This week, the Council of Supply Chain Management Professionals (CSCMP), with sponsors Penske Logistics and consulting firm Kearney, released the 33rd Annual State of Logistics Report to organization members and the industry as a whole.
This report provides a snapshot of the U.S. economy through the lens of the logistics and transportation sector in terms of costs and implications to the economy during 2021. It is important to note that this is primarily an industry generated report from that of government generated. This annual report consists of important economic and business statistical data and analysis, highlights from interviews with industry and business executives and industry stakeholders.
Since the inception of this blog in 2008, Supply Chain Matters has provided perspectives and takeaway thoughts from each annual report. Our perspectives stem from an outside-in end-to-end business process, management and cost adsorption lens vs. that reflected by logistics industry media. We do so because our readership is very much cross functional, cross-business and technology in perspectives
This Year’s Report Themes and Key Messages
The overall theme attached to the latest report was “Out of Sync” which we believe is rather appropriate in that during most of 2021, logistics and transportation modes incurred non-stop disruptions and were generally not synced to just-in-time material flows as well as business needs for predictable and manageable logistics costs.
The latest report is refreshingly more candid in depicting the challenges and ills of the logistics and transportation services sector and the need for new thinking and added emphasis on shipper and cargo holder value and service’s needs.
The overall important statistic of this particular report for general media consumption is overall business logistics costs as a percentage of U.S. GDP.
For 2021, U.S. business logistics costs reportedly rose by 22.4 percent to $1.85 trillion, representing 8 percent of the year 2021’s 23 trillion U.S. GDP level, and a level not seen since 2008. Last year’s annual report reflecting on 2020 business logistics costs indicated a level of 7.4 percent of U.S. GDP.
As noted in our summary of last year’s report, many business and supply chain management leaders will be taken back by percent of the GDP statistic. Many U.S. businesses, especially small and medium businesses, would likely attest to logistics and transportation costs nearly doubling, especially when added surcharges and fees related to network inefficiencies are added to the mix. The important qualifier is the calculation of the numerator which the authors qualify as being costs directly related to U.S. entities as opposed to foreign owned entities such as global shipping and logistics companies.
In the report’s Executive Summary, the authors indicate that as consumers adjusted to new norms of work and social life: “clogged ports and paltry capacity failed to meet surging and often desperate demand.” As inventory-to-sales ratios dropped to near record lows, inter-modal logistics networks were forced to try to manage and synchronize essentially just-in-time material movements which were out of sync in many important dimensions. Costs to store and finance generally lower inventory levels during the year reportedly rose by nearly 26 percent, while transportation costs rose by nearly 22 percent.
Readers who have interest are encouraged to review Figure 1 of the report which provides the overall breakdown of transportation, inventory and other costs that made up the calculated U.S. business logistics costs for 2021.
Similar to our commentary related to the 2020 annual report, we wanted to share highlights and perspectives related to particularly important segments which are critical to evolving business and industry supply chain needs not only in 2021 but in the years to come.
Parcel and Last Mile Fulfillment Logistics
Noted was that U.S. E-commerce shipping volumes grew by 10 percent to $871 billion, representing 13 percent of U.S. retail sales, but below a 14 percent growth rate reported for 2020.
Parcel and last mile segment costs were reported as $134.5 billion in 2021, an increase of 15.2 percent on a year-over-year basis. In 2020, this segment’s costs were reported as $118.6 billion, an increase of 24.3 percent over 2019.
The report again notes that this segment was a direct beneficiary of online sales growth, growing a reported 15.6 percent in 2021 and reflecting a compounding five-year annual growth rate (CAGR) of 11.4 percent, the highest of any the logistics cost components.
Astoundingly, the report indicates that Amazon accounted for 21 percent of U.S. parcel volumes, and as noted in our ongoing Supply Chain Matters commentaries added considerable capacity and headcount during 2021. Noted was that both UPS and FedEx raised parcel rates by nearly 6 percent in 2021, not to mention added fees and parcel surcharges. UPS itself has a declared “better not bigger” business strategy of focusing on shipping customers that can provide margin growth rather than adding additional capacity to accommodate certain less profitable large volume shippers or retailers.
