Devil's In The Data

You can't send a package over the Internet. All companies selling to businesses and consumers online must face this simple truth. Solving the shipping problem, therefore, is often the difference between e-business success and failure. As a result of this pressure, the companies most affected--most transformed--by the ascent of the Internet aren't those that do the online selling but those that deliver the goods.

The CEOs of these companies say the Internet is forcing a fundamental shift in their business and the services they provide. Not only are they transporting more online-purchased goods, they're becoming ever more critical links in those customers' supply chains. They're doing so by creating extranet links with their customers and gathering logistics data that those customers can use to improve the operation of their businesses. Information technology provides the underlying links as well as the data collection and analysis platform for all these activities.

Logistics data "allows you to operate the business more and more precisely against demand," says Fred Smith, CEO of FDX Corp., a holding company that includes Federal Express, RPS and other shipping and logistics companies.

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"Being able to have very sophisticated information architectures where our system and the customer's system is seamless--that's the ball game for us," Smith says. "All that information has to be online and available all the time."

Smith and his competitors are backing up their statements about the value of logistics data by pouring money into e-commerce.

Transportation and logistics companies spent $2,367 per employee on technology to support e-commerce over the past year, an increase of more than 11 percent from the year before, according to the Meta Group. The figures include expenditures on server hardware, operating systems, client and server applications software, as well as systems and software dedicated to e-commerce apps. For organizations like United Parcel Service, with 327,000 employees, or the U.S. Postal Service, with 760,000 employees, that's a pretty penny.

All that spending isn't simply to handle higher volumes of business. Most e-businesses are putting enormous pressure on their package carriers to participate fully in the just-in-time processes that enable manufacturers to fill orders as swiftly as possible while keeping inventory to a minimum.

"It's ironic, but the net result of e-commerce will eventually be a shrinking of shipping volumes, at least on the business-to-business side," says Brian Clancy, a principal at MergeGlobal Inc., a freight transport consultancy. "There will be a relative reduction in the need for transportation because, with ERP and supply-chain technology, forecast errors will be reduced."

As a result, Clancy says, package delivery companies are moving at breakneck speed to reshape themselves as masters of logistics, supply-chain management and even warehousing.

"In order to succeed, they must deploy technology at a speed that allows them to stay ahead of the decline in [traditional package delivery] revenue," he says. "It's like Intel, which must accelerate its technology development fast enough to stay ahead of the drop in chip prices."

While executives in the transport and logistics industry aren't ready to concede any drop-off in volume, which has steadily increased throughout the e-commerce boom (Web-related revenue was up 80 percent last year, according to Meta), they acknowledge the need to go beyond shipping goods.

Customers also want to be able to initiate, track and acknowledge shipments online. The integration of shipping software and network services has become a key requirement in most e-businesses. In many cases, the shipping data is tied to an even broader supply chain effort, which may include the logistics of transportation and warehousing as well as simpler functions such as package tracking.

In essence, transport and logistics companies are subordinating their individual business plans and identities and becoming an integrated part of their e-business customers' supply chains, says Don Schneider, CEO of Schneider National, a $2.7 billion trucking and logistics company.

"We are really part of a big chain--customers, warehouses, suppliers, our equipment, drivers, rail partners--that allows all the trading partners, independent of their internal resources, efficient interaction with the supply chain," Schneider says. "This is a dramatic change, and we really are just in the infancy of understanding how we can use this very well."

What's Happening
The effects of e-commerce on the business-to-consumer market--and thus, on delivery of goods to homes--are well known. The U.S. Postal Service and UPS, which together handle about 75 percent of all business-to-home deliveries in the United States--are overwhelmed with new volume from Web sales, ranging from major appliances to trading cards.

"The key issue in this sort of market is lowering costs," says U.S. Postmaster General William Henderson, whose agency still handles slightly more than half of that 75 percent figure. "If you pay $6 for a CD on the Web, you're not going to pay $7 to have it shipped to you. We have to find the lowest cost ways of getting the goods to you."

At the same time, carriers that handle retail goods are called on to provide more data about the contents and location of the packages they ship. "We deliver about 12 million packages a day, about 7 million of which we collect information on electronically," says Dale Hayes, vice president of e-commerce and technology marketing at UPS.

