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How Commercial Drones Will Optimize the Supply Chain
How Commercial Drones Will Optimize the Supply Chain
Drone vehicles are becomming cheaper, smarter, more powerful, and more reliable. How will this technology enter the commercial supply chain?
Technology Briefing

Drone vehicles of all sorts are becoming cheaper, smarter, more powerful, and more reliable. When, where, and how will this techhology enter the commercial supply chain? What barriers still need to be overcome? What threats and opportunities will this create? Who will benefit the most, and who will suffer? We'll provide the answers.
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Transcript

Since earliest antiquity, raw materials extraction, finished goods manufacture, and product consumption have seldom been co-located. That means that delivery has been a major function of the economy-and human progress has depended on the evolution of succeeding technologies, from the camel caravan to modern package delivery services like FedEx.

The deployment phase of the Fifth Techno- Economic Revolution will trigger another quantum leap in productivity by applying ubiquitous computing, networks, and robotics to further optimize the supply chain. One of the biggest opportunities will come via commercial drones, broadly defined as "unmanned vehicles used for business purposes." These not only include flying vehicles, ranging from toys to military weapons, but a wide range of carts, delivery trucks, warehouse vehicles, and cargo ships.

As such, drones have the potential to revolutionize supply chain management and logistics, a notion not lost on retail behemoths Amazon and Walmart. These firms have already taken the first step, by conducting trials of warehouse and home delivery projects over at least the past two years.

One harbinger of drone strategy's future is illustrated by Amazon announcing a partnership with the British government to run real-world tests to explore the feasibility of using drones to deliver small parcels in the UK. The implications of this are very significant, given that 90 percent of Amazon's sales involve products weighing less than five pounds. In the U.S., 7-Eleven has already made its first commercial delivery by drone, demonstrating that drone deliveries are far more than just a pipe dream.

From a technology perspective, the capabilities of drones are improving day by day-advancements in autonomous piloting, "sense and respond" technologies, and increased battery life mean that delivery drones are now racing closer to becoming a reality. As previously reported in Trends, the kind of small parcel air delivery envisioned by Amazon is actually far less costly than conventional same-day delivery services now offered in major metropolitan areas.

However, a lot of preparation is still needed before drone delivery in everyday supply chains becomes feasible. Before drones can be fully commercialized, we will need concrete legislation that outlines parameters of how they can be used. Only once an enabling policy framework is in place can the drone market fully develop.

Furthermore, the fact that drones require a wireless connection to an operations center makes them potentially vulnerable to hackers, so cybersecurity fears are among the biggest obstacles. There are also concerns over whether drones will be used to complement existing jobs in the supply chain or replace them outright.

As drones show promise to be a disruptive technology within the supply chain, businesses would do well to start investigating strategies now to see how they would fit their business model. Whether to speed up retail deliveries or bring key parts and equipment to heavy industry projects, drones have the potential to enhance process efficiency and reduce costs.

Businesses should start seeking help from experts to understand the technological challenges, practicalities, and limitations of using drones as part of the supply chain process before dismissing the opportunity altogether or "going all in" too quickly.

Given this trend, we offer the following forecasts for your consideration:

First, commercial small-package delivery via aerial drone will be widespread by 2025.

Package delivery services are one of the most publicized commercial applications, because they are likely to touch the average consumer directly. Amazon's drone delivery service, called Amazon Prime Air, will launch in the UK in 2016. In November 2015, Amazon showed off a highly polished prototype drone, which can deliver packages to customers within thirty minutes. But the big question is "Will consumers pay for a thirty-minute package delivery service?" Fortunately, if a recent report by ARK Invest analyst Tasha Keeney is correct, Amazon Prime Air could cost Amazon only 88 cents per delivery.

If Amazon charged customers $1 per delivery, Keeney estimates, the company could earn a 50 percent return on its investment in its drone infrastructure while offering same-day delivery more cheaply than with current alternatives. Keeney's analysis assumes that 6,000 operators who earn $50,000 per year will operate 30,000 to 40,000 drones. Each drone will make 30 deliveries per day. The rest of her analysis incorporates the costs of electricity, backup battery packs, bandwidth, upgrades to facilities, and so on.

Second, by 2020, ground-based "autonomous delivery devices" will begin to transform delivery services in urban and denser suburban locations. A pioneer in this area is Starship Technologies, which is creating a fleet of self-driving, earthbound robots that roll along on the sidewalk rather than fly through the sky. The small, six-wheeled robots are designed for deliveries within a radius of two to three miles. Moving at a human walking speed of four miles per hour, the robots can either drive themselves or be controlled remotely by humans.

The robots are designed to act like pedestrians, merging with human foot traffic. And they incorporate multiple detection systems, which give them situational awareness of people, bicycles, and cars. In 2016, Starship Technologies is testing the robots under real-world conditions in the United Kingdom, Germany, Switzerland, and Washington, D.C.

