The Great Reassessment: The Supply Chain Edition

The logistics landscape is changing. Like the employment market in the pandemic, the need to unexpectedly adjust creates the opportunity to re-think. Sometimes the change is tactical – a reversible reaction – and things return to normal. Other times it leads to be a more structural change.

Anticipating the forward shape of the supply chain means thinking about what’s driving participants’ decisions now, how those decisions roll-up and to what extent those moves are structural versus tactical.

1. Big picture – contract rates will start the trend to normalise in 2024

Contract rates will start the trend to normalise in 2024. Forward indications (eg, current production and exporting disruptions in China, second-half 2022 US retailer import projections) suggest that the second half of 2023 will not look much different than 2022, meaning annual rate negotiations at the start of 2023 will not look much better than 2022.

Signals of relief are starting to show. A report from Danish Ship Finance shows an anticipated 12% vessel capacity growth between 2023 and 2024, driven mostly by 12,000 teu+ vessels – double that of demand growth. More structural landside changes in the US will begin to come online during 2023, factoring into the 2024 contract negotiations.

Additionally, efforts to quash inflation in the US and globally may have the unintended consequence of slowing demand. Note that spot rates will continue to swing – likely more dramatically than before, given the generally increased attention on supply chain-related matters.

Large-transaction retailers, such as Walmart, which have both the wallets and volume, will get the return on investment by taking steps to secure capacity. This results in both short-term (eg, chartering vessels) and long-term impacts (eg, substantively increasing driver pay).

Vessel operators and logistics service providers are using current profit levels and capitalisation to invest internally or to acquire other companies. Focusing specifically on anticipated outcomes of IT investment:

• expect “legacy” players to catch up technically with digital forwarders and reduce the valuation premium on digital-only players;
• current, more sober, investment market conditions may slow the rate of LogTech entrants, but, as valuations drop and the extra profits start to subside in 2024, expect consolidation in the LogTech space.

2. Supply chains continue to disperse – both in sourcing and routes

Hallmarks of the early 2000s were consistency and the growth of China-US trade through the US west coast. In the pursuit of lower-cost labour, sourcing for some elements drifted south and east from China, but it was otherwise consistent. Fast-forward, through tariffs instituted in 2017-2018, Covid-led disruptions of the last two-plus years and geopolitical tensions, and there’s an explosion of change under way – both on sourcing and routes.

We refer to this phenomenon as ‘supply chain dispersion’ and view it through two inter-related lenses, sourcing and routes. Dispersion in sourcing will not lead to a single solution. Strategically attractive, capital-intensive manufacturing (eg, chip making) will more likely be on-shored. Others may be near-shored or simply shifted to a different, low-cost geography.

Additionally, some companies may be reluctant to follow the geopolitical winds for fear of angering one side or another and potentially losing access to key markets. The speed of sourcing dispersion will also not be quick. Even with stable, supportive government policies and highly abundant human and financial resources, China took decades to build to where it is today. Sourcing supply chains involve an underlying ecosystem of labour, materials and assets and those elements are part of that build-out process.

In contrast, dispersion on routes within the US started in earnest last year as shippers sought to evade bottlenecks – pushing product to the US east coast to avoid the line of vessels waiting outside LA and Long Beach, or transloading and trucking to avoid the congested railways.

Dispersion is fundamentally a structural phenomenon. Sourcing dispersion will be a slow and more deliberate process to take root and requires more surrounding investment.

Routing dispersion will take a different path; there will be immediate reactions driven by events or anticipated events (eg, 2021’s shift of product to the US east coast to avoid a long line of vessels at LA/Long Beach or pending labour negotiations). However ,there will be a tendency to make the routes more consistent as things get more reliable over time to drive efficiencies.

3. Dispersion in routes and limited physical capacity at the ports mean ‘early mile’ or feeding will take centre stage in the inbound supply chains

In the US, it is apparent that resolving the current supply chain bottlenecks means having to better leverage inland points. Terminal space for key ports such as LA/Long Beach and New York/New Jersey is finite. Landside operations outside LA/Long Beach and NY/NJ have extended to locations with exorbitantly high drayage expenses (and relatively high rents and labour costs). Labour and general infrastructure outside Savannah and Charleston will not be able to take up the slack in the mid-term.

