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Can DHL use digital innovation to take advantage of the $13.4bn market opportunity in pharmaceutical cold chain logistics?
Digitization threatens traditional logistics industry leaders
DHL is an express delivery and logistics company that has been operating since 1969. Today, it makes cargo deliveries to 120,000 cities and stands as the second largest logistics company by market share worldwide with 28.4%, behind UPS with 32.9% [1,2]. Despite historical industry growth, recent years have proven challenging as new entrants like Amazon use digital innovation to upend established logistics leaders. Companies like Amazon pose a major threat to DHL and its peers because of their ability to capitalize on capabilities like big data and drone technology to meet evolving customer demands and minimize costs [3].
Digitization of delivery services has created an arms race for the most effective and efficient supply chains to fight market pressure to reduce costs and serve more customers. In this increasingly competitive environment, DHL must innovate or get left behind.
Recognizing a $13.4bn market opportunity in cold chain logistics
Demand for cold chain logistics is growing rapidly as more products require temperature control [Image A].As DHL grapples with the rise of digitally-enabled competitors, one area where it has recognized growth opportunity is in life sciences and healthcare logistics, particularly the cold chain. The cold chain can be defined as the “maintenance and storage of goods at the appropriate temperature, as they move from supplier to ultimate delivery destination” [4]. In 2016, more than half of the top 50 best-selling drugs required temperature-sensitive storage through the cold chain [5].
An effective cold chain is critical for transporting $260bn of temperature-sensitive biopharmaceutical products sold annually. Medicines that require constant storage at 2 to 8 degrees Celsius often experience more than 30 handovers between factory production and patient delivery [6]. It is unsurprising that with so many handovers, one-third of medicine globally is “corrupted by the time it is used”, resulting in significant medical waste and serious consequences to patient health [6].
Simplified life sciences supply chain. DHL manages many of the steps [Image B].Despite recent advances in medical technology, transportation of medical products has remained largely unchanged for 30 years. In fact, a 2015 survey shows that 40% of DHL’s life sciences customers feel that maintaining an effective temperature-controlled chain for their products is a serious issue [7].
The cold chain therefore presents a significant opportunity for DHL to invest in digital capabilities to better meet customer needs. Digitization could maximize DHL’s share of the healthcare cold chain logistics market, which is expected to grow from $8.5b to nearly $13.4bn by 2020 [8]. By providing best-in-class service to biopharmaceutical customers, DHL can remain competitive and improve access to safe medication for patients globally.
DHL management takes steps to address the threat of digitization by investing in cold chain solutions
When Scott Allison took on leadership of DHL’s Life Sciences and Healthcare vertical in late 2016, he was tasked with supporting the maturation of health supply chains in the 220 countries where DHL operates [9]. One of the first things he assessed was what other supply chain-mature industries, such as technology and automotive, were doing well. He then directed his team to invest in partnering with healthcare customers to pilot new ideas based on cross-industry best practices. A few examples of steps DHL is taking to digitize its cold chain are highlighted below:
DHL Thermonet Smart Sensors: DHL is testing Smart Sensor RFID technology to monitorDHL Thermonet Sensor [Image C].and respond to temperature fluctuations that may impact medicines along the transportation journey. In the short term, these sensors allow DHL to assess compliance with regulation and assure quality to customers across the supply chain. In the long term, DHL can use data collected by sensors to offer a risk intelligence engine that identifies optimal shipment lanes, packaging, and carriers. [10]
Collaborative Robots (“CoBots”): In 2016, DHL purchased 4 cobots, which are robots that work safely alongside people. These interactive and adaptive robots are currently being tested for their ability to execute tasks like assembly and packaging. While in the short term, trials are showing efficacy in packing pet food, aerosols and canned drinks. Ultimately DHL hopes the cobots will serve as a safe, cost-effective solution to optimize logistics in cold and/or sterilized environments where biopharmaceuticals are often handled. [10,11]
What more can DHL do to turn the threat of digitization into an opportunity?
