Can Logistics Predict the Economy?

Can Logistics Predict the Economy?

Logistics is behind every product in our world. Electronics, apparel, consumables – everything is being manufactured and moved around the globe in order to be delivered to the end customer. Logistics is a hidden power which stands behind the global economy, supports it and influences it in a lot of ways. However, this power is not unstoppable, because of such unpredictable events as the famous cyber attack on Maersk, which paralyzed global trade for several months. It did not stop consumers from purchasing more products though. With an increase of e-commerce volumes that will double by 2021, more and more goods are going to be shipped around the world. The question is – Can logistics actually predict the economy by using the historical data from the industry?

To answer this question Transmetrics’ Co-Founder and CCO Anna Shaposhnikova spoke with João Monteiro, a Managing Director and Founder of LogIndex. Logindex is an affiliate of Kuehne + Nagel and the distributor of the global Kuehne + Nagel indicators (gKNi), which are Nowcasts for key economic indicators, based on the real-time logistics flows. In addition to that, João is a former Kuehne + Nagel executive and an investor in a number of companies in Fintech and Healthtech. During this interview, João also shared his insights on Logtech startups and why it’s so difficult to be successful in this field.


ANNA: Dear João, looking at your educational background, you were more interested and focused on business management, strategy, economics, finance and banking. All of these are indeed really fascinating fields to work in. Why did you choose the logistics industry as your professional path?

JOÃO: The core of my career was always l in the realm of service industries. I started as a top management consultant with Roland Berger, then I moved to the airline industry with Lufthansa, where I was in charge of business development and solutions of LSG Sky Chefs, the Cabin Provision Group of the Lufthansa Group. This business unit is the market leader, with approx. 30% global market share, and services many major world airlines. You have a Boeing 747 which is ready to take off, there are more than 40,000 items that have to be onboard for just that particular flight. Large airlines will have more than 700 flights per day taking off from a major hub, 365 days of the year. Therefore, one can see a very strong logistics component in this service industry. One of  my responsibilities, I was as managing director of the solutions business units at LSG SkyChefs, where among other things  we helped airlines  manage the process of provisioning  catering stations with catering equipment, in part orchestrating their supply chains to allow our customers to replace  the use of expensive aircraft belly cargo by  sea container services.

ANNA: This is very interesting! How did you find solutions for airlines to substitute containers for the space in the airplane bellies? Did it involve a serious of forecasting effort?

JOÃO: Yes. For this specific case, you would need to know in advance how full your airplanes are and the stock levels of airline equipment at each catering facility in every airport. After that, you are able to make your orders weeks in advance so that the catering equipment will there, when you need it, 5-6 weeks later, without falling below the minimum stock levels. When we were looking to expand these services beyond the Lufthansa group, we started looking for a more professional logistics set-up, in order to expand this business. That basically led us to create a joint venture with K+N, called SkyLogistix, which is still an important business for both companies. Instead of sending the catering equipment in the belly of airplanes to every location from the hub and thereby wasting cargo space and fuel, we created models which forecast what the needs of the particular station are going to be for the next 5-6 weeks. So they run a forecast in advance, put that equipment inside a container and send it via Sea freight to the respective stations, which saves a huge amount of time, fuel, etc.

“If you sit in KN headquarters in Hamburg and look through the window to the port, you see all the movement there. You see how full the vessels are and how much activity is happening there. In the recovery period after the 2008 crisis, by looking out of this window you could see how the economic environment was improving.”

ANNA: So, as I understand it  SkyLogistix service was very much a data-driven solution. Talking about other data-driven solutions in which you are involved: Where the ideas of Logindex came from and how did it start?

JOÃO: The Idea of Logindex actually came from the Kuehne + Nagel Chairman of the Board and our CTO Martin Kolbe. It came in a very intuitive way: if you sit in KN headquarters in Hamburg and look through the window to the port, you see all the movement there. You see how full the vessels are and how much activity is happening there. In the recovery period after the 2008 crisis, by looking out of this window you could see how the economic environment was improving.

