Logistics Hubs are nothing new. Some would argue it is not itself a business model but a distribution model; however, the advent of cowarehousing is showing that even industrial business models can be flipped on their head if the market is ripe for it.
Both centralization and decentralization are happening at the same time on the supply chain, but what is the Business Model Trend surrounding Logistics Hubs?
- Logistics Hub and Warehouse are not the same. The added space – usually 10 – 50X bigger than any individual warehouse – and capabilities in a Logistics Hub create a more advanced type of transportation infrastructure. That does not preclude, however, a network of warehouses from becoming a Logistics Hub in the future
- Often Logistics Hubs are owned by a small group of companies, and then leased out to other companies for the space; only large companies can buy their own Logistics Hub
- Software is moving to the core of the Logistics Hub model; new nodes in a network can now be created, leading to new models of Logistics Hubs
- Networks provide a blueprint for analysis of Logistics Hubs Business Models; if they are setup efficiently, they drive down costs & increase revenue by proxy – better delivery times, higher customer satisfaction
- Amazon can serve as a reference business model to analyze the structure of a Logistics Hub model, especially given their shipping expertise and the ability to accurately predict demand
- Automation is the obvious current Trend around Logistics Hubs, but decentralization is the Future Trend. When the novelty of “on-demand” starts to become the expected, a new demand curves towards the unexpected begins to take hold
There are other trends (and future countertrends) that are simultaneously in motion around 3D Printing, supply chain decentralization, and localized production that will equally scale-out over the next five years.
Logistics Hub Business Model: Bullet Points
Logistics Hub Value Proposition
- Value Proposition is connectivity and efficiency in the transport and storage of goods
- Generate Revenue by leasing space to other logistics/transport companies
- Additional Revenue Streams around SAAS (software-as-a-service) can serve as a blueprint for Logistics Hub management for individual companies, along with partnering with firms who optimize latent space by filling it with 3rd party containers
- Customer Segments include Shipping Companies, eCommerce companies, Wholesalers, Retailers and more
- Cost Structure is driven by the cost to acquire and upkeep the land. Further costs are allocated to operations, management, and any additional software costs to run
- Key Resources is the location of the Logistics Hub
Logistics Hub Business Model Canvas (Mockup)
Example Logistics Hub Companies
- Gravity Supply Chain (Software – SAAS) – “bring every element of your production and shipping journey into one place”
- Magna Park (Physical Hub – Britain) – “Europe’s Premier Logistics Location” + Stowga “the world’s warehousing marketplace”
Reference Business Model: Amazon
When you think of a Logistics Hub do you think of Amazon?
For some, it may be hard to draw the line between the eCommerce giant’s success in relation to Logistics Hubs, but their continuous investment in “last mile” infrastructure and commitment to on-demand delivery serve to keep them at the forefront of anything and everything to do with logistics.
It is important to consider that the average Logistics Hub is ~20 – 25X bigger than Amazon’s largest warehouse! Nevertheless, an analysis of Amazon’s logistics capabilities is useful as a proxy to the Logistics Hub business model.
Structurally, we can think of a Logistics Hub as a network. Networks are mostly synonymous with software nowadays, and Amazon is a software giant. But unique to the Logistics Hub model is finding the optimal location – as they always say “location, location, location.”
The optimal location of a logistics hub may lead to reduced transportation costs,
ResearchGate
promote synchronization between production and consumption, ensure a balanced development of transportation systems, and achieve better overall benefits . A best location will effectively assist in the expansion of economies of scale, as well as increase competitive advantage, achieving higher customer satisfaction through more efficient transportation.
Predictive Analytics To Predict Demand
In Amazon’s case, they have predictive power; specifically they are able to use advanced machine learning and artificial intelligence capabilities to predict demand.
There is nobody in the eCommerce space who can compete with Amazon at this level, which is why they now offer many of their advanced Logistics capabilities “as-a-Service.”
It is estimated that the last mile makes up 30% of the logistics costs. Amazon continues to chip away at the last mile because through the Billions of dollars of goods they sell each year, a small improvement in logistics costs adds up to huge money going forward.
The market now starts seeing a Logistics Hub as being less about the space and more about the optimization of that space using software. Not that the physical location is not at the core of the model, but that software opens up entirely new possibilities compared to even 10 years ago.
Future Trend: Decentralization
If we scale these trends out into the future, the entire supply chain becomes automated to the point where deliveries happen in driverless trucks/drones and are nearly instant from the point of purchase. At this point, the novelty will wear off and the instant gratification will be nearly identical to an in-store purchase.
There are certain goods that are needed on-demand, and these types of mission-critical situations are improved dramatically if automation reaches the point of making eCommerce and shipping nearly instantaneous. A lot of the original thesis of the Dot-Com era was built around the consumer’s desire for convenience and as close to instant gratification as possible. But only up to a certain threshold, and then a countertrend takes place.
There are other trends (and future countertrends) that are simultaneously in motion around 3D Printing, supply chain decentralization, and localized production that will equally scale-out over the next five years. If the zenith of Logistics Hubs becomes full-scale robotization, the demand curve will shift in response.
Shopify’s Failed ‘Big Bet’ Serves as a Cautious Tale
Supply and demand work on a continuum in fine balance. Supply can dictate demand, as when there is more scarcity to a good it can actually work to increase its demand. Demand can also dictate supply, as any new “trend” is often met with a boon of producers who are ready to scale production to meet demand in exchange for whatever lucrative opportunity the trend is geared towards. But if supply desensitizes demand – which is what we are talking about in a full automation situation – then demand decreases.
Ultimately, despite all the advancement in Logistics Hubs and delivery fulfillment expectations, customers make the final decisions about who they purchase from and where they purchase. We have seen how the ‘infinite scaling’ logic has foiled the strategies of eCommerce companies like Shopify, who went all in on eCommerce in the ‘post-pandemic’ world and failed miserably.
Looking at those trends, Lütke says the company bet big with expectations that the share of retail dollars flowing through e-commerce instead of physical retail would, “permanently leap ahead by 5 or even 10 years.”
Gizmodo
Not that the Shopify situation applies to any one specific company or industry. It just shows how a seemingly unstoppable trend – like eCommerce during the pandemic – does not necessarily scale into infinity; and when it reverses, the repercussions for being over-positioned are severe.