While DHL has made strides adapting its supply chain to become more lean and effective through digital, there is more work to be done. In the short term, DHL should continue to invest in cold chain logistics – it could explore blockchain and Internet of Things-related solutions that can more effectively manage routes, storage, and information flow for the growing biopharmaceutical market. In the long term, DHL should also ensure it shares best practices and realizes synergies across its industry verticals. DHL’s current industry-specific organization allows deep expertise, but may limit opportunities to expand digital solutions to other temperature-controlled industries like food or chemicals.
What additional steps can DHL take to strengthen its digital positioning in the cold chain? As demand for pharmaceutical products grows in emerging markets, how can DHL use its investments in a digitized cold chain to capture demand and ensure access to quality health at the last mile – with whom should it partner to do so?
[4] “Emerging Trends in Supply Chain Management: Outsourcing Public Health Logistics in Developing Countries .” United States Agency for International Development (USAID) Deliver Project, July 2010, apps.who.int/medicinedocs/documents/s21806en/s21806en.pdf.
I think this is a very important issue for our economy as we strive to make our healthcare system more efficient. The amount of waste created by corrupted medicines is unacceptable and represents low hanging fruit when thinking about taking costs out of the healthcare system. I think DHL’s thermonet sensors are an important step in collecting the type of data necessary to ultimately design more efficient systems. It is difficult to make far reaching changes to an antiquated system without first truly knowing where the pain points are.
It is interesting to note that DHL is being pushed quickly into cold chain not just because of threats from Amazon. While the e-comm behemoth is threatening DHL’s core business and forcing them to identify new growth avenues, the shift to cold chain has likely been accelerated by recent private equity interest in the space. Investors have recognized cold chain as fragmented, high growth space and have been allocating funds accordingly. This trend could be pushing DHL into the space, so they can gain an early mover advantage and leverage their scale in what will become a competitive industry
A really interesting essay. I was shocked by the stats on the proportion of medicine that is corrupted by the point of delivery, which clearly demonstrates market potential.
I thought there were two particularly important questions here which your article addressed well – first, how can DHL use technology to improve it’s offer in the cold chain sector; and second, how can it do so in a way that creates barriers to entry for other potential market participants.
In the context of the first question, I thought exploring use of the blockchain and internet of things were both really good suggestions. I wondered if it might also make sense to explore drone usage for cold chain deliveries before competitors do – as you suggest they will – in particular if it allows a reduction in corruption rates for harder to reach clients.
In terms of creating barriers to entry – if DHL moves quickly it may be able to establish scale, client relationships and technological leadership (perhaps using some of the ideas above) which will make it harder for competitors to enter the market. I also wondered if it might seek to sign long term supply contracts with its customers, linked to the delivery of new technologies.
Outstanding. Very solid use of many statistics and clear tie in to why this really matters (impact to the integrity of the medicines and ultimately people’s health). Regarding your question of how best to capitalize on cold-chain capabilities in the emerging markets, I would say that a supporting approach could be to include DHL’s capabilities in pharmaceutical health technology assessments (HTAs). These are often the processes by which centralized payors make decisions on pharmaceutical coverage in emerging markets, and including DHL’s capabilities in the assessment could go a long way in supporting customer trust of medicine quality, bolster the perception of the medicine’s underlying technology, and remove any doubt of supply chain capability.
Building on the broader topic a little bit, I would be interested to hear how DHL’s cutting-edge cold-chain capabilities stack up against their competitors, and to the extent they are stronger, if they have been able to capitalize on favorable pricing. Clearly, the RFID thermometers would go a long way in building (and proving) trust for the pharmaceutical companies and distributors which DHL connects. And with increasing FDA requirements surrounding serialization, the digitization of the supply chain would help the rubber meet the road, enabling stakeholders to track specific serial-coded batches all the way through the supply chain in real-time. All big value to the customer, yet given the environment, I don’t think there’s risk of “over-delivering”.
