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SG System's Digital Journey: Pioneering Logistics Transformation with AI, Robotics, and Global Expansion Insights

Interview - January 17, 2024

Delve into the groundbreaking IT and DX initiatives of SG System, a pioneer in logistics digital transformation, and discover how they are revolutionizing Japan's business landscape while aiming to contribute to a sustainable society through innovative logistics solutions.

TOMOHIKO TANIGUCHI, REPRESENTATIVE DIRECTOR & PRESIDENT OF SG SYSTEMS CO., LTD.
TOMOHIKO TANIGUCHI | REPRESENTATIVE DIRECTOR & PRESIDENT OF SG SYSTEMS CO., LTD.

Can you give us a brief overview of your company and the history of your IT and DX initiatives?

SG System is a company in the SG Holdings Group, a group of integrated logistics companies led by Sagawa Express, a well-known delivery and courier company responsible for overseas and domestic delivery services. Our primary focus is on supplying comprehensive IT systems for the entire group of companies. Additionally, we combine these systems and extend our services to external clients.

Our company was established in 1983 as Sagawa Computer Systems. The Group's IT initiatives can be divided into three phases. The first phase was to strengthen services through systems: around 1985, Sagawa Express was enhancing its services and expanding its customer base by building a package tracking system, an e-collect system and other systems.

However, as a result of commissioning the development of these systems to the most suitable vendor on a case-by-case basis, systems of various architectures were disorganised, and around 2004, soaring IT costs became a management issue. Therefore, from 2005 the company focused on IT cost reduction. That was the second phase.

Although the term 'cloud' was not yet common at the time, we built an open platform under the private cloud philosophy and transferred central computers over a period of seven years. We also progressively integrated the approximately 400 different systems in the Group onto the open platform.

In addition, we worked on the development of human resources. Previously, external vendors developed the systems on the central computer and our employees were mainly responsible for controlling the vendors. Therefore, we had mainly young employees participate in the central computer transfer project and learn programming. As a result, we are now able to bring a lot of programming in-house. As a result of these initiatives, we have been able to reduce our IT costs by about 35%.

And we are currently working on the third phase of the project. The rapid growth of e-commerce has increased the demand for logistics. At the same time, however, the logistics industry is experiencing a labour shortage due to a shrinking population. Therefore, we are working on labour-saving and manpower-saving operations by linking the open platform we have built with cutting-edge technologies such as AI, robotics and IoT..

 

Japan is known for its excellence in automated manufacturing, but it has received criticism for its relatively sluggish adoption of digital technologies in business and daily life. It is currently ranked 29th in IMD's digital competitiveness ranking. In your opinion, what factors have contributed to Japan's slower adoption of these technologies, and what are you aware of as your company is a pioneer in the introduction of digital technology in the logistics industry?

As the Japanese Ministry of Economy, Trade and Industry (METI) has described the problem as the "2025 cliff", many Japanese companies are said to have legacy systems and spend much of their IT costs on maintaining and managing them. This may lead to less investment capacity to spend on DX, which in turn may lead to delays in the introduction of digital technologies. Another factor may be that a small number of companies view IT investment as simply a means to improve their operations, rather than to increase the future value of the company.

The Company and the Group have consistently placed the use of IT to address business challenges and increase the future value of companies at the heart of their mission. This will not change in the future.

 

In 2019, SG Systems introduced the AI-OCR technology to automate size and weight input work. This innovation significantly reduced input work time by 8,400 hours per month. Since its initial development, you have been continuously enhancing this service. Notably, you have incorporated features like Japanese AI models and the capability to read receipt forms. Can you tell us how AI-OCR technology was introduced and what the future holds?

There are a wide variety of (algorithmic) AIs in the world, but what they all have in common is that the accuracy can be improved by letting the AI learn from a lot of data. Sagawa Express handles approximately 1.4 billion packages a year. In other words, a large number of delivery slips are generated every day, so we thought that by having AI learn from this data, we could build an AI that is more accurate than other companies.

First, we worked on reading the weight and size of the slips. Sagawa Express delivery costs are determined by weight and size, which are handwritten on the delivery slip by the driver who receives the package from the shipper. During the busy season, more than one million of these delivery slips are generated per day, and the handwritten information was manually entered into a database. The AI-OCR automates this input work, significantly reducing the amount of human labour required. The AI-OCR's recognition accuracy has risen to an astonishing 99.995% after learning from a huge amount of slips.

The next step was to digitalise all slip information. At Sagawa Express, many delivery slips have been converted to data by introducing shipping systems and other systems for customers, but even so, around 10% of delivery slips are still handwritten. In the past, addresses and other information were not digitised, so it was impossible to know all delivery destinations until the day of delivery, and the efficient delivery order and how to load the trucks accordingly were not known until the day of delivery. The AI-OCR system read the addresses, telephone numbers and other information from the handwritten slips when the parcels were received, and the information on the delivery destinations of the parcels was converted into data. This made it possible to calculate the efficient delivery order and load the parcels onto trucks during the night, thereby significantly improving the efficiency of delivery operations.

These AI-OCR technologies are also used to provide services to customers outside the Group. For example, the system is being used to convert a wide variety of forms into data, including documents submitted to local authorities by businesses that pay salaries to employees, BLs related to imports and exports, and various invoices generated in the supply chain. The system's functions are being used to actively pursue new business opportunities.



