The Supply Chain Matters blog continues a series of blogs that provide added detail and perspective for each of our ten 2020 Predictions for Industry and Global Supply Chains which we unveiled on December 17.
In our Part One posting in this predictions series, we explored for our readers 2020 Prediction One, what industry and global supply chain teams should anticipate in terms of global and regional economic outlooks.
In Part Two of this predictions series, we explored the detail of 2020 Prediction Two, what we expect to occur in global supply management challenges and trends.
In Part Three of this series we detailed what to expect in the area of supply chain talent management, retention and skills development.
Part Four in this prediction series highlighted what to expect in the area of supply chain management related cybersecurity and information security threats in the coming year.
Part Five of this series highlighted what we predict will occur regarding supply chain digital transformation efforts in the coming year.
Our Part Six posting highlighted what we anticipate business teams will likely and should prioritize in the leveraging of supply chain management focused advanced technologies, and what technology and services providers should concentrate on in meeting customer needs in the coming year.
In this blog, we address our predictions for global transportation contracting and services, logistics services and industry processes in the coming year.
Background and Introduction
On an annual basis, and since our inception in 2008, The Ferrari Consulting and Research Group and our associated Supply Chain Matters blog publishes a series of supply chain management focused annual predictions which are both described, monitored and scored for actual occurrence at the conclusion of the year.
Such predictions are provided to clients, technology providers and blog readers in the spirit of advising senior and line-of-business executives, multi-industry cross-functional supply chain management and supporting information technology teams a sensing of what to expect in the coming year, Our goal is to depict how likely global, regional, economic, business and industry trends will impact and likely influence required supply chain management actions in the coming year.
The context of these predictions include a broad cross-functional umbrella of what is today considered supply chain management, and includes areas of leadership and strategy, product management, strategic sourcing and procurement, supply chain planning and customer fulfillment, manufacturing, logistics, transportation and customer service management.
Now to our specific prediction:
2020 Prediction Seven: The Technology-Enabled Disruption of Global Transportation, Contracting and Services Processes will Reach Broader Dimensions of Technology-Enabled Disruption in 2020.
Backdrop- Logistics Managers’ Index
The Logistics Managers’ Index (LMI), a monthly survey of logistics managers and professionals which reflects broad-based U.S. activity, registered a value of 54 in December 2019, 9.5 percentage points below that of the year-earlier period. The average for all of 2019 was 57.1. Similar to the PMI indices, any value above 50 equates to expansion.
What occurred in the LMI index in 2019 was a shifting of sub-indexes, specifically declines transportation pricing and inventory levels that drove the index lower in the second half of the year.
The report authors pointed to declining inventories and high uncertainty as to economic growth in the coming year as dragging down the index. Noted was that while growth continued, the December number was at the slowest rate in the history of this index. Further stated by the index authors:
“It seems to indicate that the U.S. is currently in an uncertain economic time. While it is possible that the we are through the “soft patch” we hit last year. Many CFO’s are still concerned about a recession due to the ongoing trade wars and weakness in other parts of the world.”
From the industry lens, such data points to a slow and uncertain start to 2020 for logistics and transportation activity. It further reinforces our own prediction related to global economic outlooks and the high uncertainty levels that will challenge multi-industry supply chain management teams.
2019 Developments Lead to Added Industry Disruption
In our 2019 annual prediction in this specific area, we declared that significantly increased annualized logistics and transportation costs that occurred in 2018 across global regions were unsustainable for individual shippers and consignees, with the industry model ripe for disruption and new thinking enabled by more modern and advanced technology applied to specific network challenges. In the B2C online buying sector, the aggressive presence of platform providers Amazon, Alibaba and some extent Walmart, and their quest for global-wide online retail platform dominance, added to the disruptive forces.
Essentially, our prediction amounted to the ongoing implications of a permanent shift by consumers toward a preference toward online buying, and all that this required a far different logistics, shipment and last-mile transportation processes. Primary efforts are focused on connecting the physical and digital processes of logistics and transportation. This has resulted in a convergence of forces between industry legacy thinking and digital based innovators.
By some accounts. In excess of $1 billion in U.S. venture capital funding was targeted toward logistics and transportation focused automation. Those start-ups have been aggressively attempting to change the paradigm of traditional transportation contracting, freight data and tracking processes. Such investments extended beyond the U.S. to include major online economies of China and India.
Two additional forces compounded the B2B supply chain sector in 2019.
The first was reductions in overall larger scale transportation movements, precipitated by a global-wide contraction in manufacturing and supply chain activity levels. The result was a significant moderation in surface transportation rates, especially the trucking sector. The second was the increased implications of an ongoing trade war among the U.S. and China that prompted retailers and manufacturers to quickly alter sourcing, logistics and transport patterns. From our lens, structural global-wide sourcing changes began to occur in 2019, and we predict that trend will most likely continue into 2020. China has become the obvious unknown, in terms of market access, or outright competitor in strategic supply chain components.
Meanwhile, well-funded, aggressive digital-anchored asset-light logistics and transportation start-ups were able to exploit the need for quicker, more informed and efficient means in securing surface transportation assets in the spot market, which were often lower cost than many established contracts. The result of excess transportation assets capacity meeting technology-enabled load bidding processes. This was the opposite of 2018 when trucking rates skyrocketed due to explosive demand.
