: 

  1. Transport delivers time and space utility. If a product is worth more elsewhere at a specific time, it can be moved, given that the cost of the transfer is less than the expected increase in value. 

  2. Transports are reactive—first, a need arises, then the transport is performed. 

  3. Transport is resource-intensive—large machines and many man-hours are invested in moving products. There are therefore large economies of scale due to a high ratio of fixed costs.

  4. Transport is a fragmented system with many different interests and economies, all of which have their agenda. There’s no "Grand Master" pulling all the strings. 

  5. Transportation is difficult to coordinate due to the structure of the industry and the old-fashioned view of data and information. It’s often said that "we’re a conservative industry". 

In economics, there’s the “Law of Diminishing Returns”, which stipulates that the marginal benefit of an effort, such as an increase in production, diminishes over time. Today, this is often the case in logistics. When trying to improve our transport systems, the same amount of resources does not provide as much increase in benefits as they once did. Our old methods have been refined and polished to perfection. If we look at the system from the inside, it’s often impressively efficient. Packages sent from remote places will all arrive at their destination across the country the next day. The system works, it’s stable, and can handle gigantic volumes—but it’s based on a very basic construction element: Zip codes. This ingenious tool allows us, on a large scale, to individualize transport services, but it does so at the expense of efficiency. The system can be seen as a large machine that does the same thing, day in and day out. For it to work, it relies on overcapacity, space, and the ability to handle days of both low and high volume.

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We’ve reached the limit of what these old systems can do for us. The strategy to simplify—e.g. to divide a country into ZIP codes—instead of treating all shipments individually, cannot be improved further. Meanwhile, the global sustainability goals speak clearly: We need to accelerate the transformation. But at the same time, we do not trust our digital tools to take all factors into account, resulting in massive manual decision-making, and with that also further simplification, as our human abilities to handle complexity are limited. We excuse ourselves by thinking "It’s fine the way it is" and that change can’t be that urgent. In this system, any attempt at improvement will either be more expensive and/or have less impact than previous improvements.

Our future transport system can look very different from what we take for granted today. Either we do what we have done until now: we improve our current version slightly and optimize individual carriers within their own domains, continuing to get diminishing returns.

In Sweden, the logistics companies only spend 0.01% of their turnover on R&D, way below other industries, which is a clear sign that the industry has stagnated (Trafikanalys, 2020). This in spite of a large untapped potential for improvements of the system of today where load factors often are below 60% (IVA, 2019).

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So clearly, to be stuck in a stagnating system faced with diminishing returns isn’t the best way forward. We need to find a new way of developing the future, free of the limitations that govern most of the industry today—we need to rethink

  1. Transport does not have to be the shortest path from A to B, an intelligent system can handle movement based on a higher logic than one-to-one shipments—the system's efficiency must come first. 

  2. We need to predict and influence the demand, to optimize the resources in the system. Just being reactive doesn’t work. Here, the nudging of transport buyers comes as a natural next step. 

  3. We need to review our industry’s investment- and variable costs. Electrifying, automating, and digitizing is a given for purely economic reasons. From a sustainability perspective, it’s necessary. 

  4. Even if we have a fragmented industry it doesn’t mean that it must be inefficient—but we need decision-making at the system level to solve this. 

  5. Players who want to be part of the transport system of the future need a basic digital understanding, and an acceptance of the efficiency created by planning at the system level—not locally. 

Our future transport system can look very different from what we take for granted today. Either we do what we have done until now: we improve our current version slightly and optimize individual carriers within their own domains, continuing to get diminishing returns. Or we implement a new, radical solution—where those who commit to it become part of a larger system, where planning and controlling is done at the system level, leading to higher resource utilization and higher profitability overall. 

Analog solutions like ZIP codes have run their course. Humans aren’t smart enough to succeed in optimizing the transport system as fast as the environment needs. It's time for the algorithms to take over the transport sector once and for all.


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