Are you looking to export the AI-OCR system domestically or overseas as well?

The Group has identified the strengthening of overseas services as one of its key strategies, and is developing freight forwarding and other services using a network of 34 countries and regions worldwide (as of 30 September 2023), centred on Asia and extending to Europe, the US and Africa Biz-AI x OCR also has a proven track record in reading import/export related forms. and we would like to encourage overseas companies to use the system if they require it.

How is SG Systems addressing the challenges posed by Japan's demographic situation? Could you provide some insights into the strategies and approaches that you are implementing to respond to this demographic challenge? 

In addition to the decline in Japan's overall workforce, it is estimated that by 2027 there will be a 25% shortage of drivers to meet demand, due in part to stricter overtime regulations for truck drivers in 2024. Meanwhile, parcel volumes are expected to increase, mainly for home delivery, due to several reasons such as the continuous growth of e-commerce. To fill this gap, as mentioned earlier, within the Group, we are working to reduce the labour and manpower requirements of home delivery operations by linking cutting-edge technologies such as AI, robotics and IoT.

In terms of initiatives outside the Group, it is said that the overall logistics market in Japan, including private logistics, is worth JPY 65 trillion, and the Group is developing its business targeting this JPY 65 trillion market. To date, the Group has been working to solve logistics issues in the supply chains of its customers by utilising the synergies of the Group. In this context, the Group has promoted the automation of warehouse operations through the introduction of robotics and logistics IT systems.

In recent years, we have seen an increase in the number of customers who have been handling their own logistics operations, but now want to entrust the Group with their logistics operations due to labour shortages and other factors. For such customers, we are developing an efficient and large business by combining our logistics IT with joint delivery, which bundles the logistics of several companies in the same industry and warehouses for shared use. In this way, we are not only tackling the challenges posed by Japan's demographic trends within the Group, but also outside the Group, in order to contribute to a sustainable society by solving social and customer issues.

Could you elaborate on some of the specific challenges that the integration of digital transformation has presented to SG Systems?

We believe that the biggest challenge is to keep up with the speed of change in society and technology.

As we have already told you, we have steered our company towards in-house production and developed our digital workforce. We have now also formed a team for agile development, so that we are able to modify our systems as soon as market needs change.

We have also abolished central computers and transferred to an open platform, which makes the system environment easier to work with when new technologies emerge. Engineers are encouraged to take on challenges without fear of failure, making use of the R&D budget when new technologies emerge. In this way, we are promoting initiatives in line with changes in society and technology.

 

Are you exploring options such as hiring overseas workers to mitigate the impact of an aging population?

We do not have a problem with an ageing workforce, but we hire talented engineers of all nationalities. In fact, engineers of many different nationalities work for us. Logistics challenges are a challenge that society is facing. Our engineers are motivated by the opportunity to solve such social issues.

In addition, we have significantly reduced our IT costs, allowing us to allocate more resources to R&D. We have created an environment in which the validation and development of new technologies can be challenged in R&D, and our engineers can work on the use of new technologies without fear of failure. In this way, we have an environment in which our engineers find it challenging and rewarding, which we believe attracts the interest of talented engineers.

 

Are there any other products currently in your production lineup that you would like to highlight and showcase to our international readers?

One of the initiatives we are focusing on to solve logistics issues both within and outside the Group is the automation of warehouse operations through robotics. As there are many robots in the world, we promote the introduction of existing robots if they can solve the problems in warehouse operations. However, if there is no robot that can solve the problem, we develop a new robot from scratch.

As an example, we are working with another company to develop a new robot system designed to transport goods using AGVs (unmanned guided vehicles). The robot is designed so that two robots can reliably grab and transport loads from both sides, regardless of the size or shape of the load, as long as there are flexible wheels on the unit load to move the load. The robot system is currently in the final stages of testing on site. These robots have been developed to automate warehouse operations within the Group.

We then utilise the Group's internal know-how to offer them as a logistics automation service to customers outside the Group.

 

In 2011, your company established a joint venture in China. Could you provide more details about this specific joint venture? Additionally, are you actively seeking similar partnerships in other overseas markets?

The aim of the joint venture in China was to secure a workforce of engineers abroad. Chinese engineers are highly educated and trained, and are a valuable human asset to our business, as labour costs are lower than in Japan. Including our joint venture partners, we currently have around 120 employees in China working on the development of our systems. Following the success of this model, we are actively seeking to do so in other countries.

 

If we returned five years from now, what goals or ambitions would you like to have achieved by then as president? How would you like your company to be perceived and positioned in the global market?

So far, as a logistics IT company, we have been working with each and every company to solve logistics issues in their supply chains.

However, to reiterate, the shortage of workers in the logistics industry as a whole is a major social issue for Japan as a whole. Against this background, we would like to contribute to a sustainable society by improving the efficiency of logistics in Japan as a whole through joint logistics that unites industries and business categories, while creating synergies not only with our Group but also with external partners from time to time.

As a result of these efforts, my goal is for the company to be positioned as a leading logistics IT company.


Interview conducted by Karune Walker & Sasha Lauture

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