In a perfect world

posted on 4th April 2018

Shippers often talk about the need to modernise and automate air freight, but getting them to invest in links with forwarders isn’t always so easy, says Tim Scharwath, outgoing head of air logistics at Kuehne + Nagel and soon to be CEO of DHL Global Forwarding

The world’s biggest sea freight forwarder and second-largest air freight forwarder is also one of its most profitable, in part because of its proactive approach to technology and innovation. Indeed, logistics investment analyst Stifel lists Kuehne + Nagel (KN) among the few ‘haves’ of global freight forwarding with a unified global technology platform that has helped to deliver strong profits in difficult as well as challenging markets. And its KN FreightNet solution, which builds upon that platform, is seen as one of the first serious attempts by an air freight forwarder to offer an online quotation and booking process for end customers, in a bid to improve efficiency, productivity, and ease of doing business – and take freight, belatedly, into the 21st century.

So how is the air freight business developing as it begins to seriously transition into a digital environment, and how are the needs of its customers – shippers and consignees – evolving?

Tim Scharwath, outgoing executive VP for air logistics at KN and soon to become CEO of DHL Global Forwarding after 24 years at KN, has overseen the development of the forwarder’s successful KN FreightNet solution over the last five years, making him ideal to comment – and, apparently, to be headhunted for the biggest job in global freight forwarding. DHL’s freight forwarding division, it is worth noting, has been struggling over the last 18 months to recover from a failed IT modernisation programme – the expensive and now notorious ‘New Forwarding Environment’ initiative that led to the previous CEO’s resignation.

Scharwath says the demands on freight forwarders and the air freight sector from customers remain much the same today as they have for much of the past decade. But the pressure from customers for increased value means that forwarders need to differentiate themselves. “Everyone wants a good service; everyone wants a good transit time; but the more professional the procurement side is, the lower the rates have to be,” he notes. “There is a certain expectation, based on the overcapacity of the market and the lower oil price, that rates will continue to go down. So, if you have a solution at hand – some value you can bring to the customer – then you can get a bit away from the pressure. But the pressure on the rates is overarching; it’s something you can’t run away from.”

Many of the main challenges and opportunities for the air logistics sector in terms of infrastructure and processes have also changed little in the last five years. “There have been nice investments going on in the Middle East, in Dubai, and Doha, in handling facilities, also in Hong Kong, Singapore and even parts of India, but the rest of the world is a bit more conservative when it comes to investments,” he notes.

“I think the big challenge – and we’ve talked about it in this industry for quite some years now, but it’s going to continue being a big topic – is the exchange of information. I don’t want to call it e-freight, but the exchange of information between all parties – and that starts with the customer and ends with the customer again. We have to find solutions; find how we can manage this going forward.”

On an industry level, he says we are “making little strides forward when it comes to e-freight”. One of the factors limiting this progress is “because it’s more or less between the carriers and the freight forwarders – it doesn’t include the customers,” he notes. “If you get wrong data, which happens, then you can be as good as you want in the interface between the freight forwarder and the carrier; there’s still a lot of noise, or waste, on the front end of it.”

Speaking in his role within KN, Scharwath says this is one of the key benefits of the KN FreightNet solution, “because it also helps the customer to prepare his data; it is easier for him to process and also easier for us to process, and then of course, the mistakes go down. So we see the higher quality in those shipments, and it’s easier to expedite these shipments compared to your usual shipment, where you get the paper. If I had a wish, I would wish that customers were easier to link onto our systems via EDI.”

He says one of the major jobs the freight forwarder does is to check the documents against the cargo which he has in his warehouse, and to correct mistakes in the documents, “to figure out if every document is there, if the documents are in order, the dimensions are correct, if the value on the invoice fits what’s been shipped out, or if it’s a DGR shipment, are the DGR special documents there, and so on.

“It’s quite cumbersome sometimes, and in a perfect world where you talk about having information flows, this will all be standardized and much easier to gather and work on. Larger customers are often more experienced on these things than small and midsized customers. If they have regular air freight business, they might invest into EDI interfaces, but if air freight is something that happens on occasion, normally that would be expensive for you, you probably don’t have the experience with it, and that’s why these things happen.” Customers’ wish to have the freedom to choose – not tying themselves to a single or limited number of suppliers – also limits their motivation to invest in these EDI interfaces with a particular forwarder.

