The value in logistics has long shifted from tons to ounce: Aggregation holds the key

It was not a pleasant experience shipping an envelope the other day from Mumbai to Boston. It had one single sheet of paper and could not have weighed more than some ounce. I wanted to take the Post Office route and a registered post (EMS Speed Post) cost me Rs.585 ($8.70) for the A4 size sheet. It is perhaps the costliest parcel by weight I had ever used. The tariff chart starts from 250 grams, so I was on the other extreme end of this bargain. Had I opted for the fastest service through a private courier, the cost would have been three times, but a very slow shipper would not have made much of a difference.

The parcel service of the Indian Government, known as India Post is in good business, thanks to the prevailing tariffs in a business which is mostly dominated by courier service companies; the likes of DHL, UPS or Fedex rule this business around the world.

UPS just announced its First Quarter results, and no guesses, it increased its quarterly revenues to $14.4 billion, up 3.2% this quarter and generated a free cash flow of $2.2 Billion this quarter. Fedex or DHL is no different in their results.

The value in logistics has long shifted from moving tons to moving ounces and from door to door. The value stems from handling of large number of SKUs across long and short distances, but this value comes from enormous expertise in optimization of all kinds. The wastes that these businesses could have generated would have made the door to door delivery system completely unviable. But now with Ecommerce, the volumes are exponentially increasing and the need for optimization is only getting more pronounced. The aggregation puzzle holds most of the promise. 

On the other hand, moving large volumes of commodities is another matter, it is all about dedicated movements from specific points to specific destinations. Imagine moving coal or crude oil or bauxite over long distances and this could be very costly. The origin of logistics is from the coal industry and then iron ore and finally the biggest spurt came from oil, when Rockefeller and Standard Oil expanded across America from one state to the other. The railroad was born to cater to this vast movement of oil or ore from the mining pit to the processing centers or the refining plants.

Very soon, this movement had other contenders, like conveyors and pipelines. Today in U.S. as much as the railroad, the pipeline quarry volume is same as that of the railroad volumes. In many places around the world, pipelines and conveyors transport ores and crude for hundreds of miles. But the railroad is the more popular medium for most of the commodities that have to move in bulk. The value for the logistics provider comes from the ability to ship very large quantities at competitive costs. Most large commodity companies like the BHP Billiton or the Rio Tinto have their own railroad companies as subsidiaries to be able to derive value from this ownership.

The book, Prize, the Epic Quest for Oil, Money, Power, vividly describes this journey of oil through challenges of all kind where gaining the competitive advantage came entirely from logistics, where Standard Oil became the torch bearer through alliances of all kind.

But the other side of the story is less known, that of transporting finished products and the birth of courier service or parcel service that transformed the world. The value in this service is several times the value to be derived from the transportation of commodities. But we will come to that later.

The word courier is derived from the Latin word, currere, which means to run; the other connotations include the word current or currency, which is also related with speed. The purpose of courier was to devise methods to deliver goods and messages quickly including runners, homing pigeons, horse and pony riders, stage coaches etc. The history of couriers goes back thousands of years to the days when the only method of speedy delivery was by running.

In Greek mythology, Hermes, the son of Zeus, was called the Messenger God (in Roman Mythology known as Mercury). In ancient mythology Hermes/Mercury has wings on his feet. In stories, Hermes is often sent by his father, Zeus, to deliver dreams or to travel with mortals to keep them safe.

The origin of the U.S. postal service’s motto, traces back to Herodotus, a Greek Historian born in 484 BC, who is quoted as saying “Not snow, no, nor rain, nor heat, nor night keeps them from accomplishing their appointed courses with all speed”.

Wells Fargo was started in 1852 and became the first premium package delivery service in the U.S. It specialized in moving gold and packages and established a huge network of Wells Fargo offices throughout the U.S. which were particularly important for organizing commerce in newly established territories and states. They had a stiff opponent in their business when Central & Union Pacific Rail united in 1869 and they provided formidable network efficiency. U.S. Postal service, a government agency also provided them a very stiff competition and they had to wind up at the end of the 19th century. The birth of UPS, Fedex and the Express agency service of Railways transformed the business of delivering parcels.

Today the real value of goods that move by parcel service account for 25% of all value of goods shipped, railroad moves just 3% of all value in U.S. according to the government website of Commerce Department. But the news is that this high value parcel segment is growing to $9 Trillion of value by 2040, something that shows the importance of door to door delivery as a differentiated service. While the big miles would have to be catered to by the railways or by trailers through aggregation, it is the first and last miles where the real icing on the cake will lie.

The value also lies in the value of real good that is getting shipped, if an expensive item is to be shipped, it can hardly be aggregated as an SKU, it has got to be shipped as a single item. The value will be several times the value of an item that can be aggregated. The art of aggregation of these non-standard items is where the real expertise lies and here the support of new technologies have taken the parcel service to new frontiers of efficiency.

But for producers of items, or for customers of these items, it is always far better to understand the nuances of aggregating or the logistical challenges that have to be faced to ship an item or to receive an item well before the transaction is consummated. This is more when almost 15%-20% of the cost will be spent in shipping it. Those who shop online and place items on the cart, know it better how the cost changes with each added item and what happens when the timing of the delivery is changed from ‘overnight’ to ‘anytime’. People are refusing to aggregate their shopping experiences by going to a mall to shop things from six-packs or groceries to any household equipment. With E-commerce the entire aggregation is going to be the business of logistics.

The cost of speed versus the quality of service is where the optimization is centered. The failure of a service that would lead to reverse logistics cost and the ensuing cost of a lost customer makes the process far more costly as cost of buffering must factor in all risks. The cost of added risks makes the express delivery service far more expensive, the very reason why my package cost me so high.

If the world shuns the fast delivery model and time for aggregation is allowed, the entire delivery model will change as more alliances will make the costs shrink. The value of this is actually enormous and the fruits of this will be borne by the consumer; today this value is only partial, waiting for aggregation is an important element of all cost.