Supply chains were badly out of sync in 2021 as the stubborn COVID pandemic kept up intense pressure on the entire logistics sector. Supply chains battled a surging demand. At the same time, the industry struggled with supply and labor shortages as well as tight capacity and a congested transportation network.
The volatility and tumult caused U.S. business logistics costs to skyrocket by 22.4% to $1.85 trillion, according to the annual “State of Logistics Report” by the Council of Supply Chain Management Professionals. Those costs represented 8% of the U.S. gross domestic product – a level not seen since 2008.
The annual report provides a snapshot of the U.S. economy through the lens of the logistics sector and its role in overall supply chains and shines a spotlight on industry trends.
Business inventories dropped to near historic lows in 2021. However, the associated costs of storing, handling and financing rose considerably. Inventory-carrying costs rose by 25.9% and transportation costs jumped 21.7%. This led to uneven supply chains and inconsistent product availability for consumers – both those shopping online and at stores.
Efforts to increase multi-shoring – relying on business partners in different countries – are expected to accelerate. Companies are seeking to have operations closer to the United States in order to respond quicker to fluctuating market demands.
The report noted the residual challenges of the pandemic remain, with some disruptions continuing to deliver damaging effects on capacity.
Service spending gave way to further spending on goods by consumers adjusting to new norms of work and social life. Clogged ports and insufficient capacity were unable to meet surging and often desperate demand. Inventory-to-sales ratios dropped to near-record lows, and capacity additions from carriers were in no way near the levels required by shippers.
Disruptions in all logistics networks effectively eliminated capacity: ships loitered at ports, equipment stalled, unloaded. Trucks, left half-empty, dashed off to the next high-paying load with little regard for backhauls.
Companies ramped up more capacity in trucking, parcel, air freight, and warehousing, but it was just as quickly snapped up. The motor sector was somewhat of an exception; an infusion of more vehicles and drivers alleviated some of the pressure on ground transport.
The inflation in logistics was at least partly attributable to the lingering pandemic. COVID sidelined logistics workers as it disrupted supply chains, and those who remained on the job saw their wages shoot up even as overall capacity flatlined or suffered further depletion.
The turbulent circumstances and the pressure of rising costs were main concerns for all major logistical sectors.
Road freight, the biggest segment of U.S. logistics spending, increased dramatically, growing by 23.4% to $831 billion. Carriers that had cut or delayed capacity early in the pandemic reversed course, spending at unprecedented levels to attract new hires and buy new trucks. Shippers worried about lost sales proved more than willing to pay ever-increasing spot rates. Profits increased by 50%, 100%, or more due to sustained high demand at high prices even as their own operating costs continued to rise.
Trouble may be brewing for the sector, though. Shippers put off by low service levels increasingly see the development of their own ‘captive’ truck fleets as a more reliable and affordable alternative. The drop in demand and rates underway in the second quarter of this year will reduce carrier margins.
Andy Moses, senior vice president for sales and solutions at Penske Logistics, observed, “Captive fleets rose to the occasion as they became more valued, driving an accelerated adoption that remains with us today. We’ve seen shippers that have gone ten years without a private or dedicated fleet get into them.”
Consumers kept up their demand for ever-faster deliveries of a wider range of goods. That demand drove companies to buy more warehouse space, especially high-end facilities close to urban and suburban consumers.
The explosive growth of last-mile delivery volumes continued, driven by the increased popularity of work-from-home and other social-distancing behaviors. E-commerce grew by 10% to $871 billion—13% of all U.S. retail sales. The parcel sector benefited, growing by 15.65 and turning in the highest five-year compound annual growth rate of any of the cost components, at 11.4%. However, there is evidence that e-commerce growth has begun slowing a bit as shoppers return to stores.
Amid all the uncertainties roiling the logistics sector, shippers have increasingly turned to third-party logistics providers to address scarce capacity, supply chain complexity, service disruptions and surging customer demands.
So far, 2022 offers little respite. Russia’s invasion of Ukraine and massive pandemic shutdowns in China have created new pressures on the global supply chain.
And the U.S. economy faces uncertainty. It grew at a healthy clip, expanding by 5.7% to $23 trillion last year, but that growth rate is slowing to an estimated 2.8% in 2022—still hot by historical standards. That’s obviously good news at the bottom-line level, but it also means relief on the demand side of the logistics is not coming fast enough.
Also, as the inflation rate hit 8.5% this spring, pressures for fiscal tightening became more acute. Service industries like hospitality, restaurants, and airlines were recovering strongly, but durable goods, retail, housing, home improvement, and e-commerce saw a slowdown as rising interest rates and expectations of lower future inflation began to bite into current demand. In short, the logistics sector must simultaneously contend with the hangover of red-hot demand and worries of a revenue-diminishing and inventory-swelling downturn.
Balika Sonthalia, partner at Kearney and lead author of the report, commented on the short-term outlook. She anticipates that 2022 will see a softening in demand for logistics services, particularly as many companies have seen their inventory-to-sales ratios increase this year. Capacity, however, will continue to remain tight as the semiconductor shortage, high steel prices, and continuing labor market tightness will continue to make it difficult to deploy more equipment or capacity.
