While no one needs convincing about the importance of data today, the same couldn’t be said nearly a decade ago, when two entrepreneurs went knocking on doors in Silicon Valley, looking for investors to fund their logistics start-up. Their elevator pitch? To make global logistics more efficient with software optimization.
The start-up was Flexport, and its founder is Ryan Petersen, then an importer of Chinese motorbikes who, frustrated by the complexities of the logistics process, was on a mission to make global trade easy for everyone. “A common response was, ‘Oh, we don’t need the internet in this industry. Logistics is all relationships-driven,’” recalls Sanne Manders, Flexport’s COO. Back then, Manders was a full-time logistics consultant and was helping Petersen, a former Columbia Business School classmate, on the side.
The pair persisted, eventually winning over Silicon Valley venture capitalists such as Peter Thiel, Yuri Milner, and Masayoshi Son. In June 2014, Flexport reported its first monthly revenues of $6,000. Manders soon quit his day job to join the fledgling start-up and oversee its evolution to become the sixth-largest digital freight forwarder in the transpacific region, with a client base ranging from “emerging brands to Fortune 500 businesses.” In addition to offering customers real-time tracking, Flexport provides supply chain optimization and inventory management. Last year, the company earned $3.3 billion in revenues.
While Manders says that the number one misconception people have of Flexport is that it’s a start-up, it’s his job to maintain a start-up’s velocity and culture across a workforce of more than 2,800 employees in 89 countries. In this installment of Logistics Disruptors, Manders spoke with McKinsey’s Ryan Gavin, explaining what being customer obsessed means to Flexport, what win–win partnerships look like, and what will be guiding growth in the years ahead.
McKinsey: What’s the secret sauce for Flexport’s success?
Sanne Manders: I’d say it’s the culture; we’re truly customer obsessed. We define our customer beyond those who pay for our services. We also look at our employees as customers, as well as our asset owners and partners. I have an old mantra I repeat every time I’m doing our onboarding training at Flexport Academy: “If you make the client happy, if you make our partners happy, if you make our employees happy, you will only make money.” So our starting point is always to ask if our customer is well served: Are we creating win–win propositions for our asset owner? Are our employees getting opportunities here to grow and be excited?
The other thing is that we’ve always been very focused on what Apple used to call “think different.” We’re not thinking about industry patterns as they are right now, current profit pools, current incentives, or how the industry currently works. We’re questioning everything, asking how should this work? How can we create win–wins?
A lot in logistics is perceived as a zero-sum game, but there’s so much opportunity that we don’t have to think in such terms. You can create a lot of value in this industry by creating better user experiences and reducing inefficiencies. That’s our game: we’re creating value. And that requires a different approach, right down to recruiting. When you’re hiring people, you have to train them to think differently.
McKinsey: What’s changed since Flexport was founded eight years ago?
Sanne Manders: When Ryan started the business six years after business school, I helped him a little bit on the side. He used to be an importer and knew how complex it was to import motorbikes and scooters from China into the US. And I knew the logistics industry from the inside out and how much inefficiency there was. The root of it was data: there’s a lot of data in this industry that’s unstructured, and if you structure it, you can create a better user experience and let machines do the work, which drives higher efficiency.
In 2014, we had to explain to every potential investor the magic of the internet, and there were a lot of naysayers at the time. These days, I never have that conversation. The conversation now is all about agility, resilience, or, as General Stanley McChrystal put it, the “OODA loop.” You’ve got to observe, orient, decide, and act, and do that faster than your competitors.
This only works in a digitized supply chain, where you have the information at your fingertips. You need to have real-time visibility to observe—that’s the data. Although a lot of companies claim they’ve solved this, that’s not the case. Visibility is a hard nut to crack, especially in markets where nothing runs on schedule. We channel a lot of our engineering resources into this alone, and we have a lot of ideas in this direction. Our long-term goal is to make [visibility] so easy you don’t even think about it.
Another important trend now is increasing complexity. Supply chains ten years ago were relatively simple. You might have had a factory in Guangzhou and a warehouse in Ontario, next to the port. You imported a thousand containers a year and had direct contracts with the steamship line, a customs broker, and a drayage provider. Everything could be easily managed on a spreadsheet.
