Under pressure from the tumultuous events of 2020, shippers are increasingly willing to pay more for reliability and capacity in logistics services, easing off on their traditional search for lower fees, according to a market analysis from the consulting firm Gartner Inc.
Thundering market forces like the covid pandemic, the tariff war with China, and the delayed transition from the Trump Administration to the incoming Biden Presidency have introduced uncertainty into supply chain operations long taken for granted. At the same time, the combination of the holiday peak shopping season and the country’s sputtering recovery from economic recession have led to severe capacity constraints in sectors from truck fleets to air freight to cargo containers.
Those forces have also pushed major parcels carriers from UPS Inc. to FedEx Corp. and the U.S. Postal Service to hike their rates for delivering e-commerce packages, and even place caps on the volume of boxes they will agree to pick up from large shippers.
“With such a tumultuous year as 2020 was, there are a lot of questions about 2021—like is freight capacity even going to be available?—so companies are making strategic moves to position themselves for a new year, a new normal,” Farrah Salim, a senior principal analyst with Gartner’s Supply Chain Practice, said in a briefing. “There’s a change in mindset: if you can’t undercut your competitors on prices, then you’re going to have to beat them through better quality.”
That shift may help explain why logistics service provider XPO Logistics Inc. last week said it will split its vertically integrated business empire into two separate businesses, including a transportation and freight brokerage unit and a contract warehousing arm, she said. According to Salim, XPO has a reputation in the shipper community for delivering high quality service performance, so its two new firms will now have better independence to pursue their own markets.
“Reliability has been pushed to the forefront, as opposed to the focus on price within service level agreements, because covid showed there were problems and orders weren’t being delivered,” Salim said. “Things that used to be ‘nice to have’ have now become more serious.”
In Gartner’s analysis, warehousing clients are focused on technology automation, process efficiency, and labor availability, whereas transportation customers are in search of reliable service and freight capacity. The best way to pursue those different customer profiles is through different business units, she said. That logic echoes XPO’s explanation that its newly dubbed “RemainCo” and “NewCo” will actually follow the same revenue streams that already exist on the company’s accounting books.
“You need change; the market can’t exist the way it did before the new normal,” she said. “That’s what all the Fortune 500 companies are doing; they’re using the lessons learned in supply chain, and studying everything that went wrong to improve business continuity and logistical efficiency.”