In a prior Supply Chain Matters published commentary, we shared highlights of Prediction Nine of our published 2021 Predictions for Industry and Global Supply Chains. (Available for complimentary downloading in our Research Center) Our prediction is that significantly increasing global-wide transportation costs and eroding service levels will foster new thinking in supply network sourcing, customer fulfillment strategies and last-mile delivery.

We further reinforced our commentary with an additional blog indicating examples of transportation and logistics services provider are garnering double-digit profits and the expense of exporters and shippers

Global Transportation costs

Essentially our prediction in this area is that such trends cannot be sustained without new thinking or potentially revised business actions on the part of product management, financial or line-of-business teams.

Beyond potential pushback from governments and possibly regulators, the actions of actual businesses will an area to focus on. Further, we called for new definitions in the managing and monitoring of transportation and logistics costs. This will transcend the notions of an indirect cost or cost center expense, but rather toward managing or mitigating impact to product and business margins. In other words, transportation cost management is likely going to be far more focused on CFO management dimensions.

We have found additional evidence of such actions.

Bloomberg publishes a daily Supply Lines Column (Paid subscription required) that focuses on global supply network developments. Yesterday’s column opened with the following:

When it comes to managing global supply chains, big consumers of shipping services are going to pay a heft price for navigating without better instruments this year.”

The column notes that this was one of the messages that Under Armour CEO Patrik Frisk indicated to his logistics team, namely in weathering an “incredibly disruptive year” in 2020. Frisk told Bloomberg that planning will be the key to keep freight costs in check: To quote the report: “Anything you try to do on the fly, so to speak, is going to cost you dearly as it relates to transportation.”

Whirlpool has resorted to air cargo options to get needed components to sustain production. The company’s CFO is quoted as indicating that while not preferred, it is expensive, but not unusual.

Different viewpoints came as this report goes on to cite actions by Callaway, whose container shipping costs are projected to be $13 million higher. The company’s CEO indicated to Bloomberg that he views this not as long-term issue, that the company is expecting a strong year in golf equipment.

The COO of footwear maker Sketchers USA noted the occurrence of port disruption challenges but was optimistic that they would clear up soon and that market recovery would come as early as the second quarter of this year. The column’s authors related that optimism to statements from the CEO of the globe’s largest ocean container carrier, Maersk, indicating he anticipates normalization of container rates in the second half of this year.

We are highlighting such statements because they likely reflect the dimensions of response and opinion that may be prevalent across various industries right now.

We, however, caution teams to be watchful of status-quo transportation industry thinking.

Indeed, there have previously been ebbs and tides in transport rates during a given year. However, there is now a significant difference.  The leveraged use of advanced technology being adopted by carriers that is matched to capacity adjustments in certain major or minor transport lanes.

Think of the large number of blank sailings (cancelled ship voyages) that occurred last year. They set an industry record. Think of the continued shipping line alliances that pool overall capacity dedicated to shipping lanes, or to efforts underway to broaden services to inland logistics and actual customer land delivery.

Carrier’s are learning to sense shipping demand ahead of time, and to peg which lanes will have the most volume. If they could in turn, figure out a way to manage available container global demand and supply imbalances, the planning would be even more sophisticated.

From our lens, not only should manufacturer’s and retailers be thinking about more concerted efforts in the planning and execution of transportation costs, they should also be re-thinking the various options related to logistics movements.

There is far too much uncertainty right now. Whether it relates to when the current pandemic will subside with higher vaccination rates, whether various global economies do bounce back, or whether ongoing geo-political trade tensions cause added regional disruptions.

Such efforts are not easily accomplishment by spreadsheets.  They require technology related to detailed knowledge of end-to-end supply networks, volume movements, timeliness, actual and likely future costs of transportation and logistics. They are a basis for simulation and what-if decision making tools on both sides of the supply and demand dynamics of transportation.

 

Bob Ferrari

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