It’s very different these days. On the supply side, you’re sourcing from ten locations in the world. Trade conflicts and tariffs, as well as the rise of Southeast Asia as a strong manufacturing hub, have accelerated this trend. On the demand side, where your customers sit, complexity has also increased dramatically. While you used to store all your goods in one location, now you need to have nine locations to accomplish fast, two-day deliveries to your e-commerce customers. As expectations shift toward one-day deliveries, you may need 40 locations, and if it’s same-day deliveries, you’ll need 200 locations. In other words, in the past you were looking at one straight line with a permutation of one. Now, with ten points of origin and nine or more destinations, you’re looking at 90 combinations. That’s not manageable on a spreadsheet, and you need technology to keep a lid on that.
The third trend is vertical integration. To control the user experience, you need greater vertical integration, to which there are two paths. One path is through acquisition of last-mile networks, fulfillment, and so on. The other path—the one that Flexport is choosing—is creating control through digital means.
McKinsey: How do you do that?
Sanne Manders: It’s control through software. We don’t need to own the P&L [profit and loss] of an asset owner of, say, a container ship to control the end-to-end experience. If I work with the asset owner to integrate our software systems, I can create a win–win proposition where I can get as much control—or even better control—than owning the asset.
Our partnership with Atlas Airlines is a good example of providing a true end-to-end experience for the most time-critical customers that we have. If you manufacture high-tech goods in Malaysia, we can quickly get them to any place on the West Coast, and even Atlanta, under the strictest service-level agreements, because Atlas Airlines flights are dedicated to us. We control the asset, and in that sense we define the routing and how we load it, but they’re operating it for us.
Drayage management is another great example of how deep partnerships create value for both sides. We make about 95 percent of all our drayage moves in North America solely through our own application, which means we have real-time visibility on all these trucks. We also auto-dispatch these trucks through our system; there are no humans involved in scheduling. Our partners use our dispatcher app, our mobile apps, and even our electronic logging devices. I don’t need to own those trucks—our partner is much better at hiring and motivating drivers and running these trucks.
We do the same for warehouses. Every warehouse manager on the Flexport app sees what they will receive every day, which informs their decision making. There’s a lot that technology can do to reduce the transaction cost and empower informed decision making.
My fundamental belief is that the right track for us is to do things through partnerships rather than ownership because the P&Ls of all these companies look wildly different. As a customer-obsessed business, we will always prioritize the customer over utilization. However, if I’m an asset owner, I’ll need to prioritize my utilization because I’ve put a lot of money into the asset. Would that help you become the best customer-obsessed business? Probably not.
As a customer-obsessed business, we will always prioritize the customer over utilization. However, if I’m an asset owner, I’ll need to prioritize my utilization because I’ve put a lot of money into the asset. Would that help you become the best customer-obsessed business? Probably not.
McKinsey: What are examples of thinking differently?
Sanne Manders: The way we position ourselves with our asset owners is that we want to be their best distribution channel. That’s very different from being a marketplace, which is a bit like digitizing the yellow pages instead of solving the root problems in the industry. To be the best distribution channel, we have to get in their shoes and understand how they make money. This is relatively straightforward: asset owners make money through higher utilization.
So how can we help them get higher utilization? Where are their underutilized assets? How can they make higher yields? Typically, by doing something special or in an innovative way. A top-loaded container on a vessel is worth more than one that sits all the way down in the hull because you can bring it to the terminal later and pick it up earlier. The work and cost structure of the carrier isn’t affected, but the value to the customer is much higher. We can create a win–win here by prioritizing customers who are willing to pay a little more for this premium service, and the carriers also make money. We provide win–wins for both clients and carriers—such as offloading cargo directly on wheels to the yard—where the carriers can make more money without having to incur much more cost.
McKinsey: What are the operational challenges of scaling up operations so rapidly?
Sanne Manders: Hyperscaling brings a lot of good things. As the Silicon Valley saying goes, “Growth solves all problems.” Well, I can tell you it also brings a lot of problems. It’s like building a 747 while flying it—it comes with a lot of challenges. Even as the business hyperscales, a lot of existing processes don’t scale as smoothly. So you’re always running behind in terms of standardizing and codifying processes, and you’re constantly learning.
