A look into the future: The self-learning supply chain
When "deep learning" AI is incorporated into supply chain systems, they will be able to analyze past supply chain failures in order to prevent new ones.
The self-learning supply chain marks the next major frontier of supply chain innovation. It's a futuristic vision of a world in which supply chain systems, infused with artificial intelligence (AI), can analyze existing supply chain strategies and data to learn what factors lead to supply chain failures. These AI-driven systems then use this knowledge to predict future supply chain problems and proactively prescribe or autonomously execute resolutions. While there is still a way to go before the self-learning supply chain is a reality, recent advancements in AI suggest it is no longer "blue-sky thinking."
The self-learning supply chain of the future marries the benefits of AI with the digital technologies that many companies have already started incorporating into their supply chain disciplines. This digital supply chain transformation is being fueled by several technology advancements: physical "things" incorporating computer technology; readily available big data such as social media, news, events, and weather (SNEW); and computer systems and software becoming more intelligent. These digital technologies are transforming the very nature of the supply chain—which was once built for volume and scale—into an agile, digitally connected framework that leverages a single set of physical assets to support multiple virtual supply chains. These virtual supply chains, sometimes defined as supply chain grids, replace the traditional fixed linear supply chains of the past by providing new flow options that enable accelerated order fulfillment based on near real-time awareness of assets and inventory.
The path toward the digital supply chain We predict that the path toward digital supply chain maturity will occur in four stages: visibility, predictive analytics, the prescriptive supply chain, and ultimately in the future, the self-learning supply chain (See Figure 1). As companies move up the maturity curve, their reliance on manual capabilities will be replaced with autonomous capabilities, providing them with significant efficiency gains and cost savings.
Most companies today are in the first stage of digital supply chain maturity: the visibility phase. Currently, there is a huge focus on end-to-end supply chain visibility to help companies better manage constraints. At this maturity stage, visibility is often enabled by various system integrations such as connecting enterprise resource planning (ERP) systems with best-of-breed solutions and customer systems. This type of system integration enables a business to gain an end-to-end view of how product flows through their supply chain.
The next stage of digital supply chain maturity is predictive analytics. This phase leverages predictive analytic algorithms, enabled by big data—such as Internet of Things (IoT) sensor data, SNEW data, and others—to predict where supply chain issues may arise in the future. Predictive analytics, for instance, can be used to analyze real-time data like weather forecasts and port congestion to predict the impact on freighters in route and determine which shipments will be late—even before the captain may know.
The prescriptive supply chain, enabled by supervised machine learning is the next stage of digital supply chain maturity.1 In this stage, intelligent systems will be able to move beyond predicting potential supply chain issues to prescribing the course of action to take to resolve the issue. This technology is already being incorporated into best-of-breed offerings, where prescriptive analytics are used to learn from planners' historical actions. For a shipment that's predicted to be late, for instance, the solution could provide several resolution options (such as swap demand from another resource or purchase from another supplier) and then recommend the best course of action.
The final stage of digital supply chain maturity is the self-learning supply chain, enabled by deep learning. This capability will provide companies—as well as the solution providers that sell it—with the highest level of differentiation in the markets they serve. Deep learning is a form of AI, in which machines learn from machines. As we'll discuss below, this type of AI is already occurring.
The first iteration of the software—AlphaGo—was programmed with a dataset of human game strategies. The software studied the gaming strategies and used the knowledge it gained to beat the 18-time human world champion of Go. The most recent version of the software—AlphaGo Zero—was programmed with only the game rules. AlphaGo Zero then developed its own game strategies by competing against itself—millions of times—over the course of three days.
Recently, AlphaGo Zero competed against the original AlphaGo and won 100 times out of a 100. Writing about the achievement in Nature magazine, researchers from DeepMind said, "Humankind has accumulated Go knowledge from millions of games played over thousands of years, collectively distilled into patterns, proverbs, and books. In the space of a few days, starting tabula rasa, AlphaGo Zero was able to rediscover much of this Go knowledge, as well as novel strategies that provide new insights into the oldest of games."
How deep learning will impact the supply chain Just like the game of Go, supply chain failures (such as missed shipment windows and low order fill rates) are predicated on millions of potential combinations of action and supply chain policies. There are literally millions of combinations of ways that companies can flow product through the supply chain, and larger enterprises receive millions of order lines every day. Additionally, companies must make numerous decisions about strategic concerns such as their network strategy, replenishment method, and transportation mode. All of these decisions have a direct impact on service performance and cost. Furthermore, there are environmental factors—like weather, social sentiment, news, events, competitor activity—that can add complexity to making optimal decisions.