The KN FreightNet solution does not require the same kind of EDI interface. “It’s much easier because the customer inputs the data in the system as you would input the data in an excel spreadsheet, into an email, or fax, or verbally on the phone. He inputs the data, he uploads the documents, and then he sends it to us.” And the resulting data also contains fewer errors.

In terms of the proportion of KN’s 1.2 million tonnes a year of air freight is going through that KN FreightNet channel, he is reluctant to give specific numbers, but says: “We are reaching a new record every month on new customers onboard the system and new shipments being processed through the system, but it’s not come to a stage yet that it’s so significant that we would see a major change with the way that we work. There are three or four countries where we can’t use it, but it is more or less a global system, and it’s working.”

One particularly “encouraging” thing is the conversion rate between the offer and the booking is very high, “higher actually than if you manually do it”, he notes.

“So for us, anyway, a journey is made. It’s easy to interface to for customers, it brings value to customers, they get their quotes very quick, they can use the quotes, they can store the quotes, they can do other things with it, they can use the information they get in there and they can track the shipments later on – they can get an integrated solution. And we are seeing more and more using it and really growing the shipments that we have.”

Scharwath says the first thing he looks at in the morning is the so-called shipment report “so that I can see how many shipments we have on a daily basis. You can also see the trend of course, more on a Wednesday, Thursday, Friday, Saturday and less on a Sunday and Monday, but that’s typical.”

Given the benefits, KN has been offering incentives to encourage customers to use KN FreightNet more. But he believes the high conversion rate between the quotes and the bookings “shows that it’s not a rate issue”.

He believes that better conversion rate may be because of the speed of the quote. “That is the biggest value of the entire system, that a customer can get a quote in two seconds,” he says. “If you normally pick up the phone or send an email and if you do it at the ‘wrong’ time of day, the freight forwarder will explain to you that you have to wait in line because you have to reach out to an agent, or the agent is sleeping and no one’s going to work on it – and that’s the big difference: it’s available, 24/7, 365 days a year.”

For KN, it has not required a big investment of time to input the pricing information. “We have had a ‘product logic’ in our system for 8 or 9 years – ‘product logic’ being the different types of services we offer, based on transit times, which we call products: ‘KN Express’; ‘KN Expert’; and the ‘KN Extend’ products. Express is the most expensive; Extend is the cheapest of them.

“Since we have these rates in our system already, and we manage them on a national and regional level, it was relatively easy to hook the (KN FreightNet) system up to the databases that we have. The regions use them anyway; they set them up and look at them to see if they’re in line with the market. It’s how we have been able to develop KN FreightNet.”

KN estimates that perhaps 20-25% of air freight bookings could potentially be automated within the current structure, including portals like KN FreightNet and also customers using EDI interfaces. “We have a lot of out-of-gauge shipments,” points out Scharwath. “You cannot use something like KN FreightNet for anything which has special transport needs, like maindeck cargo or cold chain. Those need a specialist.”

But if customers were prepared to adapt their requirements – for example, becoming less specific in terms of their individual requirements – that figure could, theoretically, be much higher; perhaps 60%. “In a perfect world, probably yes. But will we have a perfect world? No,” Scharwath muses.

“I have sat with customers and discussed with them and suggested to introduce an EDI interface, and they have said: ‘Yes, we’ll do it.’ And then, when you go away from the logistics or purchasing people and talk to the IT person and they show you the list of the projects they have, it’s unbelievable. Maybe in two years they can have the slot to do the EDI interface.”

But by that time the business may have moved on.

In Scharwath’s perfect world, forwarders would have a lot of data coming in easily into their systems, without all the mistakes that come along with manual input. “If we can have 100% guaranteed data from the customers, we could be much, much quicker. We could change cut-off times and make sure that things become much more processed,” he says. “There are customers who already have a very good way of doing these things, and that have very good supply chains.”

But those are relatively few in number, forwarders note.

Integrator comparison

Even with a ‘cloud’ model, you still need to interface to get the data into and from the cloud, he says, making it difficult for air freight to transition to the kind of online booking ease that the integrators manage.