In recruiting, we need to make sure people are able to deal with such an environment. Some call it “drinking from the firehose,” and others see all the chaos and feel excited. We need to find the people who appreciate this hyperscaling environment as opposed to those who are overwhelmed by it. Speaking of building teams, [I would say] the hardest thing is finding people who have a lot of industry experience and still think with a start-up, entrepreneurial mentality.
McKinsey: What about rates? That’s what everyone is concerned about these days.
Sanne Manders: Service reliability has probably been the number one issue for the past 40 years, and now it is at a record low, while costs are at a record high. While rates for both air and maritime freight are very elevated, the two industries follow very different fundamentals. Let’s start with maritime shipping. Right now, we have a supply–demand imbalance because we’re buying so much stuff. The North American consumer still has a very strong preference to spend their money on goods over services. It’s very much like the summer of 2020, when a lot of people bought screens and fitness equipment for the home.
Will we go back to the pre-COVID-19 situation where we spend more on services than goods? If so, then there’s actually enough supply of maritime shipping. The industry will balance itself and rates will come down. If not, then capitalism will do what capitalism does. If there’s excess profitability, more people will start investing in expanding capacity, which would also normalize rates over time.
Things are a little different when it comes to air cargo. A lot of people are concluding that a portion of international air business travel may never return, which will have a massive impact on airlines. As a result, belly capacity will not return to pre-COVID-19 levels. Fifty percent of air cargo used to travel in the bellies of passenger planes, now it all needs to go into freighters. Here, the outlook is a little more grim regarding capacity, because there is not enough manufacturing capacity to produce the freighters we need quickly. The supply situation is well known and defined regarding what can be brought to the market between now and 2026: there are two more 747s rolling off the production line and a number of 777 converts, and the A350F will enter the market in 2026. As a result, air-freight rates will be much more elevated than ocean-freight rates, where there is more manufacturing capacity in terms of shipyards.
McKinsey: Are you looking to become a one-stop shop for shippers?
Sanne Manders: I’m not sure they’re asking for a one-stop shop. They want a solution in place to basically do everything from procurement to pay. And you can do that by picking the best of breed and use different vendors for different functions. Of course, it depends on the size of your company. If you’re a small importer, you may not have the resources to deal with so many different vendors—in that case, we can provide the whole solution.
But if you’re a huge importer, you’re more likely to say, “I don’t want to fully rely on Flexport, because it’s in my fiduciary duty to have multiple vendors.” Well, Flexport can still do many things for you. For example, we can help with the visibility of shipments or get them through customs, while other specialists can take care of the areas where we’re not active.
Of course, I’d love to become a one-stop shop, but that’s not realistic from a client perspective. I think we can aspire to be a one-stop shop with respect to data, but not the physical flow of goods.
McKinsey: What’s next in Flexport’s growth? Are you pursuing any new business opportunities?
Sanne Manders: Whenever my team comes in with an idea, saying it is a great opportunity, I always reply, “Starting a gardening service is a great opportunity as well.” There’s an insane amount of gardens, and there’s a lot of people who don’t have any time. But do we have the competitive advantage to go into gardening?
We have to understand where our competitive advantage sits when we explore new business opportunities. We see data as a competitive advantage, and for that reason we started Flexport Capital. We didn’t have to build a new business from scratch; we have all the supply chain data, and we already have the customers. And we know whether our customers are doing well and how much they are ordering. On top of that, we have full visibility into where all their goods are, which gives us unique capabilities. If our loans aren’t paid back we could actually stop the flow of their goods in transit.
Now that Flexport is becoming bigger, we have a five-year plan, which isn’t normal for start-ups. But we’re not a start-up anymore; we’ve grown from the 6,000th forwarder to the sixth-largest forwarder in the transpacific region, which is the largest trade lane in the world. That said, keeping up the growth—through better user experience and trade lane diversification—remains super important for us. Number six is only 3 percent market share, and we’re very small on many of the other trade lanes, such as intra-Asia and Latin America. The largest forwarder in the world has something like a 3 or 4 percent market share. Globally, we have a 0.3 percent market share, which means I can increase this share by 300 times before I’m done.
As we hyperscale, we start batching on processes and creating a platform that’s not necessarily the best for future scaling. That’s why we recently decided to fossilize everything we’ve done so far and start from scratch. We have a mindset where we replatform every four or five years, ripping everything out and starting all over again. This is a competitive advantage that we have, and it brings a wave of excitement over all the new possibilities that we’ve opened up.