The annual “State of Logistics Report” shows that a chaotic and unpredictable 2020 led to logistics costs dropping by 4%. This trend of constant change has supply chain professionals wondering what’s next on the horizon.
Susan Lacefield has been working for supply chain publications since 1999. Before joining DC VELOCITY, she was an associate editor for Supply Chain Management Review and wrote for Logistics Management magazine. She holds a master's degree in English.
The past few years have been turbulent ones for the logistics industry, leaving many supply chain professionals asking themselves, “Whatever happened to predictability?”
In particular, 2020 was a chaotic year of sudden stops, stuttering starts, dips, drips, and explosive rises—all while trying to reroute assets on the fly. As a result of this unpredictable, pandemic-driven year, U.S. business logistics costs fell 4.0% to $1.56 trillion, or 7.4% of 2020’s $20.94 trillion U.S. gross domestic product (GDP), according to the Council of Supply Chain Management Professionals’ (CSCMP’s) 32nd Annual “State of Logistics Report.” (See Figure 1.)
[Figure 1] U.S. business logistics costs as a percent of nominal GDP Enlarge this image
The main driver of that drop was the decrease in inventory carrying costs, which plunged 15%, due to the sudden decline in manufacturing and commerce early in the year caused by pandemic shutdowns.
This meant transportation volumes also fell. However, costs for many transportation and warehousing services rose, as networks dealt with capacity shortages, port congestion, and major shifts in consumer demand as well as assets that could not be deployed or redeployed efficiently. According to the report, 2020 exposed logistics systems that were optimized for cost and efficiency but were fragile and lacking resiliency in the face of disruptions.
“The 2020 upheaval of supply chains created chaos that placed gigantic demand on logistics, resulting in higher prices for logistics services despite a shrinking economy,” said Michael Zimmerman, one of the authors of the report and a partner with the consulting company Kearney at a press conference. “At the same time, due to halted economic activities during lockdowns and decreases in financial costs, logistics costs account for a lower percentage of GDP at 7.4% compared to the 7.6% in 2019.”
Sector-by-sector breakdown
Some segments of the market did better than others in riding out the storm. Figure 2 and the summaries below provide a quick look at how some of the key modes and segments fared. (For more in-depth analysis, see the report itself, which can be downloaded from cscmp.org.)
Motor carrier freight: Trucking costs, the biggest segment of U.S. logistics spend, fell by 1.6% year over year. A strong fourth quarter and a continuing economic recovery, however, indicate that rates will remain high through 2021. One silver lining of the pandemic is that the need to avoid “touch” processes drove many trucking firms to finally embrace digitization. New digital technologies, such as online freight booking and digital bill of materials, should lead to improved services levels in the future, predicts the report.
Parcel: Homebound consumers caused e-commerce to explode in 2020, growing by 33% to $792 billion, or 14% of all retail sales. This rapid rise fueled a 24.3% year-over-year increase in parcel shipping spend, which totaled $118.6 billion, but it also had shippers scrambling to adjust their delivery offerings and solutions.
Rail: Volumes and revenue were down overall for the rail industry, with spend dropping 11% year-over-year to $74.3 billion. This drop was due to reduced volumes in industrial products and coal. Intermodal, however, saw smaller declines as high trucking prices pushed some shippers to switch modes.
Air freight: Air cargo costs totaled $96.5 billion in 2020, a 9% increase over 2019. Rates remain “shockingly high” even in mid-2021, as most airlines have not recovered from the cancellation of passenger flights in 2020. The authors expect that demand will continue to exceed supply in 2021.
Water: Logistics costs associated with on-the-water shipping dropped 28.6% year over year, in part due to a one-time reclassification in the report’s methodology. However, the decrease in exports and in traffic on domestic waterways would have kept costs down substantially regardless of the recalculation. Rates and volumes, however, soared in late 2020 as retailers restocked and have remained high ever since.
Pipeline: The COVID-19 pandemic brought about a sharp and unforeseen bust in the oil industry. However, the gas industry was one of the few areas that remained relatively unaffected by the pandemic. As a result, pipeline logistics costs rose by 1.7% year over year.