In addition, very often when we meet our customers or people from other industries, let’s say, from banking, one of the most frequent questions we are asked is: “How do we see the economy doing?” We hear this question all the time. If you work for an airline in Cargo you will also hear this question very often. So the idea of Logindex came a little bit from there. We asked ourselves: “Can we create an indicator of the economic activity based on what we’re seeing as one of the biggest freight forwarders in the world?” So, I was asked to set up a team to try to find out if it is possible to create such an indicator.

We got very positive feedback from all of them: “Yes, absolutely! We would love to have a clearer indication of what is going on and not have to wait five weeks after the end of  month ”

ANNA: And how did you create the index? Did you do a market validation first or did you already have a clear idea what factors will of interest and to which audience?

JOÃO: Yes, certainly we did a market validation first. We went out to speak with several potential parties interested in these type of indicators: asset managers, market exchange platforms, banks and others. We got very positive feedback from all of them: “Yes, absolutely! We would love to have a clearer indication of what is going on and not have to wait five weeks after the end of month ”. We were also advised not to focus only on global trade indicators, but actually to go deeper into country indicators and if possible even into its sectors. So based on these inputs and the results of our research, we created Logindex.

ANNA: When did you start the company and what is the current status of LogIndex?

JOÃO: We started working on the idea in the middle of 2015 and by the end of the year we went to the board and showed them the prototype. Our numbers were significantly better than the numbers that banks are publishing in their own surveys and estimates. We got the go-ahead from the Board and started developing the service and brought gKNi to the market in the middle of 2016. We immediately attracted some very well-known customers for our data service. Of course, we don’t disclose how many customers we have, but we can disclose which types of customers. We have customers from the group of global banks, quant hedge funds, research companies that have their own indicators and take our indicators as an input for their models.

Picture Credit: Logindex, Medium.com

ANNA: Why did Kuehne + Nagel create LogIndex? Is selling indicators to financial institutions a new core business for Kuehne + Nagel?”

JOÃO: This is an indicators business and there are no expectations that this is going to be major sales contributor to the KN +20 billion dollar business. We see the Logindex business almost like a playground to develop new skills and technologies, which will later be able to contribute to how KN will operate tomorrow. I think that the big value for us as a company is the deep understanding of the datasets that exist outside and the way we can complement them with what we do inside the company. Since the beginning of this year, we have been putting a lot of emphasis on using the same methods and the same data to enhance the way that we think about our core Logistics and Freight-forwarding business and that’s where the value of what we are doing resides.

“One of the key differentiators, the unique selling proposition of KN is the strength of its own internal systems.”

ANNA: It’s very impressive indeed! To create the index you’ve collected a lot of data – from 55 different logistics sources according to the website. How did you manage to do so? You know, that the topic of our upcoming conference is “Collaboration in logistics”. It is a well-known fact that collecting logistics data from different sources can be very difficult, as logistics companies are very protective of their own data and not open to collaborating. How did you overcome this problem?

JOÃO: We continue to face this challenge. One of the key differentiators, the unique selling proposition of KN is the strength of its own internal systems. And it is well known in the industry for many years that we have these integrated systems across all business units and that we are able to have a very good real-time view of the business and its details. That was the starting point. Next step is that this data is anonymized and aggregated before being provided to Logindex. Within LogIndex we enrich these data with data from multiple data sources to create signals that are as strong as possible. We went out and scouted the market for all datasets that exist and we are continuously doing that. We looked at how detailed those datasets are, how granular they are and how frequent they are. We have selected about 50 data sources which are all logistics- or trade-driven and in this way created one of the biggest Logistics Data Lakes in existence. We receive something like 200 million messages per day in the KN Logistics Data Lake, and these 200 million messages are being converted to around 25,000 time-series, which are then processed using our algorithms.

“We have selected about 50 data sources which are all logistics- or trade-driven and in this way created one of the biggest Logistics Data Lakes in existence. We receive something like 200 million messages per day in the KN Logistics Data Lake, and these 200 million messages are being converted to around 25,000 time-series”

ANNA: And which algorithms or econometrics methods do you use to create your indicators?

