CSCMP’s 2022 State of Logistics Report: Resilience and Agility Key Within a “No Normal” Context
It may come of no surprise that the 2022 State of Logistics report found that U.S.-based supply chains have been—and continue to be—"out of sync.”
Produced annually for the Council of Supply Chain Management Professionals (CSCMP) by global consulting firm Kearney and presented by Penske Logistics, the report provides “a snapshot of the American economy through the lens of the logistics sector and its role in overall supply chains,” according to a June Penske press release. “The report is a rigorous compilation of leading logistics intelligence from around the world and shines a spotlight on industry trends and key insights on ever evolving supply chains across a number of sectors.”
Although the “out of sync” findings underscored supply chain challenges, the good news is that within the scramble to adapt to short-term needs, results uncovered the possibility that long-term solutions are being created.
Quoted in the release, Balika Sonthalia, partner at Kearney and lead author of the report, said, "It's not surprising that we are continuing to see ongoing disruptions related to the pandemic, but the scope and impact of disruptions continue to weigh heavily on the minds of logistics providers – as they do for all companies contributing to the U.S. economy. What is notable for 2021, however, is that the logistics sector has begun to enable changes which should benefit manufacturers, retailers and consumers alike. We're especially heartened by the progress the sector has made in rebuilding supply chain resilience via multi-shoring, automation and optionality in last-mile distribution. This will also improve customer service and bring efficiencies for all parties."
Here, we’ll take a look at some of the findings, the impacts of “turbulent circumstances and rising cost pressures” on the major logistical sectors, and key takeaways to help stakeholders continue to adapt within the “no normal” supply chain.
According to Penske’s announcement, some of the major report findings include:
“Business inventories dropped to near historic lows, but the costs associated with storing, handling and financing these items rose considerably. Inventory-carrying costs rose by 25.9% in 2021, and transportation costs jumped 21.7%. This led to uneven supply chains and inconsistent product availability for consumers (both in-person and online).”
“Efforts to increase multi-shoring are expected to accelerate. Companies are seeking to have operations move closer to the U.S., to respond quicker to fluctuating market demands.”
“Last year's report noted the effects of the pandemic on the supply chain. The residual challenges of the pandemic remain, with some disruptions continuing to deliver damaging effects on capacity.”
“Last-mile delivery volume is trending upward. The 2022 report notes that e-commerce sales grew 10% last year (to $871 billion), accounting for 14% of U.S. retail sales.”
“Trucking freight continues to see more volume and opportunities. With road freight accounting for the largest segment of the U.S. supply chain spend, it expanded by 23.4%, to a lofty $831 billion spend.”
Impacts on Major Logistical Sectors
In its Executive Summary of the report, Kearney described how the “turbulent circumstances and rising cost pressures” of 2021 impacted each of the major logistical sectors.
Noting a 19.2 percent jump in air freight costs due to a supply-demand mismatch, Kearney said shippers looked to the air to overcome deficits in ocean capacity. However, the ripple effect soon became apparent: “More planes were converted to cargo carriers, and cargo firms took in more plane deliveries, but air freight hubs were clogged by the surge in cargo demand, and this spilled over into secondary airports.” Though passenger flights were still down in 2021, the increase in 2022 has added to “belly-freight capacity.”
Parcel and last mile
With consumers still at home in various contexts, last-mile delivery volumes continued to experience “explosive growth” fueled by robust e-commerce activity. “The parcel sector was a direct beneficiary, growing by 15.6 percent and turning in the highest five-year compound annual growth rate (CAGR) of any of the cost components, at 11.4 percent,” Kearney said, noting a slowing of these trends as shoppers return to brick-and-mortar stores.
Third-party logistics (3PLs)
“Amid all the uncertainties roiling the logistics sector, shippers increasingly turned to 3PLs to address scarce capacity, supply chain complexity, service disruptions, and surging customer demands,” Kearney said.
Shippers struggling to find available capacity and dealing with ongoing port congestion boosted the freight forwarding market, which “expanded significantly in 2021,” according to Kearney. “Sustained high demand helped forwarders drive their gross margins high above historical standards.”
“US water shipment costs surged 23.6 percent, with ocean carriers earning more profit in 2021 than in the previous 20 years combined,” Kearney said, noting that international ocean expenditures aren’t reflected in the report. However, service levels didn’t meet expectations, with “sea-dependent shippers” expressing “growing frustration with logjams and rising costs.”