“The big difference for the express integrators is that they have packages that are up to 70 kilos or 50 kilos, have certain dimensions, are easy to carry, and they can use roller beds; they don’t use forklifts for it. And that makes it easier for them to move the things they do. And their model is also different: it is about feeding those systems.

“Our model is feeding the right cargo into the systems so that somehow it makes the system optimal in the way it works. It’s not all about the volume you can put in; too much volume can also break a freight forwarder system.”

So, does this mean that air freight can never be handled in an automated way? Does he see any kind of potential in robots for pallet building?

“If all the pieces have the same size and everything is homogeneous in the way it’s brought to you, then this might work. But if you go into a consolidator’s warehouse and look at how people work when they build the pallets, a robot is not going to help you with that,” he says. “So often they build a pallet then rebuild the pallet and suddenly another shipment comes in which has to go in that pallet too because it has to go on that flight, so they take things off and have a bit more transit time…

“So, in a laboratory environment this might work, but in the real world I doubt it…. And then the pilot comes and says: ‘I don’t trust that robot, I’m not taking that pallet on my plane.’ Now what happens? It sounds interesting, but I would not see it coming. We would be retired by then.”

Cargo iQ

But he certainly is an enthusiast for standardised processes and the re-launched Cargo 2000, Cargo iQ. Indeed, KN is one of the Cargo 2000 founding members. “Our internal quality system is based on Cargo 2000; we use it to plan every shipment,” Scharwath points out. “We believe it has been and is one of the most important things that we have in the industry because it’s the only way that we can measure quality.”

He feels the name change was a positive thing: “It’s a bit more neutral now.” But more importantly, “the momentum changed dramatically in the last one and a half years. In my mind, there’s someone driving it now and I’m very, very happy that Emirates is also now a part of Cargo iQ. Emirates is the largest carrier out there and in the past has always said: ‘We have our own quality system’. It’s a really strong statement.”

In terms of the ‘disruptive’ threat from emerging players, he says KN has changed its perception of what the competitive threat may be. “If you take the Amazon example, no one really knows what their plans are. You read that they have got a fleet of 767s. I’m not the biggest expert on planes, but I don’t think it’s a very good plane for hard cargo; it’s probably a good plane for integrators.”

One thing that does concern him about some emerging tech-driven disruptors is that their business model sometimes does not focus on producing profit. “Its all about customer experience, it’s all about making the customer happy.”

Reflecting back five years, the KN FreightNet project was launched at a time when a potential threat was anticipated to the role of freight intermediaries from disruptive emerging players, with concerns that one player may potentially come to dominate.

“This changed a bit, because the big disruptor who has a network which he manages himself, I don’t that see on the market,” says Scharwath. “We’re 126 years old, have 800 offices in a hundred countries, and we manage a network – and the customer needs someone to manage a network. If there is an issue and you have to call the trucker in China, if you don’t speak mandarin it’s very difficult to get that person.

“I think what we need, and the thing with KN FreightNet, is to give the customer a better experience in how he works with us. Because what does he expect? He expects that his shipment, especially his air freight shipment, makes it on time; the rate is at a price he wants to pay; and it doesn’t get damaged. And if something happens, you have someone to professionally take care of it and make sure the customer feels that he is being taken care of.

“And I think, if you don’t have a network or an agency network or whatever you have behind it, it’s going to be very difficult for a platform to give that.” He believes the platforms that will be successful are those that give customers transparency on rates or prices. “But I’m still missing that one platform which really brings everyone together.”

He says there are some tech-driven emerging logistics players in the US that seem impressive, “but they all say they’re freight forwarders and they have to somehow manage the network they are using”, via agents or their own network. “And that is something you really have to build up.”

Scharwath adds: “And it’s a people business. To interact with customers, to make their life easier, to give them more value, that’s the big thing in my view. That’s where we have to invest and do a lot more and to make things easier – expedite and ensure the integrations are easy – and it’s going to attract a bit more cargo towards us.”

So, effectively he believes the heavy cargo business is too complicated a business for a pure tech player to control. “And from the one or two that I know of that started with this (disruptive) business model, they are all looking now for freight forwarding partners to manage a network for them.”