Future trends of global value chains. Mirela Miresan St Mary University, USA

Future trends of global value chains Mirela Miresan St Mary University, USA

Table of contents 1 INTroduction... 3 2 Trends in Logistic Centers... 3 2.1 Aerotropolis... 3 2.2 Network and airline consolidation... 4 2.3 Reverse logistic centers... 4 3 Global Trends... 5 3.1 Circular economy and sustainability... 5 3.2 E-commerce... 6 3.3 Vertical integration of logistics... 6 3.4 Omni-channel business models... 7 3.5 Re-shoring... 7 3.6 Big data... 8 3.7 Web 3.0... 8 3.7.1 Internet jurisdiction, risk and uncertainty... 8 3.8 3-D and 4-D Printing... 9 3.9 Advanced logistics automation... 9 3.9.1 Augmented Reality and Wearable Technologies... 9 3.9.2 Low-cost Sensors... 10 3.9.3 Crypto-currency... 10 3.10 Modular Global Logistics Networks... 11 3.11 Customer expectations of low cost, faster and individually tailored delivery... 12 3.12 Internet of Things... 12 4 Recommendations for Forssa... 13 4.1 Regional empowerment... 13

1 INTRODUCTION In a world characterized by globalization and increased demand for highly individualized goods and services, the need to move goods in a fast and reliable way seems more pregnant than ever. Logistic centers are at the heart of the goods movement; their location, capacity, and operations management are major contributors to supply chain effectiveness and efficiency. At the same time, the world as a whole is (finally) more and more preoccupied by the environmental impacts of human activities, with a special attention devoted to waste and transportation. Besides moving goods from manufacturers to consumers, there is now a growing request for moving the goods back in a return chain. For example, the European Union, Japan, and a majority of Canadian provinces and states in the US require electronics original equipment manufacturers (OEMs) to ensure the safe disposal of their products at the end of the life cycle. This report includes a study of the most significant global trends affecting logistics centers and discusses their relevance to the Humppila logistic center proposed for the Forssa region. The rest of the report is organized in three major sections that address respectively the trends of logistic centers, global trends in various fields that affect or are expected to affect logistics in the future, and recommendations for the Humppila logistic center in the Forssa region. 2 TRENDS IN LOGISTIC CENTERS An analysis of the market and industry trends is necessary, since the traditional views of logistic centers are rapidly changing in the high-paced global business environment. The main global trends that can affect the way logistic centers are planned, designed, built, and operated, which have been identified and discussed in this report are: the raise of the aerotropolis concept, network and airline consolidation, and reverse logistics. The trends are presented in no particular order, since there is no possibility of evaluating the magnitude or the importance of their impact. 2.1 Aerotropolis The concept of the airport city, also called aerotropolis, refers to a metropolitan area surrounding an airport (Kasarda & Lindsay, 2012) The airport is the hub that generates and supports infrastructure developments and a vibrant local economy. An aerotropolis is populated by clusters of businesses, mostly related to aviation and logistics, and is surrounded by residential areas. In the past, airports tended to be located in remote areas and were designed as merely transport infrastructure. Due to the recent growth in air cargo and passenger transportation, airports faced a capacity problem. Airports needed to grow, while increasing the efficiency of their

operations. Moreover, passengers demand better services, entertainment and shopping options, as well as accommodation facilities. Airports became a local development magnet, attracting both commercial and industrial investors and contributing in a substantial way to local and regional economies. Residential developments followed suit and cities grew around airports. A city around a regional airport became an aerotropolis. The development of an aerotropolis can be facilitated by creating or enhancing an existent efficient transportation infrastructure (road and rail networks) (Kasarda & Lindsay, 2012). 2.2 Network and airline consolidation The airline industry trends such as network and airline consolidation, as well as the aggressive penetration of low cost airlines, have brought the competition to an unprecedented high level. As airlines merge operations through consolidation, they rationalize routes, aircraft fleet and facilities to maximize efficiency and reduce costs. This includes abandoning redundant hub airports and looking for new solutions (McCormick, 2015). The possibility to develop new airport-based logistic centers depends on traffic flows, location and connectivity, the availability and interest of supporting businesses, as well as the economic, social, and legal environments. The interest of major air carriers is vital in analyzing the value of such a logistic center. 2.3 Reverse logistic centers Dekker et al., (2003) define logistics as The process of planning, implementing and controlling flows of raw materials, in process inventory, and finished goods, from a manufacturing, distribution or use point, to a point of recovery or point of proper disposal. The processes involved in logistics have been extensively studied. However, during the last decade the concept of reverse logistics has gained more attention (Dowlatshahi, 2005, Wang, Zhou & Ren, 2010). Reverse logistics involves the movement of goods from the customer back to the supplier in the supply chain. Customer requirements, environmental concerns, tightened regulations, created the demand for efficient reverse logistics practices (Ravi & Shankar, 2005). The returns can be divided, based on the links in the supply chain, into manufacturing returns, distribution returns, and customer returns. Reverse logistics refers to the recovery and return services post-point-of-sale, for reasons such as: Manufacturing returns

