In our previous Supply Chain Matters posting we provided detail related to one of our 2021 Predictions, namely that escalating global-wide transportation and logistics costs will require businesses and their supply chain management teams to rethink transportation planning and management, as well as product sourcing strategies.
In this posting we wanted to provide readers some examples and added evidence of the effects of these developments.
Earlier this week, global parcel transportation provider United Parcel Service (UPS) reported fourth quarter financial performance that included record revenues of $24.9 billion and a corresponding 26 percent increase in in operating profit. Package volumes nearly doubled in servicing smaller customers compared with a 4 percent volume increase among larger customers during the recent holiday fulfillment quarter. Revenue per shipment in the quarter reportedly increased 7.8 percent, the highest increase in over ten years. The Wall Street Journal, reporting on the UPS financial results, commented that newly installed CEO Carol Tome’s strategy for the carrier of “better, not bigger,” which seeks to maximize returns and profits instead of chasing added business or capacity was bearing results.
Rival FedEx, in its recent November 2020 ended quarter, reported a doubling of operating profits to $1.23 billion compared to $560 million in the year earlier period, when the carrier had a services agreement with Amazon. Noted was a 29 percent increase in shipping volumes for its Ground business unit. The carrier indicated that it would extend some peak season surcharges scheduled to expire in mid-January, until further notice because of expectation of elevated demand and costs increases. Bloomberg reported in early December that FedEx: “…intentionally slowed some of its shipping lanes by a day beginning in November, temporarily ceding the speed (of delivery) crown as the coronavirus pandemic spurs record demand, according to ShipMatrix.” That strategy of metering capacity paid off in operating profit.
Both UPS and FedEx metered daily shipping capacity among various retail shippers during the highest peak volume periods in the holiday quarter. Even though such actions were communicated to customers before the holiday surge, the actions forced shippers to have to seek alternate routing which often included the U.S. Postal Service, which ended up having its parcel networks completely overwhelmed in late December, missing holiday delivery commitment targets. Customer service ratings and brand loyalty also paid a price.
A glance at financial headlines among noteworthy carriers provides further evidence of double-digit profit increases:
Truckload carrier Knight-Swift Transportation more than doubled fourth quarter profitability to $142.3 million.
Truckload carrier Schneider National’s fourth quarter profits increased 38 percent to $76.9 million on a 9 percent gain in operating revenues.
Freight broker Echo Global Logistics net profit jumped $11 million on nearly a 42 percent increase I fourth quarter revenues.
As to impacts and implications to various industries:
The Financial Times published a report this week indicating that the soaring costs of shipping cargo from Asia has led to a shortage of consumer goods across Europe.
The Wall Street Journal published a report indicating that COVID-19 safety measures and exploding transportation costs are crimping various manufacturers in their abilities to support increased demand for products. In the report, Mike Roman, the CEO of diversified manufacturer 3M Company is quoted: “You are seeing logistic costs going up, trucking costs going up, airfreight going up.” For the CEO to be acutely aware of such trends is a sure sign of business bottom line impact or concern.
In a prior Supply Chain Matters commentary reflecting on exercise equipment and service provider Peloton’s Customer Delivery Frustrations and Business Impacts, we contrasted how the company’s supply network sourcing, end-to-end supply chain visibility and last mile delivery challenges conflicted with overall business model tenets, resulting in growing customer frustrations. This week, the company announced that it will delay the launch of a much-anticipated new treadmill machine in order to address supply network bottlenecks and continual late delivery times. Further announced is that new exercise equipment will be temporarily shipped by air to the U.S. to avoid existing ocean container delays and eroded service levels. The company will reportedly also cut back on product marketing efforts and double the size of its customer service organization to address ongoing customer frustrations. Meanwhile, the company reported more than a doubling of sales volume and net income of over $63 million in its latest quarter, after reporting an operating loss in the year-ago quarter. Thus, while Peloton equipment is obviously high value, the erosion of global transportation reliability because of ocean container availability or highly congested U.S. ports has a direct impact to customer frustrations.
The question remains as to when in the coming weeks or months, will skyrocketing transportation costs abate.
While shipping industry players reap the benefits of added profits, shippers and exporters, especially those without volume clout, are being forced to deal with the financial and operational consequences. Such dynamics can often lead to industry structural changes, on either side of the equation.
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