JOÃO: We are lucky that in the logistics industry we are dealing with a lot of structured data. Therefore we are able to use econometric methods that might not be possible to use when you have just pieces of text or pictures – things that are not well connected to each other. To develop our econometric models we used basically three types of methods: MIDAS and principal factor analysis, Nowcasting modeling, and the last but not least, machine learning. We mainly apply machine learning when we have parts of the data that actually are more unstructured, which we need to make sense of. Those are the engines which we use in order to create our indicators.

ANNA: How often do you update your indicators? Is it an ongoing process and how do your customers receive the updates?

JOÃO: Every day we have an update on all the more than 600 indicators we produce and make them available to our customers via an API or via an online user interface, and in a weekly newsletter. Our current customers tend to use either the API interface or the online user interface.

“There are not a lot of 22- to 27-year-olds in their garages, who understand or even are aware of what is going on in logistics and international trade. I really think that understanding the sector is the key here.”

ANNA: You are very passionate about Logindex and it is in its own right a logistics startup. But I know that you are passionate entrepreneurs in general and an active angel investor in other startups, mainly in finance, banking and health. Why are you interested in those sectors? Why didn’t you decide to invest more in logistics startups where you have deep expertise?

JOÃO: I did try investing in logistics startups, but it is difficult because logistics is a complex industry. Actually, as an angel investor, I look for opportunities in three fields: Logtech, Fintech, and HealthTech. Logistics is a bit of an issue, and I say this because I accompanied many startups in this area. It’s hard because there are a lot of nuances in the industry. And those nuances are not at all visible if you don’t have a considerable experience in this industry. So there are not a lot of 22- to 27-year-olds in their garages, who understand or even are aware of what is going on in logistics and international trade. I really think that understanding the sector is the key here.So I had a lot exchanges with teams which started working on new ideas for logistics, but they didn’t pass my personal investment criteria.

ANNA: I totally agree with you. Understanding the logistics industry is the key. And this understanding only comes with a lot of experience. One cannot understand it as a freshly-minted graduate out of university. You really have to work in the industry for some time to start understanding it. And only then can you start seeing how it can be improved. Nonetheless, Transmetrics is a logistics startup and so far quite successful ☺ We also know a few good logistics startups that are trying to bring value to the industry by using Big Data, AI and Machine Learning. What advice would you give to such companies? How shall they move forward on their hard journey?

JOÃO: The key is that you need to be bold and you need to really believe in the changes you want to make.  But at the same time, you should not be naive. You need to have the courage to go after the experts and the industry in order to understand if the reality matches your assumptions. Then you need to challenge that! I had an example of a team which I was accompanying in the overland business. There are a lot of hard truths or things that people speak about and then just take for granted. In this case, they were speaking about the fact that 30% of trucks are empty and how to fill them. It is true, but it doesn’t just end there. You need to understand the business, you need to understand how freight forwarders operate. There is a lot to understand before you are actually able to say “yep, there is a business there”. To develop the technology – that is, in my experience, the easy part. Thanks to cloud services and open source, today we are able to do amazing things which cost much less as compared to 10 years ago. But that is not enough. You still need to find a business idea that works. And you must understand the economics of it.

ANNA: Thank you very much for the advice! What you have just said is very true. At least for Transmetrics, it worked exactly in this way. In the beginning, we were constantly validating our ideas with industry and adjusting them in the process. Now we are coming to the end of our interview and traditionally I would like to ask if you have some words of wisdom to share with our readers? Something inspirational which helps (quoting the famous Beatles’ song) “When I find myself in times of trouble” or “in my hour of darkness”.

JOÃO: That’s the difficult one! This might sound strange, but I always stick with the following principle in life: “Big Battles, Small Victories”. What it means is that once you chose your battle, once you said “this is it, this is the battle I have to fight now”, you should bring all your focus and energy to it. And when in end in a well-deserved victory, consider it small, and start the looking for the next one.

ANNA: Yeah, I see exactly what you mean and it’s brilliant! It is all about small victories and having a consistent approach in whatever you do. Dear Joao, thank you very much for the interview. It was extremely interesting and I am sure that our readers will enjoy it!