o raw material surplus o quality control returns o production leftovers o byproducts Distribution returns o Product recalls o Commercial returns return of unsold goods products that are obsolete/close to expiration date warranty management wrong/damaged deliveries leasing returns return of reusable packaging return of demonstration equipment refusal of products reuse repairs remanufacturing dismantling for spare parts recycling end-of-life proper disposal energy recovery Reverse logistics include reverse distribution, which causes goods and information to flow in the opposite direction of normal logistics activities. There are important financial opportunities offered in the market of superfluous or discarded goods and materials. For example, many electronic products arrive at the end of useful life in a short period, but their components still have significant economic value. 3 GLOBAL TRENDS 3.1 Circular economy and sustainability A growing number of interested parties are putting a more and more intense pressure on companies and their supply chains to reduce the environmental impacts of their activities, products, and services. Governments, suppliers, buyers, and competitors are the most powerful drivers of environmental sustainability and corporate social responsibility. Environmental design focuses on the potential for product recovery at the end of its life cycle. The types and number of input materials, the number of components, and the easiness of material and component separation are all taken into account. While reducing the use of materials is the

central component of environmental sustainability, reusing, recycling, and recovering also bring their contribution. This trend is important for logistics, for multiple reasons. First, it is expected that the movement of goods should be limited to the strictly necessary amounts, types, and distances. Second, the environmental impact of logistics and logistic centers should be evaluated and reduced as much as possible. Third, the demand for reverse logistics will increase, as discussed above. 3.2 E-commerce International e-commerce refers to international business transactions between different countries, making deals and transactions through an e-commerce platform, and delivering goods through cross-border planning and management agreements (Wang, 2014). E-commerce opens the doors to the global marketplace for companies large and small, leveling the field. More goods will need to be moved around the world faster and in safe conditions. The brick-and-mortar retail will be replaced by experiential centers where customers try products and familiarize themselves with them. Stores as we know them might soon change into lean presentation spaces of select physical goods, while warehouses and logistic centers will carry the weight of storing and delivering the products to consumers, based on their online orders. Pop-up stores and flash sales could become more common. Such trends will require rethinking the logistics for retail, while keeping the costs low and avoid investing in new assets. Traditional logistics networks will have to adapt fast. Another challenge is created by the lack of synchronized policies and regulations in global markets. The relatively recent (August 2013) decision of the Chinese State Council to support international e-commerce, supported by regulations, generates a rapid and significant increase in the volume of global e- transactions. (Wang, 2014) 3.3 Vertical integration of logistics Global retail through e-commerce and the inherent risks of global logistics also highlighted the need for companies like ebay or Amazon to vertically integrate and control their entire global logistics networks. This trend will increase the competition for traditional logistics providers but will also allow for creative solutions, such as crowd-sourcing, to increase flexibly and reduce costs.

3.4 Omni-channel business models The convenience of e-commerce has determined shoppers to change their habits. Powered by the advances in mobile technology and wireless networks, e-commerce has added a new dimension to the consumer s shopping experience. They demand the ability to order anything, anytime, from anywhere, and they expect an exceptional experience every time. A negative experience is communicated promptly and shared with everyone else on the Internet. Some shoppers are willing to wait for the goods ordered to be shipped long distances if that saves them money. Others are interested in fast delivery. The possibility of returning unwanted goods is valued by all buyers. Higher volumes of goods are bought online, but the size of the orders is small. That reduces the chance to ship in bulk, while increasing the work needed for order picking, packing, transportation, delivery, and return management. In addition, the risk of damaging goods increases (Heutger, 2014). To serve customers shopping through various channels and offer them a seamless experience, companies providing logistics services expanded their activities in new areas, from creating and maintaining professional online stores and developing proprietary software meant to track shipment and inventory to packaging, distribution, and even repairing various goods and offering technical support. Faced with the need for multichannel management (on a continuum between bricks and clicks), some stores function as mini-fulfillment centers and support efficient next-day shipping or even delivery. Multiple picking options determine the addition of facilities, strategically located based on the different logistics considerations of each channel (Heutger, 2014). The omni-channel fulfillment challenge is not limited to retail. Manufacturers and distributors sell and deliver their products through multiple channels. The warehouse management systems are vital in operating modern warehouse and distribution centers (Napolitano, 2013). 3.5 Re-shoring Risks, even the small ones, can have unpredictable effects on the international supply chains. Companies doing business globally should be prepared to face events that can cause significant disruptions. Political uncertainty, social unrest, and economic volatility require flexibility in asset, cost, and network management, elasticity of capacities, and development of responsive business networks. Recent terrorist threats generated high levels of political, public, and business anxiety.

