Published: Monday, February 27, 2017

The UAE ranks high on the list of promising emerging markets and its domestic logistics market shows no less potential. The logistics industry is poised to grow at a rate of 8-9% annually through 2020 to $16 billion.

In 2010, it was a $7 billion industry. The obvious advantage for the UAE is its geographic vantage position which gives trade access to a population of 2 billion in the region, and is on its way to being one of the busiest trade hubs by 2030. The government believes in the longevity of the logistics industry and has expended billions of dollars in infrastructure in the last 5 years.

The contract logistics industry in the UAE is huge, particularly as Dubai is a hub for goods distributed to the rest of the GCC region, as well as increasingly into Africa. Many companies have their main facilities in the free zones, and use the UAE as a launch point to distribute goods into other markets because of the infrastructure that is in place here.

Air Cargo Update spoke with logistics experts RSA Logistics and Agility Logistics about contract logistics and the trends shaping the logistics industry.

Trends shaping the market

According to Transport Intelligence’s (Ti) report, another trend that has changed the shape of the market is globalization. As supply chain complexity increases, so do the services which logistics providers are asked to perform. No longer is logistics seen as a tactical activity, where the gains made are purely measured regarding transport or warehousing cost savings. Instead, customers become more engaged in the transformational impact on supply chain competitiveness which a logistics provider can achieve.

Kevin Hill, Agility’s Regional Director, Sales and Marketing Middle East & Africa, notes, “The growth of e-commerce and globalization has led to two main changes for our industry; a decrease in the size of orders, and an increase in frequency. This has to do with the quick turnaround expected by consumers, who are ordering products online and expect delivery within a few days. With quicker turnaround times, we’re experiencing a need for improved efficiency throughout the supply chain in order to be able to live up to customers’ expectations.”
Also, logistics providers have had to react and adapt to their own service offerings to accommodate the burgeoning growth of e-commerce. Unlike store-based shopping, e-retail is far more commoditised and the greater the volume sold, the more efficient the fulfilment operation.

To succeed in such an evolving market, logistics providers are exploiting innovations and technologies to streamline their operations.
Abhishek Ajay Shah, Co-Founder & Managing Director, RSA Logistics & Director of the Board at RSA TALKE, said, “Globalisation has shortened cultural distances across the world. This in turn has prompted geographic distances to be bridged to meet consumer demands that cross borders, and the burden of this lies heavily on efficient logistics services. E-commerce has shown consumers that they have access to the best products from around the globe and they want them delivered yesterday. Inevitably this will create greater competition in the contract logistics industry over who can provide the fastest and most reliable delivery guarantees. Logistic providers need to be savvier about trends, risks and threats in a wider pool of markets and use technology to turn the challenges into opportunities.”

What dominates contract logistics?

The verticals that are driving the biggest growth for the contract logistics sector are automotive and pharmaceuticals. These industries are more inclined to sign long-term contracts, as they require stability and reliability in the delivery of their products on a large scale. Both of these industries are sizable in the GCC region, but with the GCC healthcare sector projected to grow at a 12.1% CAGR from an estimated US$ 40.3 billion in 2015 to $71.3 billion in 2020 according to Alpen Capital’s most recent industry report, the pharmaceutical sector is bound to remain strong.

“It has been a tough year across the board due to declines in some sectors, including retail items and FMCG. The UAE has remained balanced, but it has been challenging in the rest of the GCC region. Because contract logistics customers tend to sign on for three to five years at a time, this business has remained stable, but the freight industry has struggled a little more. We are hopeful for a strong fourth quarter,” notes Mr Hill.

Role of ‘outsourcing’

With the advent of new technologies particularly from start-ups, contract logistics is being increasingly modularised with innovations that can add tremendous value to customers in terms of transparency, and anticipatory planning.The supply chains for contract logistics are long, and for multinational companies it is a security and convenience to outsource the contract logistics function to a 3PL provider such as Agility and RSA Logistics.

