How Maersk Designed a More Resilient Supply Chain
Maersk, the global shipping giant, created an innovation center in 2021 to help it contend not only with the supply disruptions caused by the pandemic but also long-term challenges such the need to decarbonize and further digitize its operations, deploy and leverage AI capabilities, and address endemic staffing and retention issues. In doing so, Maersk adhered to three principles, which other companies can employ to address supply chain problems as well as others.
As the Covid-19-related lockdowns eased in 2021, Maersk North America, a division of the Denmark-based global shipping and logistics giant, found itself in the eye of a storm. Its ports, terminals, warehouses, and distribution centers were becoming global chokepoints, and labor shortages made the situation worse. Maersk responded by redeploying ships from less-traveled routes to transpacific trade lanes, expanding the hours of operation in its facilities, upgrading its tracking systems, and opening new warehousing and distribution locations.
At the same time, Maersk was earning record profits from the sheer volume of pent-up demand, not to mention the premiums companies were paying to expedite their deliveries. It was the best and worst of possible worlds — and an unprecedented opportunity to explore and fund solutions that not only addressed the immediate crisis but also long-cycle trends, building further resilience into its operations. These included the need to decarbonize and further digitize its operations, deploy and leverage AI capabilities, and address endemic staffing and retention issues.
Companies faced with a major disruption typically take a limited approach to innovation — hiring a chief innovation officer, for example, or creating a dedicated fund to invest in startups. Maersk’s leaders, in contrast, adopted a systems approach that any company with a sophisticated multinational supply chain can learn from — one that integrates strategy, processes, and talent in a coordinated way. Spot solutions are needed to help a company get through a sudden shock, but the only way to ensure agility and resilience going forward is by addressing systemic issues in a way that is intentional and focused on the long term and brings together clear priorities, well-designed repeatable processes, robust governance, and a skilled team.
In collaboration with Innosight, Maersk created a dedicated innovation center in 2021 that has used the following three systems-design principles:
1. Keep a clear focus on enterprise priorities.
Innovation groups frequently succumb to the temptation to pursue innovation for innovation’s sake, chasing the shiniest technologies whether they are aligned with a company’s overall goals or not. But the purpose of an innovation center isn’t simply to help a company “keep up with the Jones.” They should be designed and organized to support and advance their overarching strategies. In Maersk’s case, this meant accelerating its movement towards end-to-end supply chain integration.
For example, Maersk’s leaders considered entering the micro-fulfillment space, extending last-mile services to individual consumers. But while the approach has promise and may become more relevant in the future, it was not focused on the major retailers most affected by the supply chain crisis who are Maersk’s biggest customers and hence the most important drivers of its profitability and growth.
So the innovation center turned its focus to port-transload operations — moving the contents of international containers from ocean carriers into 53-foot truck trailers — which was a major bottleneck in North America. Partnering with internal Maersk operators, the Port of Vancouver, and Canadian Pacific Railway, it created the Pacific Transload Express, a 117,000-square-foot, 103-door transload facility located a short train trip away from the chaos of Vancouver’s three major container terminals. This solution reduced the volatility of door-to-door times for container shipments from 35 to 75 days to 35 to 40 days, making supply chains that much more dependable and predictable. And by eliminating more than 100,000 local truck trips per year, it reduced CO2 emissions by more than 15%, advancing Maersk’s goal of being carbon neutral by 2040.
2. Create an effective governance system and clear interfaces with internal and external partners.
Another reason many innovation groups fall short of expectations is their isolation from the customers they are meant to serve. In the case of Maersk’s innovation center, those “customers” are the internal business units that oversee warehousing and distribution hubs. Similarly, an innovation group may neglect to create effective interfaces with the start-ups, universities, and other critical vendors that are their third-party partners.