In the recent years, global companies have seen value in bringing production facilities closer to customers and sourcing locally. Outsourcing and offshoring tend to be replaced by intelligent sourcing and X-shoring. In turn, logistics networks could suffer major transformations, depending on the nature of the reshoring. 3.6 Big data Predictive analytics and real-time event processing are now possible due to the advances in data manipulation. Big data, collected through a wide variety of channels and devices, is mined to provide valuable insights. Data derives from open sources (published by governments and private organizations) or proprietary sources (collected by individual companies or trade associations and shared with partners or members). Anticipatory logistics is based on processing big data from logistics services (Heutger, 2014). It includes risk evaluation and resilience planning, predictive network and capacity planning, real-time route optimization, and crowd-sourced pickup and delivery management. It is expected to boost efficiency in multiple areas of business and increase service quality. Data sharing in transportation can improve the efficiency of freight operations, increase the capacity and asset utilization rate, and add contribute to synchronizing schedules in logistics networks. Logistics centers and companies can consider sharing or even selling their own data for a profit. 3.7 Web 3.0 The World Wide Web Consortium (http://www.w3.org/) referred to Web 3.0 as the code for the semantic web, the next stage of the internet. So far, the web (in its 2.0 version) provided connectivity among people to an extent never reached before. Web 3.0 is expected to connect data and create useful, by interpreting the context of the activities performed. Personalized search results, shopping recommendations, or complex decision making can be offered through Web 3.0. By getting the meaning behind big data through automated processes, businesses can better anticipate trends, identify opportunities and threats and predict what operations would add more value. 3.7.1 Internet jurisdiction, risk and uncertainty The internet is essential in logistics and supply chain management. More than goods and money, the modern networks of suppliers and customers exchange impressive amounts of information, almost entirely in an electronic format, through the internet. Increasingly, companies are storing data into the cloud, which strengthens their dependence on the internet. Global connectivity depends on the

internet at both personal and business level. Still, the internet is vulnerable, increasingly fragmented, and lacks global governance (Heutger, 2014). Cyber-attacks are more common, aggressive, and daring. They can affect everything, from real time logistics applications, tracking systems, and GPSs to air and traffic controls. Cyber-attacks pose huge disruption risks in front of supply chain managers. Privacy protection and data and web security will be on the agenda of logistics companies as a top priority (Bailey, Del Miglio, & Richter, 2014). 3.8 3-D and 4-D Printing The possibilities of 3 and 4-D printing have expanded faster and faster during the last years. More materials are used to print more sophisticated designs, with more precision, and at higher speed. At the same time, the cost of printing has decreased. The range of application of tridimensional printing that will have a significant impact on supply chains and logistics centers include manufacturing of parts - either for original manufacturing or for repairs/remanufacturing - and 3D Fab labs. Companies like Stratasys pioneer 3D printing objects that are able to change their shape in time, phenomenon known as 4D printing. (See, for example, http://www.stratasys.com/industries/education/4d-printing-project). During the next years, it is expected that 3D printing will become the preferred way to manufacture parts for prototyping, testing, and maintenance. That will allow for parts to be produced anywhere, just in time. Industries such as medical equipment and life sciences, automotive, or electronics would benefit greatly from the new technology. For logistics, this has serious implications. The parts produced by 3D printing have to be integrated smoothly in the supply chain and coordinated with the traditionally manufactured components. Since 3D printing can be done virtually anywhere, it might also happen that logistics centers will become 3D manufacturing sites, increasing the complexity of their operations, but also the value to their customers. 3D-Fab Labs are small scale workshops where parts can be fabricated using modern technologies. They allow for fast response in the case of urgent needs for specific parts and offer a space for testing new ideas and research. These represent new business models that could prove significant for logistics in general and for logistic centers in particular (Heutger, 2014). 3.9 Advanced logistics automation 3.9.1 Augmented Reality and Wearable Technologies