Super interesting topic! Like RM, I was immensely surprised about the amount of waste generated by corrupted products at delivery. Given the longer distances to supply pharmaceutical products in emerging markets, I wonder if the main means of transportation currently used is air freight, adding more costs and raising the final retail price for the consumer. Developing appropriate packaging to maintain desired temperatures for a longer time could allow DHL to leverage on intermodal transportation (including sea freight) to reduce costs. Although it could represent a longer delivery time to the end consumer, innovating in packaging in addition to the Thermonet Sensors could increase the reliability of the service and have decrease waste. In terms of innovation in packaging, some companies have developed their own solutions. For example, World Courier, leader in specialty logistics and part of AmerisourceBergen, released last November a new packaging solution called “Cocoon”. This innovative solution is built with honeycomb vacuum-insulated panels, weighting on average 15 to 30 lb less than other similar packaging products, and supports a big range of temperature requirements, perfect for long-distance deliveries with stability for temperature-sensitive pharmaceuticals [1]. Extended periods to deliver the final products without compromising the quality of the pharmaceutical products would give a more flexible maneuverability of the batches, allowing DHL to consolidate more orders from different customers and optimize routes accordingly.
Katie – fascinating topic. I was surprised at the low yield of cold supply chains and the corresponding billions of dollars of waste. I like your hardware improvement points, but my thoughts turned more towards analytics approaches made possible by higher fidelity and real-time hardware inputs. Two thoughts in particular came to mind. The first is the idea of monitoring and optimizing “cold capacity.” In simplest terms, one unit of supply requires less energy to refrigerate than ten units. A real time picture of location, quantity, and temperature threshold across the supply chain would allow DHL to describe a minimum required energy output for discrete blocks of the chain (warehouses, trucks, planes, etc) to keep it at the required temperature. Some of the ~30% spoil rate you describe could be traced to higher volume chunks of the chain where storage simply doesn’t have the ability to maintain the necessary temperature. Identifying these areas would allow the chain to be re-engineered. My second thought was could DHL optimize global movement plans to minimize refrigeration energy expenditure based on real time climate data? How much refrigeration energy could be saved on a ship by taking a slightly more northerly route and staying in colder water? What is (or is there) a breakeven point for additional miles traveled versus energy savings from natural refrigeration? Interesting considerations for the logistics industry to keep an eye on.
Katie, this is a very interesting topic. Thank you for bringing it to our attention!
It really does seem that DHL could leverage its expertise in logistic operations requiring some specialization, such as the cold chain. I would think that since innovation in this space has been stagnant for so long, that there is ample opportunity for DHL to improve and further build a competitive advantage through the use of technology. In addition to the efforts the company is already making, I wonder if it would be possible to leverage it’s large customer and supplier network in a similar fashion as UBer and Lyft to meet delivery demand in a more cost effective and efficient way. Overall, I believe that DHL could build out many other specialized segments of its business with similar types of technology in mind.
Katie – love the topic and post!
I think this is a very important issue for our economy as we strive to make our healthcare system more efficient. The amount of waste created by corrupted medicines is unacceptable and represents low hanging fruit when thinking about taking costs out of the healthcare system. I think DHL’s thermonet sensors are an important step in collecting the type of data necessary to ultimately design more efficient systems. It is difficult to make far reaching changes to an antiquated system without first truly knowing where the pain points are.
It is interesting to note that DHL is being pushed quickly into cold chain not just because of threats from Amazon. While the e-comm behemoth is threatening DHL’s core business and forcing them to identify new growth avenues, the shift to cold chain has likely been accelerated by recent private equity interest in the space. Investors have recognized cold chain as fragmented, high growth space and have been allocating funds accordingly. This trend could be pushing DHL into the space, so they can gain an early mover advantage and leverage their scale in what will become a competitive industry
A really interesting essay. I was shocked by the stats on the proportion of medicine that is corrupted by the point of delivery, which clearly demonstrates market potential.
I thought there were two particularly important questions here which your article addressed well – first, how can DHL use technology to improve it’s offer in the cold chain sector; and second, how can it do so in a way that creates barriers to entry for other potential market participants.
In the context of the first question, I thought exploring use of the blockchain and internet of things were both really good suggestions. I wondered if it might also make sense to explore drone usage for cold chain deliveries before competitors do – as you suggest they will – in particular if it allows a reduction in corruption rates for harder to reach clients.
In terms of creating barriers to entry – if DHL moves quickly it may be able to establish scale, client relationships and technological leadership (perhaps using some of the ideas above) which will make it harder for competitors to enter the market. I also wondered if it might seek to sign long term supply contracts with its customers, linked to the delivery of new technologies.
