This week, the Council of Supply Chain Management Professionals (CSCMP), with sponsors Penske Logistics and consulting firm Kearney, released the 32nd Annual State of Logistics Report to organization members and the industry as a whole.
Since the inception of this blog, Supply Chain Matters has provided both perspectives and takeaway thoughts from each annual report. Our perspectives stem from an outward-in end-to-end business, supply chain business process, management and cost adsorption lens vs. and industry media. We do so because our readership is very much cross functional, cross-business and IT in their perspectives.
The overall theme attached to this latest report that focuses on the year 2020 was: “Change of Plans”. The overarching themes to the report was response to the pandemic including the many challenges that logisticians had to overcome, and the far more acknowledged reinforcement that logistics and transportation serves as an essential capability in challenging times. In the addition to the pandemic were climate-related disasters that included raging wildfires across U.S. Western regions, hurricanes and floods devasting parts of the U.S. in 2020.
The overall important statistic of this year’s report was that U.S. business logistics costs fell 4 percent to represent 7.4 percent of U.S. GDP. That compared to a 7.9 percent number reported for 2019 activity. No doubt, many business and supply chain management leaders will be taken back by this statistic, given the ongoing explosion of overall logistics and transportation costs.
During the press event and CSCMP web event, Kearney Partner Michael Zimmerman explained that the lower number was a result of a far lower GDP base, lower overall inventories and transportation volumes along with significant drops in inventory and working capital costs. The report’s Executive Summary further opined that while logisticians cheer for a lower overall logistics to GDP ratio, the high logistics prices already being experienced this year makes the future direction of this ratio uncertain. From our lens, that is a stark understatement.
Report Sector By Sector Highlights
Readers who follow this report are aware that each year there is a sector-by-sector breakdown of logistical service areas. We wanted to call attention to two specific areas, each that should garner the most attention and concern from businesses.
Parcel and last mile segment costs were reported as increasing 24.3 percent in 2020 to $118.6 billion as E-commerce volumes continued to explode. This latest report reflects a five-year average annual growth rate of 12.2 percent. It further compares to an 8.5 percent growth rate reported in 2019. Costs in the closely related air freight segment reportedly increase 9 percent.
As we have pointed out in many prior Supply Chain Matters commentaries, major parcel carriers have consistently raised rates and package surcharges annually. In 2020, surcharges were extended to cover added COVID-19 health safety and volume explosion expenses. Our sense is that in 2021, parcel costs will increase even more, and the parcel industry has to reckon with the implications that brings to soaring online fulfillment costs and subsequently to customer bottom lines. In today’s online world, consumers expect and demand “free shipping”.
Water, which includes domestic, import and export, reportedly declined 28.6 percent, in part due to: “a one-time reclassification in the report’s methodology”. During the press conference and within the report, there is no explanation of this reclassification. As many supply chain practitioners are keenly aware, ocean container volumes soared in the second half of 2020. By the end of 2020, the Drewy World Container Index, a compilation of eight major routes to and from Asia, Europe and the U.S., reflected a value of $4,359 per 40-foot container, an increase of 137.9 percent. As of June 5th, that index number stood at $6464, a further increase of over 48 percent in close to six months. While rates clearly reflect the current conditions of major port congestion and demand and supply imbalances, the cost rise is unprecedented and shows little signs of abating for the remainder of this year.
Any indication that import ocean container costs have declined rings hollow given ongoing market realities. Again, from our lens, it is essential for the report authors to provide further clarity to the reclassifications made.
Trends and Outlook Section
The report includes Logistics Trends and Outlooks section that addresses areas of industry direction, technology adoption, M&A and sustainability areas. The authors indicated that like companies among many industries, the logistics industry is still figuring out how to operate going forward, given the way players have historically operated while becoming more efficient in the face of tight margins and urgent market conditions.
Noted are notions of an industry that is responding to the times of a “no normal”, a “permanent now” that forces players to do business at the moment. Stated succinctly: “The outlook for logistics, as for so much of the economy calls for strategic and organizational agility to adapt to the no normal.”
