THE logistics industry has long heralded the potential of e-commerce.
Over the past few years, the sector has seen the entrance of many delivery startups while mid-sized and larger players have invested in hubs and partnered or acquired other companies to capitalise on the e-commerce wave.
Still, the surge in online retail in the last three months took many by surprise.
As the movement control order (MCO) took effect in March and consumers were home-bound, the sudden shift to online purchases has put a certain strain on logistics players, particularly those in the courier and last-mile delivery segments. Despite the long-drawn buzz around e-commerce, many had yet to invest in their capacity to handle such an increase.
“The local logistics industry is still largely fragmented with many independent players along the supply chain employing traditional business models.
“I think the logistics players were not prepared for this unprecedented increase. They had not yet built the infrastructure to be able to embrace this huge demand. This may have impacted the overall customer online experience.
“Many do not have the necessary infrastructure, whether the front-end or back-end, to support e-commerce and demand significantly exceeded the ability of logistics players, and even the sellers, to fulfill the orders during the MCO. So there was a challenge to get the goods to the consumers fast enough, ” notes PwC Malaysia partner and deals strategy leader Yennie Tan.
With parcel deliveries up multi-fold in some places, some players are operating above their capacity. Naturally, complaints on poor delivery have also been aplenty.
Granted, the MCO has put some genuine constraints on courier and delivery service providers.
Ninja Van Malaysia country head Adzim Halim says the limited hours allowed for businesses to operate curtailed its delivery times and caused disruptions to its operational processes and supply chain.
“This was further compounded by Ramadhan, where our delivery team had to break fast in addition to adhering to the standard operating procedures (SOPs) set out by the government.
“But we have been able to manage the increased number of deliveries during this unpredictable time, ” he explains.
Another obstacle for players is the drop in passenger flights, which means lower cargo capacity.
Domestically, Adzim says this has led to significant delays for deliveries in East Malaysia.
On the international front, Julian Neo, managing director of DHL Express Malaysia and Brunei, notes that it has affected inbound and outbound deliveries.
“This significant reduction in both available commercial air cargo space and destinations made it necessary to switch to more indirect routings as well as to purchase additional cargo aircraft capacity, which is hardly available.
“Additionally, a large portion of the limited capacity is currently devoted to the transportation of critical medical supplies and personal protective equipment. In a nutshell, the impact of Covid-19 is very significant to global trade and accordingly, our business.
“At DHL Express, we have been fortunate to have our own fleet, but even then, we have had to prioritise the shipment of critical goods to ensure that they get to the communities that need them urgently, ” says Neo.
While the current landscape poses a challenge for courier and delivery service providers, the industry has long been plagued by rising cost and declining margins as players are unable to pass on the cost to consumers.
These days, customers expect to get their goods faster, more flexibly and at low or no delivery cost.
Coupled with a critical shortage of drivers in the industry, the sector is under growing pressure to increase efficiency and deliver a better service at an ever lower cost.
To remain sustainable, Tan says players will have to ensure scale, service reliability and adequate capacity. As the industry becomes more competitive, volume will be key.
To address decreasing margins, service providers could look at models employed by logistics players in more advanced e-commerce markets.
“Currently, merchants either absorb delivery charges or include them in product pricing, or they use techniques like minimal purchase for free delivery.
“But there are other models like the ones used by Amazon, where you subscribe to Amazon Prime which guarantees same day delivery in the US, for example. Some customers are willing to pay for that kind of service, like a subscription service for certain guarantees or for other services, ” she says.
That said, the local e-commerce market is still in its nascent stage and total industry volume is still relatively low. Tan points out that e-commerce as a percentage of gross domestic product (GDP) was only at 8% in 2018.
“So for the players, the question is do we invest ahead of the curve or preserve margins now when the adoption of e-commerce is still low?
“If the market has that scale, by becoming a regional hub, then as a logistics player, you can bring down the cost and be more competitive, ” says Tan.
This would then encourage local players to invest more into technology like artificial intelligence (AI), machine learning, robotics, automation and smart warehousing to improve efficiency and further prepare for the opportunities that will arise from e-commerce.
There are other elements that come into play in the growth of the e-commerce market. These include higher consumer trust, stronger security of the system, facilitation of payment, wider merchant onboarding and, of course, better logistics.
As more SMEs look to go online, there is a greater need to hasten the development of these components.
Window of opportunity
As with most other businesses, the pandemic has presented logistics players the opportunity to review their operations and products and make improvements where needed.
Neo says the crisis opens the doors to renew operational systems for the better in terms of effectiveness, efficiency, resilience and responsibility.
“We are accelerating deployment of solutions to enhance customer safety and experience during this period. For example, where previously a signature would be needed during delivery, we have implemented contactless delivery that further mitigates infection risk.
“We have also successfully rolled out our WhatsApp service, DHLontheGo, which allows shipment booking, tracking and enquiry all through the messaging app, ” he says.