Warehousing: The e-commerce boom spurred high demand for warehousing space especially in urban locations. At the same time, warehouse flows have become more complicated and labor conditions remain tight, leading more warehouses to turn to automation.
Freight forwarding: While volumes declined in this segment, higher rates led to higher 2020 revenues. The report predicts that freight forwarding will see fierce competition as more traditional providers face off against new digital startups, carriers seeking to become end-to-end providers, and large monoliths such as Amazon and Maersk. They also predict more mergers and acquisitions ahead.
Third-party logistics providers (3PLs): While many 3PLs saw higher revenue last year, some experienced cost increases, which harmed their profitability. The report authors predict that as supply chain and logistics become more complex, the sector will continue to grow.
[Figure 2] U.S. business logistics costs (in $ billions) Enlarge this image
More change ahead
In spite of the upheaval of the past year, the report authors are hopeful. Logisticians proved themselves capable of quickly abandoning old plans, solving new problems, and handling disruptions. This ability to adapt will serve logistics professionals well in the future, as the report predicts that the pandemic’s aftereffects and “new surprises” will force logistics professionals to continually change their plans.
“There is no relief in sight,” said Zimmerman.
The list of potential future disruptors includes the trend toward “right shoring,” continuing technological advances, and climate-related disasters—to name just a few. Right shoring involves a company creating a mix of offshore and nearshore (or “reshored”) manufacturing operations. The goal with this trend is for a company not to be overly dependent on one supplier or region for its manufacturing operations and for production to be closer to consumption. While the idea on the surface is appealing, moving manufacturing operations out of low-cost countries in Asia is a difficult process and will make logistics needs even more complex.
The pandemic also accelerated interest in technology that improves visibility and automation. For example, Kearney has seen increased interest in control tower technology to improve and centralize companies’ access to critical data. Additionally, the report authors expect to see increased use of distributed sensors to collect that data and artificial intelligence and machine learning to analyze it. Meanwhile the difficulty of finding labor and keeping that labor safe from a contagious disease has fueled interest in automation technology and robotics.
Finally, the effects of climate change and extreme weather are making sustainability an increasing concern for logistics processes and companies. Logisticians are responding by taking a closer look at measures such as electric vehicles and alternative fuels; network redesigns, such as locating warehouses close to inland ports; and more efficient forms of transportation, such as rail.
The report authors also predict that the cost of logistics will rise as the scope of what the field encompasses grows. As an example, they point to last-mile delivery, which used to be a “domestic” activity performed by consumers and is now an increasingly commercial one.
After the stresses of last year, logistics executives are focused on rebuilding their supply chains to be more resilient. “State of Logistics Report” authors don’t expect these changes to be minor. They predict that in 2021 and beyond, executives will be fundamentally rethinking and redesigning their logistics networks. “In 2021, even if conditions prove less volatile, the changes may be more profound,” concludes the report.
The “State of Logistics Report” is authored by the consulting company Kearney for the industry association, the Council for Supply Chain Management Professionals. It is sponsored by Penske Logistics.
Ron Marotta of Yusen Logistics listens to Rick DiMaio of Ace Hardware talk about the steps Ace is taking to keep its store stocked after Hurricane Helene and during the East and Gulf Coast Port Strike.
The East and Gulf Coast port strike was the top discussion point during a panel discussion of shippers and logistics providers at the Council of Supply Chain Management Professionals (CSCMP) annual EDGE Conference this morning. The session, which was supposed to be focused on providing an update to CSCMP’s “2024 State of Logistics Report,” quickly shifted to addressing the effect that the strike by nearly 50,000 dockworker at 36 ports in the Eastern half of the U.S. could have on supply chains.
“The seriousness of this action cannot to be taken lightly,” said Ron Marotta, vice president of the freight forwarder and supply chain service provider Yusen Logistics (America). “It has not happened since 1977. Our lives depend on sustaining a smooth global supply chain.”
Marotta warned that for every day that the ports were not open, it would take four to five days to recover from the impact. One added concern is how the port closures would affect recovery efforts for Hurricane Helene. “There’s a huge amount of item that would normally be replenished by importers and retailers,” Marotta said.