With AI embedded in the self-learning supply chain, machines will be able to examine supply chain strategies to determine where supply chain failures have occurred and why, along with what combination of external factors—such as transactions, loyalty, inventory levels, weather, competitor events, market performance, traffic, or socio-economic events—contributed to the supply chain failure. Machine-learning algorithms will then sift through this data to learn how these factors interact to result in a high probability of a supply chain failure.
In the future, this type of self-learning supply chain will be able to tell a planner that when a certain combination of events occurs at the same time it is predictive of a supply chain failure. The machine will then be able to prevent the failure by moving inventory to a new location, or it will alert the planner to respond to the problem.
The self-learning supply chain of the future We believe that deep-learning algorithms will drive the supply chains of the future. They will be able to analyze all these combinations of factors, determine which of these items are predictive of a service failure, and build risk mitigation strategies that help organizations "win" by serving customers at the highest level of confidence, at the lowest possible cost. Companies that can do these things—serve customers better than anyone else (that is, faster, with a higher degree of order fill, and on time)—and do it at the lowest cost, will be hard to beat.
Getting to this level of maturity will require reliance on a partner ecosystem that can collect data signals (SNEW and others) to feed into these deep-learning models for real-time insights that can then be used as input to the supply chain plan. While the technology required to support the self-learning supply chain is still being developed, there is a lot of value to be gained in starting to master the early stages of digital supply chain maturity. Companies that embark on a digital supply chain journey now will be well positioned to capitalize on deep learning supply chain capabilities when they are available.
Notes: 1.Supervised learning takes input variables (x) and an output variable (y) and uses an algorithm to learn the mapping function from the input(s) to the output. Common supervised learning frameworks include classification and regression.
If you feel like your supply chain has been continuously buffeted by external forces over the last few years and that you are constantly having to adjust your operations to tact through the winds of change, you are not alone.
The Council of Supply Chain Management Professionals’ (CSCMP’s) “35th Annual State of Logistics Report” and the subsequent follow-up presentation at the CSCMP EDGE Annual Conference depict a logistics industry facing intense external stresses, such as geopolitical conflict, severe weather events and climate change, labor action, and inflation. The past 18 months have seen all these factors have an impact on demand for transportation and logistics services as well as capacity, freight rates, and overall costs.
The “State of Logistics Report” is an annual study compiled and authored by a team of analysts from Kearney for CSCMP and supported and sponsored by logistics service provider Penske Logistics. The purpose of the report is to provide a snapshot of the logistics industry by assessing macroeconomic conditions and providing a detailed look at its major subsectors.
One of the key metrics the report has tracked every year since its inception in 1988 is U.S. business logistics costs (USBLC). This year’s report found that U.S. business logistics costs went down in 2023 for the first time since the start of the pandemic. As Figure 1 shows, U.S. business logistics costs for 2023 dropped 11.2% year-over-year to $2.4 trillion, or 8.7% of last year’s $27.4 trillion gross domestic product (GDP).
“This was not unexpected,” said Josh Brogan, Kearney partner and lead author of the report, during a press conference in June announcing the results. “After the initial impacts of COVID were felt in 2020, we saw a steady rise of logistics costs, even in terms of total GDP. What we are seeing now is a reversion more toward the mean.”
This breakdown of U.S. Business Logistics Costs for 2023 shows an across-the-board decline in all transportation costs.
CSCMP's 35th Annual "State of Logistics Report"
As a result, Figure 1 shows an across-the-board decline in transportation costs (except for some administrative costs) for the 2023 calendar year. “What such a chart cannot fully capture about this period is the intensification of certain external stressors on the global economy and its logistical networks,” says the report. “These include a growing geopolitical instability that further complicates investment and policy decisions for business leaders and government officials.”Both the report and the follow-up session at the CSCMP EDGE Conference in October provided a vivid picture of the global instability that logistics providers and shippers are facing. These conditions include (but are not limited to):
An intensification of military conflict, with the Red Sea Crisis being particularly top of mind for companies shipping from Asia to Europe or to the eastern part of North America;
Continued fragmentation of global trade, as evidenced by the deepening rift between China and the United States;
Climate change and severe weather events, such as the drought in Panama, which lowered water levels in the Panama Canal, and the two massive hurricanes that ripped through the Southeastern United States;
Labor disputes, such as the three-day port strike which stopped operations at ports along the East and Gulf Coasts of the United States in October; and
Persistent inflation (despite some recent improvement in the United States) and muted global economic growth.