Ninja Van has, likewise, tweaked its solutions to continue delivering seamless services to its customers including introducing contactless delivery where parcels can be placed at the recipients’ doorsteps, taking photos to replace signatures as proof of deliveries and offering bank-in options for cash-on-delivery parcels.
The company has also expanded its services to help SMEs digitise their business models and partnered virtual events to provide longer-term logistics solutions.
“The pandemic has created opportunities for many businesses. The majority of brick and mortar stores as well as distributors are looking at new ways to reach customers directly, in an effort to diversify their dependence on traditional retail.
“This has posed new opportunities for logistics players to showcase their capabilities in providing both offline and online support required by local businesses to operate during this time, ” adds Adzim.
But logistics players will have to look beyond just adapting their products and services to meet customers’ needs now. They also need to invest in the future with greater use of technology and provide more value-added services.
In the wake of digitalisation and the rapid rise of e-commerce, logistics providers will have to transform to stay competitive and respond quicker to evolving customer trends.
Neo notes that beyond bread-and-butter delivery, industry players are increasingly expected to offer support in storage, specialised transport, customs compliance and time sensitivity, among others.
Tan says digital-enabled tools will help companies operate their supply chain more efficiently to facilitate quicker order fulfilment which is critical for a successful e-commerce strategy.
“This is also an opportunity for players. By using data, for example, it can help to manage cost and maybe enable them to expand into other segments like warehousing or distribution centres.
“A lot of centres are located closer to ports or industrial areas. But if you can locate closer to consumers with multiple distribution centres, you can deliver more orders to consumers quicker.
“And if you have data, you’ll know what’s moving fast, like maybe pharmaceutical products during the MCO. Then you’ll be able to feedback this to your customers, who are the sellers, and help them focus their offerings for a demographic. So data for strategic decision making is important. That’s where the value-added services come in, ” shares Tan.
Neo concurs, noting that automation will have a larger role to play in the traditionally people-heavy processes in logistics.
“Non-customer facing tasks, such as sorting and warehousing, are increasingly reallocated to controlled and programmable robotic systems as well as AI. But the human asset remains as important as ever. Knowledge, experience and instinct cannot be replaced at the helm of major decisions.
“The current situation shows that DPDHL Group’s strategy which focuses on our core business and digitalisation is absolutely right. This is even more pertinent during the current unpredictable and challenging climate with Covid-19, and which might now act as an accelerator for digitalising the industry, ” he says.
The group is set to invest 2bil on digitalisation initiatives at the global level to enhance customer and employee experience as well as improve operational excellence.
Consolidation on the cards
Given that the logistics market is highly competitive with a sizeable number of operators, all requiring enormous scale and a large network to provide efficient logistics solutions, Tan opines that consolidation in the industry is inevitable.
There are currently too many players servicing the market. Official data shows that Malaysia has 116 courier services firms as of March.
“The logistics industry in Malaysia is very established and mature. But there is a lack of innovation or the use of digital technology which can be a critical enabler to achieve that kind of cost efficiency.
“Given the increasing pressures on pricing and low margins, I think this will essentially drive the bigger players to take over the smaller ones and smaller players who can’t compete against the bigger players will naturally exit the market, ” she says.
Neo says competition is nothing new in the logistics industry.
“This does not necessarily crowd the logistics space on the international delivery front as the sector serves distinct market segments that may be mutually exclusive of others. The constantly changing landscape of e-commerce itself demonstrates the untapped potential that is still available, as new verticals emerge and old ones evolve, ” he says.
The last-mile delivery segment has grown increasingly competitive in recent years as more and more startups look to disrupt the space with tech-based solutions to cater to changing consumer trends.
Notably, they have helped close the gap between SMEs and consumers.
However, Tan notes that as startups grow their market share, they will need to demonstrate that they can grow in a sustainable manner.
“After a few years, you must be able to demonstrate that you can make a profitable business out of this. It is not just about the hype and growth story. Some have a great story, even regionally, with the disruptions that they’ve caused.
“But ultimately, the investor will look at fundamentals. So in the mid- to long-term, they have to show that they are sustainable. And it is difficult to be a standalone business in this segment, so they will have to eventually be integrated into the logistics value chain for greater scale and cost efficiencies.
“There are a lot of last-mile delivery players and I do believe that they, likewise, need to be consolidated. If you are only focused on the last mile, it would be very challenging because you would not have the benefits of the integration across the value chain, ” says Tan.
But Adzim believes the pie is big enough to be shared among multiple players within the industry.
However, he acknowledges that each player will have to find their niche and provide a sustainable level of service for their customers.
“We will continue to strategically diversify our operations and fleet types moving forward to support the wider range of businesses that are making their transition online.
“Ultimately, Ninja Van Malaysia is a tech-enabled logistics startup and as such, will continue to embrace operating in a volatile, uncertain, complex and ambiguous environment.
“We believe that our ability to adapt is our competitive edge and is what will continue to set us apart from the rest. After all, we have to embrace change and plan for the unexpected, ” concludes Adzim.
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