"Collecting the information electronically has been good both for UPS and for its customers--it ensures the accuracy of the information we receive so that we know not only where it was picked up, but what's in the package," Hayes says. "We can use that information to keep track of inventory."

Providing that sort of data is more difficult for the Postal Service, which handles 3.4 billion pieces of mail each week. "Our goal for our customers is that they will eventually be able to know where all their mail is through the Web," Henderson says. "It will take time, but we will get there."

Shippers also are figuring out how to handle new, regional Internet home delivery options such as groceries, video rentals and even dry cleaning services, Henderson says.

Carriers, consultant Clancy says, will eventually be segmented by the number and frequency of the stops they make. "FedEx does well in making deliveries from central business district to central business district, but it will be difficult for them to fit into this local delivery service market," he says.

One start-up launching this month says traditional carriers are not equipped to provide speedy, inexpensive local delivery, because they are hamstrung by the economics of their business, which calls for filling planes and trucks to capacity and delivering packages over long distances.

The start-up, Shipper.com, is building fulfillment centers in nine metropolitan areas, much like WebVan is doing for groceries. These centers will be used to warehouse goods for e-retailers and express-deliver them to consumers for the price of the typical five-day ground shipment, says marketing vice president Andrew Krainin. In many cases, Shipper.com will be able to ship the same day an item is ordered.

"There is a lot of online purchasing going on in the early afternoon," Krainin says. "By then, FedEx and UPS are busy on the upstream side, getting packages to distribution centers. But that's when people want their product delivered downstream."

Shipper.com has launched with 10 trucks and two warehouses in the Los Angeles and San Francisco metro areas. It plans to expand into New York and Washington, D.C., later this year and early next.

Full-Blown Partners
Yet as challenging as business-to-consumer delivery may be, it's simple compared with the increasingly complex task of integrating shipping and logistics systems with modern e-commerce systems. Carriers are now becoming full-blown partners in the success or failure of e-businesses whose supply chains are mostly electronic but who also depend on third parties to deliver their products to customers.

"A couple of years ago, Web-based tracking of shipments was a big deal [for logistics companies], but now anybody can do that," says Ari Smith, a principal at Next Generation Logistics Inc., a shipping and logistics consulting and services firm. "Now we're being called on to do more. We not only do shipping and tracking, but we source products and we reroute the loads when the carriers drop them. We basically tell them to give the orders to us and we take over from there."

FDX, the parent company of Federal Express, is taking that idea to a new level, working with companies to develop logistics and supply chain systems and processes that go beyond overnight package delivery.

"Our strategy is to have a complete plug-and-play transportation solution that will hook in with you however you want to do it," says FDX CEO Smith. "If you've got SAP or Baan, we can plug into them. Then we're all of the things that you need to know outside the four walls of your company to manage your inventory in motion. And if you want us to, we'll actually manage the warehouse for you."

Such broad offerings will mean swift deployment of Internet technology in the shipping market, not only by carriers, but also by their business customers. While companies such as FedEx offer supply chain and logistics software and consulting services to customers, UPS earlier this month announced an even more basic Web aid: free "fenced" Internet access that lets customers use UPS.com.

The growing variety of offerings from shipping and logistics companies also is forcing their customers to make some hard decisions about the role that each carrier should play in their supply chains, experts say.

"Some companies may want to outsource their whole logistics process to a company like ours," says Next Generation Logistics' Smith.

The problem with logistics outsourcing for commodity manufacturers and e-retailers is that they can no longer reap the tiny profit margins made in each part of the shipping process. An efficient e-retailer makes a tiny profit at each step of the process--processing an order, warehousing the stock and shipping. If they outsource warehousing and shipping, they turn those profits over to the outsourcer. "That's why a company like Amazon.com chose to build its own warehouses instead of outsourcing them," Clancy says.

Some older companies have been slow to automate their logistics and supply chain processes, and they are paying the price, says Laurie Tucker, senior vice president of e-commerce and customer service for FedEx. "Some companies will be near death before they see the vision," she says. "But when they stare death in the face, we're ready with the tools."