Rick DiMaio, executive vice president and chief supply chain officer, for Ace Hardware Corp., commented that the hardware retail cooperative was doing okay for now keeping stores in stock, although he did expect the company would be “chasing generators for awhile.” “But in this recovery phase [from the hurricane], we certainly don’t need a strike right now,” he said.
The port closure will also have a knock-on effect on other transportation modes. For example, Andy Moses, senior vice president of sales and solutions for logistics services provider Penske Logistics, expects to see some companies turn to air freight as a result of the strike. This will, in turn, cause air freight capacity to tighten up and rates to rise. Furthermore, the longer the ports are closed, the more likely inflation is to rise again, according to Moses.
Nor will the effects of the strike stop at the U.S. border, according to Marotta. Many Caribbean Island nations depend on food import from the U.S. that move through East Coast ports. Additionally, some medical supplies typically are exported through the ports to Europe.
On a positive note, however, many companies took actions earlier in the year to prepare themselves for a potential strike. Ammie McAsey, senior vice president of customer distribution experience for the pharmaceutical distributor McKesson, said the pharmaceutical industry has brought in enough extra inventory that there will not be a short-term impact on the U.S. health care system due to the strike.
Government intervention?
Marotta hopes that the U.S. government takes the step of invoking the Taft-Hartley Act to stop the strike and send the International Longshoremen’s Association (ILA) and the port management group, United States Maritime Alliance (USMX) back to the negotiation table. In 2002, for example, President George W. Bush used the Taft-Hartley Act to end an 11-day lockout of union workers at West Coast ports. President Joe Biden, however, told reporters on Sunday that he would not do this.
“I hope that cooler heads prevail and that the executive branch realizes that it’s not just a labor issue, it’s also a humanitarian issue,” Marotta said.
Confronted with the closed ports, most companies can either route their imports to standard East Coast destinations and wait for the strike to clear, or else re-route those containers to West Coast sites, incurring a three week delay for extra sailing time plus another week required to truck those goods back east, Ron said in an interview at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
However, Uber Freight says its latest platform updates offer a series of mitigation options, including alternative routings, pre-booked allocation and volume during peak season, and providing daily visibility reports on shipments impacted by routings via U.S. east and gulf coast ports. And Ron said the company can also leverage its pool of some 2.3 million truck drivers who have downloaded its smartphone app, targeting them with freight hauling opportunities in the affected regions by pricing those loads “appropriately” through its surge-pricing model.
“If this [strike] continues a month, we will see severe disruptions,” Ron said. “So we can offer them alternatives. We say, if one door is closed, we can open another door? But even with that, there are no magic solutions.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
CSCMP EDGE attendees gathered Tuesday afternoon for an update and outlook on the truckload (TL) market, which is on the upswing following the longest down cycle in recorded history. Kevin Adamik of RXO (formerly Coyote Logistics), offered an overview of truckload market cycles, highlighting major trends from the recent freight recession and providing an update on where the TL cycle is now.
EDGE 2024, sponsored by the Council of Supply Chain Management Professionals (CSCMP), is taking place this week in Nashville.
Citing data from the Coyote Curve index (which measures year-over-year changes in spot market rates) and other sources, Adamik outlined the dynamics of the TL market. He explained that the last cycle—which lasted from about 2019 to 2024—was longer than the typical three to four-year market cycle, marked by volatile conditions spurred by the Covid-19 pandemic. That cycle is behind us now, he said, adding that the market has reached equilibrium and is headed toward an inflationary environment.
Adamik also told attendees that he expects the new TL cycle to be marked by far less volatility, with a return to more typical conditions. And he offered a slate of supply and demand trends to note as the industry moves into the new cycle.
Supply trends include:
Carrier operating authorities are declining;
Employment in the trucking industry is declining;
Private fleets have expanded, but the expansion has stopped;
Truckload orders are falling.
Demand trends include:
Consumer spending is stable, but is still more service-centric and less goods-intensive;
After a steep decline, imports are on the rise;
Freight volumes have been sluggish but are showing signs of life.
CSCMP EDGE runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Resort.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.