Outstanding. Very solid use of many statistics and clear tie in to why this really matters (impact to the integrity of the medicines and ultimately people’s health). Regarding your question of how best to capitalize on cold-chain capabilities in the emerging markets, I would say that a supporting approach could be to include DHL’s capabilities in pharmaceutical health technology assessments (HTAs). These are often the processes by which centralized payors make decisions on pharmaceutical coverage in emerging markets, and including DHL’s capabilities in the assessment could go a long way in supporting customer trust of medicine quality, bolster the perception of the medicine’s underlying technology, and remove any doubt of supply chain capability.
Building on the broader topic a little bit, I would be interested to hear how DHL’s cutting-edge cold-chain capabilities stack up against their competitors, and to the extent they are stronger, if they have been able to capitalize on favorable pricing. Clearly, the RFID thermometers would go a long way in building (and proving) trust for the pharmaceutical companies and distributors which DHL connects. And with increasing FDA requirements surrounding serialization, the digitization of the supply chain would help the rubber meet the road, enabling stakeholders to track specific serial-coded batches all the way through the supply chain in real-time. All big value to the customer, yet given the environment, I don’t think there’s risk of “over-delivering”.
Super interesting topic! Like RM, I was immensely surprised about the amount of waste generated by corrupted products at delivery. Given the longer distances to supply pharmaceutical products in emerging markets, I wonder if the main means of transportation currently used is air freight, adding more costs and raising the final retail price for the consumer. Developing appropriate packaging to maintain desired temperatures for a longer time could allow DHL to leverage on intermodal transportation (including sea freight) to reduce costs. Although it could represent a longer delivery time to the end consumer, innovating in packaging in addition to the Thermonet Sensors could increase the reliability of the service and have decrease waste. In terms of innovation in packaging, some companies have developed their own solutions. For example, World Courier, leader in specialty logistics and part of AmerisourceBergen, released last November a new packaging solution called “Cocoon”. This innovative solution is built with honeycomb vacuum-insulated panels, weighting on average 15 to 30 lb less than other similar packaging products, and supports a big range of temperature requirements, perfect for long-distance deliveries with stability for temperature-sensitive pharmaceuticals [1]. Extended periods to deliver the final products without compromising the quality of the pharmaceutical products would give a more flexible maneuverability of the batches, allowing DHL to consolidate more orders from different customers and optimize routes accordingly.
[1] “World Courier Unveils Lighter, More Robust Thermal Packaging Solution”. https://www.worldcourier.com/insights-events/market-insights/detail/cocoon-packaging-solution; Accessed on November 30th, 2017.
Katie – fascinating topic. I was surprised at the low yield of cold supply chains and the corresponding billions of dollars of waste. I like your hardware improvement points, but my thoughts turned more towards analytics approaches made possible by higher fidelity and real-time hardware inputs. Two thoughts in particular came to mind. The first is the idea of monitoring and optimizing “cold capacity.” In simplest terms, one unit of supply requires less energy to refrigerate than ten units. A real time picture of location, quantity, and temperature threshold across the supply chain would allow DHL to describe a minimum required energy output for discrete blocks of the chain (warehouses, trucks, planes, etc) to keep it at the required temperature. Some of the ~30% spoil rate you describe could be traced to higher volume chunks of the chain where storage simply doesn’t have the ability to maintain the necessary temperature. Identifying these areas would allow the chain to be re-engineered. My second thought was could DHL optimize global movement plans to minimize refrigeration energy expenditure based on real time climate data? How much refrigeration energy could be saved on a ship by taking a slightly more northerly route and staying in colder water? What is (or is there) a breakeven point for additional miles traveled versus energy savings from natural refrigeration? Interesting considerations for the logistics industry to keep an eye on.
Katie, this is a very interesting topic. Thank you for bringing it to our attention!
It really does seem that DHL could leverage its expertise in logistic operations requiring some specialization, such as the cold chain. I would think that since innovation in this space has been stagnant for so long, that there is ample opportunity for DHL to improve and further build a competitive advantage through the use of technology. In addition to the efforts the company is already making, I wonder if it would be possible to leverage it’s large customer and supplier network in a similar fashion as UBer and Lyft to meet delivery demand in a more cost effective and efficient way. Overall, I believe that DHL could build out many other specialized segments of its business with similar types of technology in mind.