At the same time that the logistics market was dealing with these external factors, it was also facing sluggish freight demand and an ongoing excess of capacity. These twin dynamics have contributed to continued low cargo rates through 2024.
“For 2024, I foresee a generally flat USBLC as a percentage of GDP,” says Brogan. “We did see increases in air and ocean costs in preparation for the East Coast port strike but overall, road freight is down. I think this will balance out with the relatively low level of inflation seen in the general economy.”
Breakdown by mode
The following is a quick review of how the forces outlined above are affecting the primary logistics sectors, as described by the “State of Logistics Report” and the updated presentation given at the CSCMP EDGE Conference in early October.
Trucking: A downturn in consumer demand plus a lingering surplus in capacity led to a plunge in rates in 2023 compared to 2022. Throughout 2024, however, rates have remained relatively stable. Speaking in October, report author Brogan said he expects that trend to continue for the near future. On the capacity side, despite thousands of companies having departed the market since 2022, the number of departures has not been as high as would normally be expected during a down market. Brogan accounts this to investors expecting to see some turbulence in the marketplace and being willing to stick around longer than has traditionally been the case.
Parcel and last mile: Parcel volumes in 2023 were down by 0.5% compared to 2022. Simultaneously, there has been a move away from UPS and FedEx, both of which saw their year-over-year parcel volumes decline in 2023. Nontraditional competitors have taken larger portions of the parcel volume, including Amazon, which passed UPS for the largest parcel carrier in the U.S. in 2023. Additionally, there has been an increasing use of regional providers, as large shippers continue to shift away from “single sourcing” their carrier base. Parcel volumes have increased in 2024, mostly driven by e-commerce. Brogan expects regional providers to claim “the lion’s share” of this volume.
Rail: In 2023, Class I railroads experienced a challenging financial environment, characterized by a 4% increase in operating ratios, a 2% decline in revenue, and an 11% decrease in operating income compared to 2022. These financial troubles were primarily driven by intermodal volume decreases, service challenges, inflationary pressures, escalated fuel and labor expenses, and a surge in employee headcount. The outlook for 2024 is slightly more promising, according to Kearney. Intermodal, often regarded a primary growth driver, has seen increased volumes and market share. Class I railroads are also seeing some positive operational developments with train speeds increasing by 2.3% and terminal dwell times decreasing by 1.8%. Finally, opportunities are opening up for an expansion in cross-border rail traffic within North America.
Air: The air freight market saw a steep decline in costs year over year from 2022 to 2023. Rates in 2024 began flat before starting to pick up in the summer, and report authors expect to see demand increase by 4.5%. Part of the demand pickup is due to disruptions in key sea lanes, such as the Suez Canal, causing shippers to convert from ocean to air. Meanwhile, the capacity picture has been mixed with some lanes having a lot of capacity while others have none. Much of this dynamic is due to Chinese e-commerce retailers Temu and Shein, which depend heavily on airfreight to execute their business models. In order to serve this booming business, some airfreight providers have pulled capacity out of more niche markets, such as flights into Latin America or Africa, and are now using those planes to serve the Asia-to-U.S. or Asia-to-Europe lanes.
Water/ports: The recent “State of Logistics Report” indicated that waterborne freight experienced a very steep decline of 64.2% in expenditures in 2023 relative to 2022. This was mostly due to muted demand, overcapacity, and a normalization from the inflated ocean rates seen during the pandemic years. After the trough of 2023, the market has been seeing significant “micro-spikes” in rates on some lanes due to constraints caused by geopolitical issues, such as the Red Sea conflict and the U.S. East and Gulf Coast ports strike. Kearney foresees a continuation of these rate hikes for the next few months. However, over the long term, the market will have to deal with the overcapacity that was built up during the height of the pandemic, which will cause rates to soften. Ultimately, however, Brogan said he did not expect to see a return to 2023 rate levels.
Third-party logistics (3PLs): The third-party logistics (3PL) sector is facing some significant challenges in 2024. Low freight rates and excess capacity could force some 3PLs to consolidate, especially if they are smaller players and rely on venture capital funding. Meanwhile, Kearney reports that there is some redefining of traditional roles going on within the 3PL-shipper ecosystem. For example, some historically asset-light 3PLs are expanding into asset-heavy services, and some shippers are trying to monetize their own logistics capabilities by marketing them externally.