The tests include a food-delivery trial in London with Just Eat, a take-out ordering service. The European tests started in July, and the D.C. trial is occurring this fall. The company is aiming to achieve 99 percent autonomous driving, where one human monitors and controls 100 robots. The idea is to always have some degree of human involvement to deal with the unexpected. So far, the delivery service is running smoothly. When the robots are traveling down the street, more than 60 percent of pedestrians simply ignore them, while the remaining 35-40 percent of responses are overwhelmingly positive.

Third, no technology will automate away more jobs or drive more economic efficiency than the driverless truck.

Shipping a full truckload from L.A. to New York costs around $4,500 today, with labor representing 75 percent of that cost. But those labor savings aren't the only gains to be had from the adoption of driverless trucks.5 While drivers are restricted by law from driving more than eleven hours per day without taking an eight-hour break, a driverless truck can drive nearly twenty-four hours per day. That means the technology could effectively double the output of the U.S. transportation network at 25 percent of the cost.

And the savings become even more significant when we account for fuel efficiency gains; the optimal cruising speed from a fuel efficiency standpoint is around 45 miles per hour, whereas truckers who are paid by the mile drive much faster. Furthermore, fuel efficiencies will increase further as the self-driving fleets adopt "platooning technologies" (like those from Peloton Technology), allowing trucks to draft behind one another in so-called "highway trains." When you couple this with the reduced costs associated with accidents due to human error, the incentives for widespread industry adoption are obvious.

Fourth, drone cargo ships will enter service over the next decade, reducing costs for containerized and bulk-cargo shipping.

Rolls-Royce Holdings Plc. envisions that captains on dry land will use specialized control centers to command hundreds of crewless ships. But, Rolls-Royce is not the first to float the idea of autonomous ships; the U.S. Navy christened its first self-driving warship, designed to stalk submarines and other vessels for two to three months at a time, earlier this year. Rolls-Royce makes the case that drone ships will become a safer, cheaper, and less polluting technology for the $375 billion shipping industry that carries 90 percent of world trade.

Today, crew costs account for about 44 percent of total operating expenses for a large container ship. The company's schematics show vessels loaded with containers from front to back, without the bridge structure where the crew lives. By replacing the bridge-along with the other systems that support the crew, such as electricity, air conditioning, water, and sewage-with more cargo, ships can cut costs and boost revenue. The ships would be 5 percent lighter before loading cargo, and would burn 12-15 percent less fuel. While regulatory hurdles, coupled with industry and union skepticism about cost and safety, will slow global adoption, drone cargo ships might be deployed in regions such as the Baltic Sea within a decade.

The European Union is already funding a $4.8 million study called the Maritime Unmanned Navigation through Intelligence in Networks project.8 According to Rolls-Royce, the transition will happen gradually as computers increase their role in navigation and operations. Container ships and dry-bulk carriers will probably be the first to forgo crews. Tankers hauling hazardous materials such as oil and liquefied natural gas will probably remain manned longer because of the perception that having people on board is safer.

Fifth, fully automated seaports, trucking terminals, and distribution centers will complete the new supply chain system by the 2030s.

Automated warehouses are already becoming the norm, with trucking terminals following along. However, U.S. seaports have lagged far behind.9 A port terminal recently opened in Rotterdam, in the Netherlands, tells a different story: Almost every part of the process of unloading containers is handled by software, and office workers remotely control the cranes using their computers. Some have called the operation the world's most advanced container-ship terminal.

The biggest impediment to such innovations in the United States will remain organized labor. All ports on the West Coast of the United States are organized under a single union, the International Longshore and Warehouse Union. Today, the average member of the union in Oakland makes $147,000 per year in wages, with benefits equal to another $82,000 per year. Union power was used to oppose the introduction of containers in the 1960s and, later, computerized systems for tracking cargo. In each case, however, the union eventually conceded the introduction of these technologies in exchange for higher wages for existing workers and buyouts for displaced ones.

As with previous disruptive technology, the union will need to be compensated for any reduction in jobs. Nevertheless, several mitigating factors may allow automation to proceed. For one, the job loss calculations largely assume that shipping volumes will not be affected by automation. However, as automation reduces the price of shipping, we should expect to see more shipping, which will partially offset the job losses. More importantly, the returns on investment in port terminal automation are large enough that there should be room for a negotiated settlement that makes both the union and the terminal operators happy.

Sixth, while many low- and mid-skilled jobs will be destroyed, new and better jobs will be created, and the twenty-first century supply chain will substantially reduce the cost of living.

A recent report, titled "New Work Order," revealed that 70 percent of people entering the workforce today are working in industries that will soon be drastically affected by the use of robots. Interestingly, the demand for drone pilots is likely to emerge as a key growth industry-and some experts see this emerging as a well-paid, in-demand job opportunity within the next two years.

For people pursuing a career as a drone pilot, the rewards could be great. Figures for the U.S. aren't available, but the average salary of a drone pilot in Australia is already around $100,000 with the top end approaching $150,000 a year. Ten years ago, there were fewer than 25 certified drone operators in Australia. But, by March 2016, the number had grown to 500 and was expected to climb to over 600 by the end of the year.

Meanwhile, thousands of other job opportunities are emerging in relation to operating these drones. And, globally, the world market for piloted aerial drones is forecast to more than double by 2022.

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