In Maersk’s case, the lines of reporting for its innovation center extend all the way up to the C-suite, ensuring that it has the full mindshare and support of senior management, and also to key operational leaders, whose buy-in is critical as initiatives are tested and scaled. To make certain that business units have a say in setting priorities and that they maintain operational control when initiatives affecting them are piloted, there is an innovation council, whose members include Maersk’s North American regional managing director and the unit’s executive vice presidents of operations and corporate operations. External stakeholders providing input to the council include multiple universities (e.g., the MIT Center for Transportation & Logistics), government entities such as the New Jersey Economic Development Authority, the commercial robotics firm Boston Dynamics, and multiple startup companies. Having the perspective of all these key parties ensures that the innovation center remains focused on the most relevant problems and that it can pivot quickly when an initiative creates new ones.
Though Maersk has a robust corporate venture capital arm, Maersk Growth, the innovation group maintains its own relationships in the VC and startup world to increase its access to new, disruptive technologies and bring an outside-in perspective to their initiatives. This is where it turned when the chronic problem of inventory “leakage” — unaccounted for or misplaced pallets in warehouses, amounting to 6% of the goods on hand — gained new salience during the crisis. (Most warehouse operations are willing to live with as much as 5% to 10% leakage.)
After ideating with a number of different firms, the solution it chose utilized autonomous drones, which fly through warehouses collecting images, videos, and 3D scans. These are then processed via video analytics and AI to locate the missing pallets. Thanks to the clear lines of communication that the center maintained with its many partners, the drones and their software were fully developed, tested, and deployed in warehouses in less than four months. Leakage was reduced to close to 0%, and the system is now being rolled out at scale.
3. Ensure that the center is fully resourced and employs clear and repeatable processes.
Too many corporate innovation groups are staffed with smart people who are disconnected from the strategy and goals of the enterprise they are meant to serve. As a result, their initiatives often fail to have the impact they could. Maersk recruited engineers, data scientists, and logistics and operations specialists internally and externally and probed and tested candidates’ creative thinking throughout the interview process.
Maersk’s leaders thought carefully about the innovation’s center location and chose a dedicated office space in Jersey City, New Jersey, which is far from Maersk North America’s headquarters in suburban Florham Park, New Jersey. The talent they sought was in the metropolitan New York City area, and the urban location was a short PATH train ride from Manhattan. In addition, the site’s distance from the regional unit’s headquarters in Florham Park would provide the psychological and physical separation necessary to ensure that the innovation center didn’t simply default to Maersk’s long-established methodologies.
To keep its teams tied to Maersk’s strategy and remove the need to reinvent the center’s operating model every time it investigated a new idea, clear, repeatable processes were designed and communicated. Instead of leaping from idea to proof of concept, its innovation process begins with the identification of a problem, the stakeholders most affected by it, and its economic and operational impacts.
For example, when looking to improve labor efficiency, an innovation team determined that manual picking and packing was especially time consuming. Only then did they move to formulate a hypothetical solution, utilizing “goods to person” robotics, automated technologies that deliver the right item at the right time to the right worker. Initiatives proceed through a stage gate process as they move from ideation through designs, pilots, and ultimately solutions at scale, with explicit benchmarks set and input collected in real time. Should a pilot fail to deliver or prove unscalable, it is shut down in a timely way.
The results speak for themselves. By November, 2022, Maersk had piloted more than 23 initiatives, seven of which are being rolled out at scale, and two of which were canceled. The net result is a 46% reduction in the lead time variability of shipments from Asia to North America, as well as significant savings. But at an industry conference that same month, North America Regional Managing Director Narin Phol cautioned against complacency. “Supply chain disruption is a constant,” he said. “Don’t take anything for granted.”
Maersk’s experience shows that a systems approach to innovation — one that is aligned to the enterprise strategy, solves relevant problems for internal and external customers, develops clear interfaces with partners, and builds and maintains broad organizational capacities — can bring clarity, resilience, and scalability to efforts to build the supply chain of the future. Its approach is one that any company with a complex supply chain can learn from.