“Road freight, the biggest segment of US logistics expenditure, rose powerfully in 2021, growing by 23.4 percent to $831 billion,” Kearney said. “Carriers that had cut or delayed capacity early in the pandemic went into overdrive, spending at unprecedented levels to attract new hires and buy new trucks.” Worried about the impact on sales if consumer expectations couldn’t be met, shippers “proved more than willing to pay ever-increasing spot rates.”
As a result, “high prices powered profits, with top US carriers seeing profits rise by 50 percent, 100 percent, or more even as their own costs of operation continued to surge,” according to the firm, noting that the trend may not continue.
“Shippers miffed by low service levels increasingly see the development of their own ‘captive’ truck fleets as a more reliable alternative that has become more affordable and the drop in demand and rates underway in Q2 of 2022 will squeeze carrier margins,” Kearney noted.
Although overall U.S. rail costs increased 18.8 percent, “network speeds and service levels worsened due to the same kinds of disruptions seen by other modes, including port congestion, chassis shortages, and tight labor markets,” Kearney said, noting a modest increase in intermodal volumes due to limited capacity in trucking, which meant intermodal prices “shot up accordingly.”
With persistent consumer demand for “ever-faster deliveries for a wider range of goods,” Kearney said companies bought more warehousing space, “especially high-end facilities close to urban and suburban consumers.”
“The pipeline sector was up 18.2 percent, amid rising pressure on a variety of fronts, including an increasingly hostile regulatory environment, more frequent severe weather events, and geopolitical turmoil that could soon post severe tests for the North American network,” Kearney said.
In its list of “Top Takeaways,” Kearney provided additional analysis regarding the impact on major logistical sectors:
Macroeconomics: a new level of disruption—Although the US economy grew by 5.7 percent in 2021—"fueled by trillions in COVID relief funds”—persistently high energy costs and increased interest rates “may erode consumer spending and cool demand for logistics. Continued geopolitical conflict could accelerate US reshoring and nearshoring.”
Air: heavy lift—The expanded role of air freight in 2021 led to the conversion of more planes to carry cargo and “shippers often resorted to costly chartered planes.”
Parcel and last mile: stress spurs innovation—The use of localized fulfillment hubs by last-mile companies grew to enable next-day/two-day service, “competing head-to-head with traditional parcel providers. As shippers scramble to find capacity, expect demand for nontraditional carriers and last-mile aggregators to grow.”
Third-party logistics: window of opportunity—Shippers needing help to navigate ongoing supply chain challenges turned to third-party logistics (3PL) providers, and big 3PLs that were able to offer “more integrated solutions” were rewarded with high profits. In this context, 3PLs “have a window of opportunity to become more consultative partners to shippers where in the past they were often viewed as interchangeable commodity-service providers.”
Freight forwarding: riding high, but for how long?—Along the same lines, high demand for help from freight forwarders drove their “gross margins high above historical standards.” In this context, “stepped-up investment in technology can propel forwarders beyond the commoditized role of securing capacity to become strategic advisors to shippers.”
Water and ports: flush times, fresh dangers: Despite earning “more profit in 2021 than in the previous 20 years combined,” ocean carriers “were often unable to fulfill their contractual obligations to shippers.” As a result, Kearney asks, “Will widespread frustration encourage reshoring or nearshoring?”
Motor: fuel for growth—“…Looking ahead, motor carriers could play a key role in intermodal and reshoring/nearshoring strategies.”
Rail: a slow switch to growth—“…To position for intermodal growth, railroads are investing heavily in infrastructure, visibility, and the development of more end-to-end solutions.”
Warehousing: rising demand, rising costs—“…Adapting to the varied demands of omnichannel, companies are reimagining their warehouse and fulfillment center footprint to ensure rapid delivery and efficient returns processing. Rising costs have helped justify speeding up investments in warehouse automation.”
Pipeline: under pressure—“…Russia’s invasion of Ukraine and the subsequent sanctions on Russian energy exports threaten European energy security, placing potentially unprecedented pressures on North America’s pipelines, which already saw tolls increase as much as 33 percent last year.”
Kearney also offered several observations and recommendations about “seeking sync” for the supply chain within a “new game” with “new rules,”—including this one: “Beyond such continuous plan redevelopment and adaptation, logistics must be permanently about embedding resilience and agility into its capabilities before shifting its focus back to such questions as cost minimization and efficiency. Relative stability may or may not return, so the logistics sector must invest now in controlling what factors it can.”