In the area of supply chain resiliency, the report cites the latest Kearney Reshoring Index reflecting that reshoring or nearshoring of supply network capability has not quite arrived. Noted is that the pandemic’s disruptions have resulted in a more complex decision which Kearney describes as “right sourcing”.
In the area of industry advanced technology adoption, the theme is that more than ever, global supply chains need connections among formerly siloed data and information. The aspects of Supply Chain Control Tower technology garners a lot of report explanation as to why such capability matters more than ever, and the recommendation is that more 3PL’s and logistics services providers can foster more synergies for customers with such capabilities. Other technology areas addressed include increased use of robotics, automation, Internet of Things enablement.
As our research advisory, 2021 Predictions for Industry and Global Supply Chains published at the start of this year noted, this week’s report indicates that in addition to 2020, a new, at-scale cycle of industry merger and acquisition, partnership and equity investment activity will continue and may determine the industry’s next winners and losers. Already in the first-half of this year, equity ivestments flowing into the logistics area are significant. Noted is that the motivation is clear, that it may determine the industry’s next winners and losers.
In the ever-important area of Sustainability, the report indicates that with the transportation sector now accounting for 29 percent of U.S. greenhouse gas emissions, the industry has become more active and demonstrative in the value and ongoing actions placed on sustainability efforts.
Supply Chain Matters Added Perspectives
As we have noted in our prior commentaries related to this report, perceptions come in many dimensions. They can either be internally focused and in the context of the industry and its stakeholders, or outward focused on the context of customer needs in utilizing services and in service expectations. We continue to sense that the logistics industry struggles with differentiating and prioritizing both dimensions.
We noted in last year’s commentary that the heightened value of the logistics industry were the heroic actions of the various workers who risked their health in order to keep essential goods flowing in the economy. We were disappointed in the lack of mention of such efforts in last year’s report in text and narration, but not so this year. There was clear mention of gratitude to the sacrifices made by employees and service partners. There was specific mention as well as concern regarding the lack of people to staff open operational, support and technological positions is now clearly hampering the industry’s productivity and effectiveness.
Last year our perspective was a global transportation and logistics network that struggled at the height of COVID-19, and at the same time, passed along added costs to various manufacturers and retailers. That condition has exacerbated with effects of the Suez Canal blockage in March and now the disruption of Yantian Port in China.
In last year’s Supply Chain Matters commentary we specifically noted:
Becoming a trusted partner implies shared investments in advanced technology for the benefit of all stakeholders. Increased volumes of shipments and goods driven by E-commerce are not a problem addressed solely by continual heighted shipping rates and special handling surcharges.
This week’s briefing included a more discernable tone that the industry recognizes it must become more focused to customer needs for enhanced visibility and to integrated inter-modal movements. As noted, the industry seeks to be more invested in advanced technology, yet the new industry disruptors are leveraging more sophisticated digital technologies to upend the industry’s traditional visibility, risk identification and decision-making processes. They are doing so by leveraging data and information generated by physical assets, while avoiding the costs of having to operate those assets.
When we published our 2021 predictions at the start of the year, our stated theme was 2021 being a Year of Renewal, requiring New Thinking, New Definitions and New Directions among various supply chain management strategies, business processes and resource allocations.
We submit that the Logistics and Transportation Services industry by its actual state of logistics, would benefit by the same above listed prescriptions. While network efficiencies and added margins and profitability may well be an underlying need, more responsive and enhanced services for highly evolving customer needs is a different need. The notion of “no normal” if you believe is the case, has both inward and outward focused thinking and expectations.
We submit that the general industry practice of passing the burden of added capacity, advanced technology or sustainability costs directly on to shipping customers is not new thinking. That is what the new industry disruptors have already figured out.
As a final note, readers who would like to obtain the full copy of the latest report can purchase it on the CSCMP web site for a cost of $249.
CSCMP members via paid membership can download the report on a complimentary basis.
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