Freight forwarding: Major forwarders had a shaky final quarter of 2023, seeing a decline in financial performance. To regain form, Kearney asserts that forwarders will need to increase their focus on technology, value-added services, and tiered servicing. Overall, the forwarding sector is expected to grow at slow rate in coming years, with a projected annual growth rate of 5.5% for the period of 2023–2032.
Warehousing: According to Brogan an interesting phenomenon is occurring in the warehousing market with the average asking rents continuing to rise even though vacancy rates have also increased. There are several reasons for this mixed message, according to the “State of Logistics” report, including: longer contract durations, enhanced facility features, and steady demand growth. A record-breaking level of new construction and new facilities, however, have helped to stabilize rent prices and increase vacancy rates, according to the report authors.
Path forward
What is the way forward given these uncertain times? For many shippers and carriers, a fresh look at their networks and overall supply chains may be in order. Many companies are currently reassessing their distribution networks and operations to make sure that they are optimized. In these cost-sensitive times, that may involve consolidating facilities, eliminating redundant capacity, or rebalancing inventory.
It’s important to realize, however, that network optimization should not just focus on eliminating unnecessary costs. It should also ensure that the network has the right amount of capacity to response with agility and flexibility to any future disruptions. Companies must look at their supply chain networks as a whole and think about how they can be utilized to unlock strategic advantage.
The notice of proposed rulemaking suggests a new standard that would require that:
certain pipeline, freight railroad, passenger railroad, and rail transit owner/operators with higher cybersecurity risk profiles establish and maintain a comprehensive cyber risk management program;
these owner/operators, and higher-risk bus-only public transportation and over-the-road bus owner/operators, currently required to report significant physical security concerns to TSA to also report cybersecurity incidents to CISA; and
higher-risk pipeline owner/operators adopt TSA's current requirements for rail and higher-risk bus operations to designate a physical security coordinator and report significant physical security concerns to TSA.
The publication of a “notice of proposed rulemaking” in the Federal Register typically begins a 60-day period for public comment from any interested party, and an additional 30 days for reply comments.
"TSA has collaborated closely with its industry partners to increase the cybersecurity resilience of the nation's critical transportation infrastructure," TSA Administrator David Pekoske said in a release. "The requirements in the proposed rule seek to build on this collaborative effort and further strengthen the cybersecurity posture of surface transportation stakeholders. We look forward to industry and public input on this proposed regulation."
The notice came a week after a White House representative warned the trucking freight industry that the People’s Republic of China (PRC) has remained the most active and persistent cyber threat to the U.S. government, private sector, and critical infrastructure networks. The briefing came from a member of the administration’s Office of the National Cyber Director, in an address to attendees at the National Motor Freight Traffic Association (NMFTA)’s Cybersecurity Conference.
“In January, the National Cyber Director testified in front of Congress along with colleagues from CISA, NSA, and the FBI about this threat from the PRC, dubbed Volt Typhoon,” speaker Stephen Viña said in his remarks. “Volt Typhoon conducted cyber operations focused not on financial gain, espionage, or state secrets but on developing deep access to our critical infrastructure. This includes the energy sector transportation systems, among many others. A prolonged interruption to these critical services could disrupt our ability to mobilize in the event of a national emergency or conflict and can create panic among our citizens. Ultimately, if trucking stops, America stops.”
Online merchants should consider seven key factors about American consumers in order to optimize their sales and operations this holiday season, according to a report from DHL eCommerce.
First, many of the most powerful sales platforms are marketplaces. With nearly universal appeal, 99% of U.S. shoppers buy from marketplaces, ranked in popularity from Amazon (92%) to Walmart (68%), eBay (47%), Temu (32%), Etsy (28%), and Shein (21%).
Second, they use them often, with 61% of American shoppers buying online at least once a week. Among the most popular items are online clothing and footwear (63%), followed by consumer electronics (33%) and health supplements (30%).
Third, delivery is a crucial aspect of making the sale. Fully 94% of U.S. shoppers say delivery options influence where they shop online, and 45% of consumers abandon their baskets if their preferred delivery option is not offered.