The sophisticated knowledge on graphics and imaging developed by the gaming industry has recently found new applications by pulling graphics out of the electronic device screens and integrating them into real-world environments. This new technology, called augmented reality, enhances human sensory experiences and blurs the line between reality and computer-generated environments. Computer-generated graphics and voice instructions help us find our way in new locations, in real time. Made popular by research such as SixthSense Lab Project at MIT (http://www.pranavmistry.com/projects/sixthsense/), augmented reality is developing fast and becomes more and more affordable every day. Augmented reality allows more than hands-free operation. Physical processes can be simulated and experienced in virtual environments, which will dramatically improve training and increase operational precision in a safe way. Advances in wearable technologies for consumer electronics, combined with responsive environments and contextual apps, will affect logistics operations, as well. Glasses, watches, and even intelligent fabrics will change the way operators work and increase the speed of their response. Companies and logistic centers have to integrate wearable devices and responsive environments at early stages. Creating apps will become a necessity for any player in logistics and many organizations will probably prefer to do that in-house, given the strategic importance of some of those apps. The world of logistics could become more flexible and efficient, but also more reliable and precise (Heutger, 2014). 3.9.2 Low-cost Sensors Low-cost sensor devices for electronics have increased the ability of controlling movement and location of goods and means of transportation in supply chains (Heutger, 2014). Logistics providers could use sensors to control automated loading and unloading and to determine freight volume - which will make possible volume-based sorting and pricing. Sensors for location and environmental monitoring could help reduce the uncertainty in logistics. Logistics process automation will be much advanced by object contour scanning, motion, gesture, face, and voice recognition sensors (Handfield et al., 2013). 3.9.3 Crypto-currency According to Oxford Dictionaries, crypto-currency can be defined as a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. First developed in the '90s, alternatives to the established financial infrastructures of governments, banks, and credit card companies have gained acceptance by individuals and organizations. If and when they reach a tipping

point, that will seriously shake the payment chain associated to supply chains. Major paradigm changes will have to happen fast in companies and financial institutions around the world. 3.10 Modular Global Logistics Networks The logistics networks of the future will need to be flexible, increase global efficiency and promote collaboration between the links of the supply chains while keeping the costs as low as possible. Standardization and the use of modular services connected by powerful information management systems can be part of the solution. Super specialization of the logistics companies could contribute to the creation of reliable modules of logistics services. Organizations that outsource logistics would be able to plan their needs and streamline their operations through the use of modules of service (Handfield et al., 2013). Moreover, it becomes more and more common to use supply chain software on demand instead of in-house or through a contract. That avoids large upfront investments in software, makes the use of software possible for smaller companies, or companies that do not have enough IT resources to implement and maintain supply chain software. This software can be remotely or locally deployed and the payment is made in a subscription transaction model. The license can be also bought upfront, but the software is hosted by the provider or a third-party (Heutger, 2014). The Electronic Logistic Marketplace is a term defined by Wang et al. (2007), as an electronic hub using web-based systems that link shippers and carriers together for the purpose of collaboration and/or trading. It facilitates cooperation both vertically and horizontally in the supply chain and makes network optimization possible. Such logistic marketplaces have been traditionally run by dominant supply chain players or by associations of organizations active in the same sector (Wang et al., 2007). Open logistic marketplaces allow any carriers or shippers to use them without restrictions they are typically priced driven (Gosain and Palmer, 2004). Since the knowledge and the strategic partnerships in supply chains are often the source of competitive advantage, some companies prefer to retain control over such marketplaces. Closed electronic logistic marketplaces support long-term collaboration between a specific network of shippers and carriers, improving planning and responsiveness in supply chains. According to Wang et al. (2007), closed electronic marketplaces can be private, shared, or collaborative. The private and shared marketplaces are set up by individual companies and are intended to facilitate the vertical collaboration between shippers and carriers. The collaborative marketplaces are created by consortia of businesses and offer the possibility of horizontal collaboration between shippers, allowing for synergies in distribution

