Each year for the past 30, the Council of Supply Chain Management Professionals’ venerable “State of Logistics Report” has focused most of its analysis on the prior year’s activity, sprinkling in the current year’s action to achieve a richer perspective of the $1.6 trillion-a-year U.S. business logistics market. The 31st annual version, which was released Tuesday, flipped the script.
The report contained the standard data points to illustrate the size of the 2019 U.S. logistics market, its importance to the overall economy, and the performance of different modes from air to warehousing. (For 2019, logistics expenditures represented 7.9% of gross domestic product (GDP), the highest levels since 2008 and what was described as a normal ratio of costs to GDP). However, the events of the past four months effectively relegated those numbers to footnotes. As the report’s author, consultancy A.T. Kearney, put it, the 2019 results “all seem like history,” adding that at the end of last year, U.S. logistics was unknowingly in its “last hurrah of the ‘old normal.’”
Trauma and adaptation
The report painted a picture of an industry first traumatized by the coronavirus pandemic and the government’s tough measures designed to stop its spread, but then able to right itself and meet the challenge of bringing essential goods to market. An industry that’s rarely top of the public mind demonstrated its enduring value, the report said. The sector, though damaged by the pandemic, is already adapting to the profound changes it has caused, the report said.
The report’s central narrative echoed the views of many: that the nation’s supply chain, and the logistics practitioners who support it, will shift from a model based on cost and efficiency to one driven by resiliency, defined by the report as being positioned to “adjust and recover from future difficulties.” U.S. firms that sourced exclusively from China faced massive supply disruptions in February and March after Chinese authorities shut down large swaths of the country’s manufacturing and outbound shipping to curtail the virus’ spread. For U.S. firms, avoiding a repeat scenario will require development of multiple sourcing locations, more buffer inventory, and the warehouses needed to store them. It will also lead to higher costs to support the investment in assets.
Shifting supply chain strategies does not mean abandoning China, according to a group of experts participating in an online Q&A session. Michael Zimmerman, a Kearney partner, said businesses looking to diversify from China may find it hard to replicate the country’s established efficient supply chain infrastructure anywhere else in the region or the world. Companies will face “difficult choices” in restructuring their supply chains, Zimmerman said. Craig Fuller, CEO and founder of FreightWaves, said countries planning to compete with China will need to invest billions of dollars over the long haul to modernize their physical transport and distribution infrastructures.
Rising warehouse demand
Warehousing, which had a banner year in 2019 due to the growth of e-commerce fulfillment, will continue to prosper in 2020 as e-commerce demand soars anew in the wake of the pandemic and inventories rise as resilience-obsessed businesses maintain higher safety stock levels. U.S. inventories are projected to rise between 5% and 10% over the next few years, with each 5% bump translating into a 750 million-square-foot increase in logistics warehousing space.
The surge in warehousing demand will keep availability tight, construction pipelines full and rents elevated, the report said. It will also prolong the eight-year bull market in the sector. Cold storage demand could be the strongest sub-sector as more consumers order food online, the report said.
The pandemic is “redrawing the historic roles” of stores, distribution centers and the parcel delivery sector, which also enjoyed strong growth in 2019, the report said. Omnichannel fulfillment, which is designed to handle online orders from any location near the end user, is more prevalent than ever. Successful shippers and intermediaries are “segmenting products and customers” with different service level requirements, the report said. The intelligence mined from this process will help leading-edge firms uncover new sources of value and extend their lead in omnichannel fulfillment, while the laggards will be left “bleeding cash,” according to the report.
Varying outlooks by mode
U.S. surface transportation stepped back in 2019 after strong 2018 performances. Motor freight demand in 2020 picked up solidly starting in May, while railroads’ intermodal business remains flattish. Trucking may have a rough road in the near term, though, with more fleet cutbacks and bankruptcies, Zimmerman said. This will force shippers to engage in “more conversations” with their carriers while diversifying their routing guides, he said. Mark Wallace, executive vice president of sales and marketing at CSX Corp. (NYSE:CSX), said any near-term gains in intermodal will come from taking share from trucks rather than from growing the business organically.
Airfreight had a bad year in 2019, with volumes down 9.7% due to slowing industrial activity. The mode then took it on the chin during the pandemic as demand for nonessential goods collapsed and international passenger travel ground to a halt, taking the lower-deck cargo holds with them. International airlines desperate for revenue resorted to booking cargo aboard passenger cabins, in many cases removing the seats and lashing the cargo to the floors.
The report noted that air cargo has a bright outlook because it is the most agile transport mode and tailor-made for more resilient supply chains. However, the experts in the Q&A session predicted that, if history is any guide, the passenger airlines are unlikely to make cargo services a priority once international flights return to normal. According to Fuller, airline management “will pivot to serving passengers” rather than investing the time and effort into the cargo operation.