In the parcel logistics and transportation sector, the area most impacted by the exploding growth of online retail. Major parcel carriers FedEx, UPS and national postal services providers woke-up to the realization that Amazon and Alibaba were indeed competitive threats and industry disruptors in terms of influencing online shipment customer expectations and shipping rates. A far shorter holiday fulfillment period spanning the Thanksgiving and Christmas holiday period indeed tested the responsiveness and on-time reliability of specific carriers.
Year 2020 Prediction Summary
In the year 2020, global logistics, transportation and third-party logistics entities will continue to confront the converging forces of industry business model disruption. Ongoing advanced technology and online enabled business and process disruption will add to either more visible signs of industry consolidation or industry innovation.
A late 2019 assessment from Morgan Stanley declared that based on a current growth trajectory, Amazon Logistics will surpass an annual volume rate of 6.5 billion packages in three years. That volume surpasses the current rate of established carriers FedEx and UPS. The industry has finally acknowledged that Amazon exists as significant disruptor. The dimensions span influencing of online hosted supplier transportation vendor choices, aggressive contracting of supplemental transportation services that ultimately influences spot market rates, and the online provider’s continued aggressive investment in global-wide logistics and transport capabilities that increasingly will rival established services providers. We predict that in the coming year, the industry will move beyond acknowledgement of Amazon’s threat, and more towards more succinct strategies on how to best compete. That well could include headlines reflecting added acquisitions of innovative logistics and freight brokerage start-ups on the part of established carriers.
At the same time, ongoing contraction in global-wide supply chain and production activity levels will lead to yet another excess capacity challenge among transportation assets across the industry.
In the coming year, traditional third-party logistics and brokerage industry players must not only deal with the overall changing operational dynamics of the global landscape but meet the challenges of up and coming and well-funded technology driven start-ups.
We would not be surprised it one or two significant acquisitions occur in this area as well. What industry supply chain management teams need to watch for in such acquisitions is whether either carrier or shipper market dynamics are altered by such acquisitions. In other words, will the balance of influence or market dynamics be swayed in either direction by the technology.
An Added Unknown
Just as we begin to share the details of this specific prediction on Supply Chain Matters, a new and somewhat concerning unknown has emerged. The early January headlines of heightened tensions among the United States and Iran concerning the assassination of Iran’s top-ranking military general has caused tensions among these two nations to rise significantly and for global oil prices to consequently spike. Whereas, the price of Brent crude oil closed at $61 per barrel on December 31, 2019, after Iran launched ballistic missiles striking two U.S. military bases located in Iraq, the Brent price immediately spiked upwards of 5 percent.
As to whether ongoing tensions continue among the two nations, and as to whether there is a spillover involving broader Middle East hostilities is a big unknown. Obviously, such uncertainty is likely to be prevalent among global logistics and transportation industry interests as well as multi-industry supply chains in terms of added cost and services implications.
Ocean Container Transport
In the coming year, ocean container industry players must once again manage the realities of declining global trade and consequent cargo movements. A belief that trade tensions will subside would be ill advised. The industry will further be impacted in 2020 with the initial implementation of new global emissions and fuel burning regulations, termed IMO 2020. This new regulation calls for marine transportation to burn fuel with a sulfur content that does not exceed 0.5 percentage, compared to the former use of bunker fuel that had a limit of 3.5 percent. Ships can either burn ultra-low sulfur diesel (ULSD) or utilize termed scrubber technology to limit sulfur emissions. Industry experts indicate that vessels that have been outfitted with new scrubber technology with have a significant economic advantage over ships that elect to burn ULSD because of the large spread of pricing of crude vs. refined diesel.
Since carriers have already made their technology choices, the dynamics of the market will play out. In either case, container shipping rates were already spiking at the start of 2020, because of the added cost impacts of IMO 2020. All of these dynamics imply added ocean transport costs for shippers, the question is how much?
Industry leader Maersk Line must not only manage global excess ship capacity but make good on the carrier’ business objectives to horizontally integrate services that include more land-based logistics and last-mile delivery. Maersk declared to investors that half of the carrier’s earnings will stem from inland logistics in coming 2-3 years. That strategy likely implies increased technology investment including added acquisition activity in the coming year.
As we prepared these predictions for 2020, it was clear that the U.S. trucking industry would face added business challenges in the coming year after what industry media has described as the bloodbath of 2019. with reduced market demand meeting excess capacity. Such challenges will continue to play out in carrier financial results in the first half of 2020.
A compounding factor was the influence of online retailers such as Amazon and Walmart in market capacity demand and in driving down trucking rates by aggressive contracting. Reported were hundreds of smaller trucking firms having to suspend operations with corresponding lost truck driver jobs. There were two noteworthy bankruptcies that caught the attention of industry observes, New England Motor Freight and Celadon Group. The former believed to be caused by a decision from Amazon to move trucking needs in-house and the latter being financially self-inflicted. We predict that in 2020, there may well be other similar headlines.
We also predict additional technology-focused acquisition activity to occur in the trucking sector during 2020 as-well.
In our detailed research report, we will touch upon predictions related to other global and regional transportation segments along with the implications of new technology-driven forces in those segments.
We once again encourage clients and readers to take the time to review what to anticipate in the coming year and how your organization can be best prepared.
As we continue our highlighting of each of our predictions in added detail, please continue to provide your individual feedback along with what specific area that most concerns you in the coming year.
© Copyright 2020, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.