That finding meshes with another report released this week, as a white paper from FedEx Corp. and Morning Consult said that 75% of consumers prioritize free shipping over fast shipping. Over half of those surveyed (57%) prioritize free shipping when making an online purchase, even more than finding the best prices (54%). In fact, 81% of shoppers are willing to increase their spending to meet a retailer’s free shipping threshold, FedEx said.
In additional findings from DHL, the Weston, Florida-based company found:
43% of Americans have an online shopping subscription, with pet food subscriptions being particularly popular (44% compared to 25% globally). Social Media Influence:
61% of shoppers use social media for shopping inspiration, and 26% have made a purchase directly on a social platform.
37% of Americans buy from online retailers in other countries, with 70% doing so at least once a month. Of the 49% of Americans who buy from abroad, most shop from China (64%), followed by the U.K. (29%), France (23%), Canada (15%), and Germany (13%).
While 58% of shoppers say sustainability is important, they are not necessarily willing to pay more for sustainable delivery options.
Gulf Coast businesses in Louisiana and Texas are keeping a watchful eye on the latest storm to emerge from the Gulf Of Mexico this week, as Hurricane Rafael nears Cuba.
The category 2 storm’s edges could also brush Florida as it heads northwest, causing tropical storm force winds in the lower and middle Florida keys. However, the weather agency said it is too soon to forecast Rafael’s impact on the U.S. western Gulf Coast.
In the face of campaign pledges by Donald Trump to boost tariffs on imports, many U.S. business interests are pushing back on that policy plan following Trump’s election yesterday as president-elect.
U.S. firms are already rushing to import goods before the promised tariff increases take effect, to avoid potential cost increases. That’s because tariffs are paid by the domestic companies that order the goods, not by the foreign nation that makes them.
That dynamic would likely increase prices for U.S. consumers as importers pass along the extra cost in the form of price hikes, according to an analysis by the National Retail Federation (NRF). Specifically, Trump’s tariff plan would boost prices in six consumer product categories: apparel, toys, furniture, household appliances, footwear, and travel goods. “Retailers rely heavily on imported products and manufacturing components so that they can offer their customers a variety of products at affordable prices,” NRF Vice President of Supply Chain and Customs Policy Jonathan Gold said in a release. “A tariff is a tax paid by the U.S. importer, not a foreign country or the exporter. This tax ultimately comes out of consumers’ pockets through higher prices.”
The rush to avoid those swollen costs can already be measured in the form of rising rates for transporting ocean freight, as companies start buffering their inventories before the new administration officially announces tariff hikes. Transpacific rates are still $1,000/FEU or more above their April lows, showing increased ocean volumes and climbing rates generated by shippers’ concerns about supply chain disruptions including port strikes and the Trump tariff increases, supply chain visibility provider Freightos said in an analysis. "The Trump win may start shaking up supply chains even before he takes office. Just the anticipation of higher tariffs may lead importers to pull forward shipments, creating a preemptive freight frenzy," Judah Levine, Head of Research at Freightos, said in a release. “Frontloading will cause freight rates to feel the heat as importers race to dodge the extra costs, similar to what took place with Trump’s tariffs on Chinese goods in 2018 and 2019."
Another group sounding a note of caution about international trade developments was the Global Cold Chain Alliance (GCCA), a trade group which represents some 1,500 member companies in more than 90 countries that provide temperature-controlled warehousing, logistics, and transportation. “We congratulate President Trump on his election. We also congratulate all those who have been elected to the U.S. Senate and House of Representatives,” GCCA President and CEO Sara Stickler said in a statement. “We are also committed to promoting the growth of exports from U.S.-based food production and broader manufacturing sectors. We will engage constructively in the policy discussion about future trade policy and continue to make the case for the importance of maintaining balanced and resilient trade routes for food and other temperature-controlled products across the world.”
Businesses in the European Union (EU) were likewise wary of tariff plans, judging by a statement from the VDMA, a trade group representing 3,600 German and European machinery and equipment manufacturing companies. "Donald Trump's second term will be a greater challenge for German and European industry than his first presidency. We must take his tariff announcements seriously, in particular. This will once again put a noticeable strain on transatlantic trade and investment relations," VDMA Executive Director Thilo Brodtmann said in a statement. “The USA is and will remain the most important export market outside the EU for mechanical and plant engineering from Germany. Our companies offer the products required to implement the re-industrialization of the USA that Donald Trump is striving for. The VDMA's overall outlook for the American market therefore remains positive."