Since our inception as both a supply chain management industry analyst research firm and a Supply Chain Matters global-wide blog presence, we have produced and made available our annual predictions for industry and global supply chains.
The purpose of these predictions is to advise our clients and global-wide supply chain management teams as to what to anticipate in the coming year as well as areas to focus on in strategy and tactical direction, business process improvements and technology investments. These predictions and their implications become the basis of our continued research and consulting agenda in the coming year. Feedback we have received indicates that this report often serves as a reference for many of our clients and readers.
This year’s predictions feature a new format in what we are designating the year 2021 as a Year of Renewal. Our individual predictions are formatted in the context of New Thinking, New Definitions and New Directions for each area.
Over the coming days, we will be highlighting select portions of our ten specific 2021 predictions for blog readers.
Prior published bogs detailing our individual 2021 predictions have included:
In this Supply Chain Matters posting we share our prediction related to escalating global-wide transportation and logistics costs.
2021 Prediction Nine: Significantly Increasing Global-Wide Transportation Costs and Eroded Service levels Will Foster New Thinking in Supply Network Sourcing, Customer Fulfillment Strategies and Last-Mile Delivery.
If there was one significant pain point for multi-industry supply chains during 2020 it was global transportation, both from overall service level erosion and disruptions and associated skyrocketing cost increases. These challenges transcended global ocean container, regional and domestic trucking, and parcel delivery networks. Industry participants, watchers and shippers can likely agree on the word “horrendous” in describing what occurred in these areas in 2020.
Substantially increasing cost factors are of considerable concern to businesses large and small and are reflected in multiple interviews and survey data among supply chain management and business leaders.
One significant milestone was the World Container Index, a compilation of spot rates among eight major global shipping routes, produced by global shipping advisory firm Drewry Consultants. The index posted a value of $4359 at the close of 2020, a near 138 percent increase from its year-ago level. Drewry’ s commentary was one of” …exporters and importers using ocean transportation fighting a seemingly constant battle to secure freight capacity they needed, only to get burnt when they did on the cost side.”
Parallel with the explosion of shipping rates was a persistent global-wide imbalance of shipping containers, forcing added delays in securing timely vessel bookings for shipments originating in Asia. Whether ocean, ground, air or intermodal, carriers and logistics services providers found mechanisms to meter capacity and service levels to the benefit of their balance sheets, but to the detriment of shippers and exporters. Such market dynamics lead to consequent decisions as to whether added costs can be passed along to end-customers, or whether such cost increases are unsustainable.
Experienced transportation and logistics managers have indicated such rate increases and service erosions were unprecedented. Similarly, increased rates, added surcharges and outright capacity metering during high peak shipping periods took a financial and business impact toll on online retailers and businesses. The exploding transportation and eroding service levels especially impacted online B2C and B2B fulfillment during the second half of 2020, not to mention carrier announcements to increase rates even further for 2021.
Our prediction for the coming year is that such trends cannot be sustained without new thinking on the part of global logistics, financial management, product sourcing and procurement teams. Such trending may well accelerate moves toward more regional or nearshored product sourcing strategies.
For the shipping industry, our prediction is that the transportation industry will experience more pronounced pushback from global governments and regulators as such cost increases are increasingly perceived as hindering economic and business recovery. In early January 2021, the European Freight Forwarders Association and the European Shippers Council were requesting European Union competition officials to investigate supply chain disruptions believed to have been caused by ocean container carriers.
Some online retail platform providers, such as Amazon or others, may find themselves at an industry advantage because of their abilities to leverage transport volumes for more attractive and predictable contracted rates.
New Thinking: Global or domestic transportation capacity and cost management are now a far more important factor in the ability of being able to more accurately predict overall volumes per mode of transportation and proactively manage or reduce unsustainable transportation and logistics cost increases. Such needs are usually achieved by establishing annual contracts with carriers or logistics services providers at calculated threshold volumes and hedging contracted rates by taking advantage of market spot rates when advantageous for cost savings or added service needs. In some cases, manufacturers or retailers would tend to turn over transportation contracting and cost management to logistics service providers, or an online retail platform provider, under the belief that their economies of scale can better leverage overall costs spanning contract and spot market.
In the coming and future years, far more attention will be required toward more dynamically managing both contracted and spot market transportation needs, and that will require added considerations among business CFO’s and supply chain management leaders as to rethinking transportation contracting and of more centralizing overall management. This is, of course, industry dependent and industry-specific, but with more business volumes expected to move toward Omni-channel customer fulfillment, long and shorter-term management of transportation costs and service levels takes on far more business significance.
Our more profound area of new thinking is coming to grips with a painful reality that for certain deemed “low value” goods, the overall costs of global sourcing and transportation may well exceed the value of the goods included in a shipping container. That will require some tough discussions as to business strategy alternatives.
One of the more expensive and cost-ridden areas of online Omni-channel based customer fulfillment is the area of last-mile of fulfillment. Many logistics and services providers who have attempted to address this area have since withdrawn, and the industry seems to be of the belief of turning this over to last-mile fulfillment start-ups or traditional postal carriers because of prohibitive costs. That obviously does not bode well for various retailers and services providers who feel the added cost burden. We sense that a new direction in the coming year will be coming to grips with the reality that Free Shipping is indeed a marketing driven concept, and that solutions to last-mile fulfillment will be more driven by a gig economy focused model of independent local contractors. The challenge will be consensus and alignment as to acceptable cost and fees in specific retail markets.
New Definitions: Our belief is that in the coming year, logistics and transportation management will transcend from a services-based procurement, cost center management focus, to that of a broader functional organizational dimension that will peg specific margin and service performance goal setting and more dynamic transportation management capabilities under a broader organizational definition. This may well be the initial basis for centralizing of transportation under an umbrella for dynamically linking supply network planning and response with services procurement. As carriers continue to leverage more sophisticated methods to withhold or meter capacity, shippers will continue to burden increased costs and reduced service levels. While relatively large global enterprises can deploy volume and influence in contract and rate enforcement, small and medium businesses will be increasingly disadvantaged.
We believe such trending will accelerate re-definitions of logistics-services providers in the specific services and contract goals that are defined.
New Directions: We anticipate that this will be a significant new opportunity for enablement for supply chain management technology in that it requires bringing together the most-timely information related to overall global supply network footprints, planned material flows in monthly buckets and online transportation brokerage and contracting. New thinking in this area will be supply network strategists and integrated business planning teams having a more concentrated focus on more dynamic contracting of transportation pegged to cost and margin goals.
The direction of actual carriers moving into broader, more technology enabled one-stop logistics and inter-modal services providers will encounter significant tests as to whether businesses and/or global regulators will accept or tolerate such directions when the transportation industry secures more revenues and profit at the expense of importers and exporters.
Obtaining a Copy
Our Ferrari Consulting and Research Group Advisory Report– 2021 Predictions for Industry and Global Supply Chains is now available for complimentary downloading with our Research Center. Readers can obtain a complete copy by providing some basic registration information.
In our next posting in our 2021 Predictions series, we will highlight Prediction Three- The Need for Augmented Resiliency in Global Supply Network Strategies.
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