This year’s report was far more candid in depicting the threats and challenges stemming from the ocean shipping segment. Acknowledgement was made that rates are at historically high levels, with trans-Pacific freight costs rising by 200 percent in 2021 and with trans-Atlantic costs rising by 100 percent. A candid historic perspective notes that as recently as 2018, seven of the top ten ocean carriers were in danger of bankruptcy, because of excessive market capacity. Now the scenario has flipped. Specifically stated:
“The result? A strange mix of a historic windfall (ocean carriers earned more profit in 2021 than in the previous 20 years combined) and widespread frustration, as shippers impatiently awaited delivery of the products and materials they needed to serve a simulated consumer economy where demand shifted from services to goods.”
The authors further provided a stark warning, namely that if ocean carriers elect to sit back and enjoy the ride, such a stance: “will prove detrimental, if not disastrous, over time.” The argument is one stated by this blog along with others, namely that the longer that higher global-wide ocean transportation cost increases exist at 2021 levels, the more compelling is the requirement for manufacturers and retailers to consider reshoring or nearshoring sourcing strategies.
In our many years of highlighting the content of this report, this year’s narrative related to ocean transport is the most direct and most candid. We applaud the report’s authors and reviewers for taking such a stance.
Rising Costs of Warehousing
As a result of businesses rethinking of both their lean operations as well as their multi-echelon inventory management and supply chain resilience strategies, the report indicates that needs for warehouse space boomed in 2021. Warehouse vacancy rates reportedly fell from 5.1 percent in 2020 to 3.7 percent in 2021. Consequently, warehouse leasing rates rose twice as fast during 2021, growing by 9.5 percent overall.
Additionally noted was that tight capacity and higher customer demands are leading to new approaches in maximizing the value of warehousing infrastructure. At the same time, the report indicates that warehouse configurations are trending smaller as online customer fulfillment centers are located closer to major product demand regions to accommodate higher expectations for same or two-day on-time delivery.
Further is a trend toward increased investment in warehouse automation more tailored to online customer fulfillment needs, especially robotics as a service (RaaS) deployment which is reported to be growing at a 16.5 percent CAGR rate.
Heightened Industry M&A Activity Levels ion 2021
The report indicates that 2021 was a record year for mergers and acquisitions as financial investors seek to reconfigure or consolidate the industry to address the visible challenges that have occurred as a result of the global pandemic.
Especially noted is technology-driven innovation with one example being Uber Freight’s acquisition of Transplace, the aim being an industry leading logistics technology platform.
The report authors rightfully warn that a quest for end-to-end solutions should not distract companies from focusing on enhancing operational excellence in standalone services.
The authors indicate that as businesses seek to respond more rapidly to both industry threats as well as for selecting logistics services partners that can support the reshaping of changing strategy and needs for an increased level of digital sophistication.
There is mention of supply chain control tower capabilities remaining promising means for improving overall supply chain performance, but the authors provide pointers to businesses as to how to assess the market and whether to partner with a tools-based or logistics services-based provider. There is a noted bias that momentum toward control towers is intensifying among third-party logistics and technology providers.
Supply Chain Matters Added Perspectives
In last year’s narrative related to the state of logistics in 2020, we indicated that the report’s context can sometimes be more internally focused in the context of the logistics industry and its stakeholders as contrasted to outward in focused on the needs of manufacturers, retailers and other industry supply chain needs.
This is an industry that can greatly benefit in new thinking, a renewed focus on customer needs and an infusion of modern technology directed at better synchronization of inter-modal processes and information flows.
From our lens, this year’s report is far different in tone. It includes more context and perspectives from the lens of needs of businesses and shippers. We applaud Kearney for the quality as well as the candidness of the perspectives in the report content and assessments.
We encourage our logistics and transportation focused readers as well as supply chain executives themselves to take the time to review the various sections of this latest 33rd Annual State of Logistics report.
Readers who would like to obtain the full copy can access the report via the CSCMP web site.
There is no cost for paid CSCMP membership, or the report can be purchased for $249 by non CSCMP members. There is also a complimentary download of the executive summary of the report.
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