“We at Agility have the expertise and the manpower to handle large volumes of goods efficiently and on an international scale,” says MrHill.

Mr Abhishek said, “Outsourcing these segments can greatly improve service deliverables, however communication and alignment between the different parties will determine the success of this. Furthermore, the GFC (Global Financial Crisis) made organisations really think about what is a core activity and what can be outsourced. The question being ‘what do we want to be the best at?’”

Technological advances

Technological innovation is central to success. The contract logistics industry need to innovate to be able to compete on price, or lose its customers once the contract is up.

“With smaller, more frequent orders needing to leave the warehouses, we’ve seen an increasing demand for manpower, as our teams need to be on hand to pack and check more shipments. Technology is playing an important role in helping us achieve this, and we have digital warehouse management systems in place to both help our crew find the correct items quickly in these huge warehouses, and also to help ensure that our customers’ orders are complete, and contain the right items.

“We are also innovating the way we pack things, constantly looking for ways to make the supply chain more efficient. One of these solutions is ‘softbox’ packaging, which is a micro-transport system for the pharmaceuticals sector that we developed for the American military to guarantee a steady temperature on difficult shipments.

“We have had a system in place for our customers to be able to track their goods at all times during both inbound and outbound freight for the past four or five years. This has been a huge help in providing better visibility on the projected shelf life expiry of sensitive products, and has improved our ability to tailor services to suit these customers, says Mr Hill.

“Contract logistics requires coordination between several parties to move goods efficiently from point A to B. For it to work at an optimal level, communication, transparency, order visibility and process efficiency is vital. Technology is the key driver in all these factors and as such plays a pivotal role in the success of contract logistics,” says Mr Abhishek.

Market success

RSA’s Mr Abhishek views that manufacturers around the world need to get their products to consumers wherever they are. Consumers in the developed parts of the world continue to stagnate in population growth thus, the attention turns to the emerging markets.
“For us, all of these markets have significant challenges that need to be solved through innovative logistics solutions.”

Risks faced by contract logistics

As the industry evolves, with customers requiring smaller more frequent shipments, the industry needs to respond and become more flexible, with warehousing processes becoming more efficient in order to meet expectations from customers and compete with other companies as the contract logistics industry is driven by cargo owners that would like to create a hub/base closer to their customer base to shorten the lead times and be more flexible on order sizes.

The vulnerability of supply chains to disruption such as by natural disasters have been exacerbated over the past 30 years by strategies aimed at lower inventory and labour costs. Lean inventory plans, centralized distribution, just in time, remote off-shore production, sourcing from developing countries and multiple tiers of suppliers have all improved companies bottom line, but not with cost. Although a high level of stock requires a high standard of risk, they also act as a buffer against supply chain disruption, according to Ti’s report.
“Given the volatility in global supply chains we see our customers struggling to understand the number of demand days of inventory they should hold. The risks with this is that our customers may be over leveraged in terms of stock holding or they may be understocked and miss out on opportunities. This challenge is only solved by a great understanding of information up and down the supply chain,” says RSA Logistics’ Mr Abhishek.

“Within an increasingly competitive and fragmented market, it is important that we continuously find ways to provide added value and offer a strong service provision. At Agility, we are dedicated to leveraging the opportunities presented by technology to make this happen, and we are exploring new ways to innovate and ensure that we are offering our customers the best possible value for money,” affirms Mr Hill.
Future of contract logistics

RSA logistics predicts a shortage in skilled workers as the baby boomer population goes into retirement. Automation and digitalisation will compensate for this in a struggle to meet increasingly complex customer demands.

However Agility foresees 3D printing having the potential to fundamentally change the industry, as warehouses for shipping will no longer be necessary on the same scale.

For example, imagine if automotive parts were 3D printed in each market instead of produced centrally and shipped out.

Large volumes of goods would just require overland transportation as opposed to the current international air freight and shipping.
“But with technology evolving at breakneck speed, who knows what else will happen in the next few years. It’s an exciting time for the industry,” concludes Mr Hill.