networks. The marketplace acts as a hub of the networks to improve fleet utilization rates and reduce inefficiencies. 3.11 Customer expectations of low cost, faster and individually tailored delivery Low costs are one of the most pressing demands and common expectations of customers anywhere. Even if the environmental concerns and social justice recently raised in importance as buying decision criteria, cost still ranks high. Manufacturing costs have been dramatically reduced through lean and six Sigma initiatives. Logistics costs are targeted next. Handfield et al. (2013) found in their study that logistics costs share of overall revenue are increasing (larger than 8% on average for manufacturing industries). As many as 14% of their respondents could not estimate their logistics costs (Handfield et al., 2013) The sharing economy, the economy in which asset sharing seems to be preferred to ownership, is one of the most visible trends in the last few years. Numerous new businesses and a variety of business models have been recently created using the crowd concept. Collaborative consumption encouraged by companies like Airbnb is catching up fast. Companies like Uber or Car2go challenge the taxi model and public transportation. In logistics, crowd sourcing or crowd-based delivery models are expected to contribute to shortening delivery times, especially in cities. They can also be used for last mile delivery solutions, as proven by the MyWays initiative of DHL(Heutger, 2014). As cities struggle with high population density and congested roads and customers require faster and faster deliveries, another technology solution is coming to the rescue. Unmanned Aerial Vehicles (UAVs) have been successfully tested for small package deliveries by a wide variety of companies, from pizza places to Amazon. 3.12 Internet of Things Super connectivity of common objects using the Internet, also known as Internet of things, has evolved from the hub model, in which various sensors communicate through a central hub, to direct communication between the objects equipped with the sensors. Objects around us can communicate and organize as they are connected, using their existing infrastructure based on the Internet. In fact, the World Wide Web is a crucial part of the global infrastructure nowadays. Low-cost sensors, as discussed above, have already changed the face of logistics. With the help of the Internet, that power grows exponentially. Warehouses that know when and how to order supplies based on predetermined low level limits, and components and products can be followed online throughout their lifecycle.

4 RECOMMENDATIONS FOR FORSSA The following elements are essential in the development process of the logistic center based on an airport: connectivity, capacity, opportunities for additional investments, technology, and marketing. Connectivity is critical for the competitiveness of a region. The attractiveness of a site depends on its connectivity through diverse, reliable infrastructure, and the possibility to open new routes. Capacity and resilience to delays are linked to all of the above. The capacity depends on the availability of significant investments and ability to run complex processes. Advanced technologies are an integral part of any system that transports people and goods. The support of policy makers is needed to ensure air traffic deregulation, airport-airline cooperation, and market opportunities. Modern marketing tools and techniques have to be employed to make any operation known to and desired by customers. 4.1 Regional empowerment Aviation provides fast connectivity over long-distances and airports are nodes of paramount importance. The internet has grown to a vital virtual component of modern lives; the logistics networks represent its physical equivalent. The need for speed is pregnant in both the virtual and physical world, and aviation logistics is the answer to rapid movement of goods and people. An airport strategically located between the three largest cities of Finland can become a major urban corridor between them. Cargo distribution facilities, timesensitive light industry, business offices, convention centers, shopping, and entertainment can create a large number of jobs. Most European airports are limited in their potential to grow into aerotropolis. A regional airport such as proposed Humppila development, with enough room for growth, can become a successful logistics hub in the Forssa region. An aerotropolis-type of development would attract tourism, businesses that often use aviation services (such as consulting, finance, and marketing), and companies that have to move time-critical products (such as specialty perishables, pharmaceuticals, medical devices or tests, microelectronics, valuable manufacturing components). Such businesses can be a major source of regional economic growth around the proposed airport and logistic center. The existing road and railway systems have to provide express transit networks that will allow smooth connections between production sites, warehouses, business facilities, and residential areas.

To ensure the success of the new development, local authorities will need to work on strategic partnerships with major players in e-commerce, air transportation, and warehousing. The older logistic centers have been originally designed to serve brick and mortar commerce. Software and hardware have been added to existing warehouses, but more often than not they represent fragmented systems that do not do not integrate seamlessly to deliver the required omni-channel experience. A new logistics center in Humppila could have the advantage of starting with integrated software and hardware systems that will equip it better to face the omnichannel challenges. The reshoring trends specific to Finland need to be studied to reveal how the new logistic center could support them. To be successful, the proposed logistic center needs to consider from the beginning the data that it has to collect as well as the data that it has to share with partners and network members in order to process and use strategically to become and remain competitive. Moreover, it would be beneficial to identify the possibilities of monetizing either collected data or processed information. The Humppila project can also aim at creating a regional electronic logistic marketplace to offer potential collaboration opportunities between shippers and carriers across sectors. More synergies could be exploited, bringing benefits to the participating companies and improving the competitiveness of the whole region.