The race has just started to take shape – talk of inland hubs, partnerships of rail operators and 3PLs/4PLs aggregating volumes across BCOs, but it’s early days. This will be a structural change, resulting in a few regional hubs driven by proximity to current routes, local workforce and general access to regional geography.

In Europe, meanwhile, congestion at the ports is increasing driven by mega-ship calls, driving increased demand, slowing productivity of feeder operations, meaning additional capacity needs to be brought in, as seen in IHS Markit’s Port Performance, the number of containers moved on and off a vessel at major north European ports was up 13% 2021 compared with the prior year.

4. Persistent shortage of labour, coupled with labour inflation pressures, pushes exponential growth of robotics/automation in tailored processes and using hybrid solutions

The recent general consensus – even prior to the pandemic – has been that there’s an overall shortage of labour. Upward pressure on wages remains significant, whereas innovation and competition will drive the costs down for automated solutions.

High-profile automation efforts, such as self-driving vehicles and warehouse picking robots, continue to push boundaries but are currently falling short in real-world adoption.

Warehouse operations have stuck to a hybrid approach, carving out and re-designing processes to better fit automation and allow workers to do the things they do best. Robots handle things like conveyance – moving the product to the workers, with workers providing much of the hands-on work.

Implementing back-office automation requires a similar approach to (a) establish a more realistic understanding of what machine learning can do with a high level of confidence; and (b) re-develop workflow applications and processes to reorganise the tasks so that ML/algorithms and humans can each work on areas of relative advantage in an integrated fashion.

Again, this is structural change and could accelerate in areas, depending on the technical development. But expect changes in enterprise workflows to allow for this hybrid ML/human work structure, eg, an up-front workflow that better structures the process between ML and human linked to the current enterprise database.

5. Developments in IT result in changes in industry structure

Standards reduce the costs associated with obtaining and aggregating information and re-shape industry structures. It is likely the FMC Data Initiative will propose an information system to store and make core data available – like vessel schedules, import container status and earliest receiving dates for exports

Tactically, that would result in participants like vessel, terminal and rail operators to implement data feeds to comply with the recommendations. Structurally, however, major track and trace players, such as project44 and FourKites, will see their business models – and valuations – under threat.

On a longer scale, expect blockchain-driven efforts like TradeLens to evolve into trusted third-party roles, where the decentralised ledger is a feature providing a level of comfort and disclosure among the participants versus the defining characteristic.

6. Return of a (changed) retail space. Non-e-commerce retail experience will reinvigorate, creating an opportunity to provide services to smaller entities

Consumer buying behaviour was changing before Covid-19, moving away from bricks and mortar purchases. The United States is staring at a large amount of retail physical space – 40% more than Canada and ten times more than Germany on a per capita basis – which could be a real-estate bubble ready to burst.

The metaphor in 2020 and 2021 was that the pandemic simply acted as an accelerant for the demise of department stores and malls – major retailers closed about 12,000 stores in 2020 and more than 60 major retailers filed for bankruptcy that year.

Consumer behaviours, though, have started to rebound. Data published by the Wall Street Journal in early May outlined how concert tickets, gym memberships and air travel were surging back. It’s also worth noting that, while e-commerce captures the headlines, it gradually declined over 2021 as a percentage of US retail sales to 12.9% of US retail sales in Q4 21 – about 5% down from a year earlier – with about 50% based on computers, computer accessories, apparel and home furnishings.

The Covid-accelerant reduced rents for new entrants. Expect smaller footprints, more transitory participants (eg, pop-ups to introduce products), centred on brand experience and supported by an omnichannel serving supply chain.

Let’s assume that when people ask “when do we get back to normal?”, they take it to mean two things: when will costs trend down to something normal; and when do things get back to predictable and consistent?

Expect the second half of 2022 to be a struggle. Expect positive signals in 2023. Expect solid progress in 2024.

However – and this is the point of the drivers and trends – be proactive and vigilant to shape and take advantage of the changes under way.

Kai Timmermann, COO at Prompt, a logistics software company, has served as COO and CIO roles at a number of companies, including Toll Global Forwarding, O’Neill Logistics and Performance Team, after starting his career at P&O Nedlloyd.