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Zachary S. Rogers is an assistant professor of operations and supply chain management at Colorado State University. His primary research interests include the financial impact of supply chain sustainability, emerging logistics technologies, supply chain cyber security and various other emerging purchasing and logistics issues. He is also a researcher and co-author of the monthly Logistics Managers’ Index (LMI) report. Dr. Rogers’ work has appeared in multiple academic journals, corporate white papers, trade publications, and conference proceedings. He is also a frequent speaker at both academic and practitioner-oriented conferences. Dr. Rogers earned his B.S. and M.B.A. degrees at the University of Nevada, Reno and his PhD in supply chain management from Arizona State University. Prior to returning to academia Dr. Rogers worked as a purchasing agent for a large hotel-resort and as an operations manager for Quidsi, a subsidiary of Amazon.
David Maloney, Editorial Director, DC Velocity 00:01
As we begin 2021, what's the state of the logistics industry? Will capacity remain tight for shippers? And new calls to improve safer packing of container shipments.
Pull up a chair and join us as the editors of DC Velocity discuss these stories, as well as news and supply chain trends, on this week's Logistics Matters podcast.
Hi, I'm Dave Maloney. I'm the editorial director at DC Velocity. Welcome.
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As usual, or DC Velocity senior editors, Ben Ames and Victoria Kickham, will be along to provide their insight into the top stories of this week. But to begin: What is the state of the logistics industry as we begin the new year? To discuss this and other stories, here is Victoria with today's guest.
Victoria Kickham, Senior Editor, DC Velocity 01:15
Yes, our guest this week is Zac Rogers, and Zac is assistant professor of supply chain management at Colorado State University. He's also a researcher for the monthly Logistics Managers' Index report, which gauges economic activity and strength in the logistics industry.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 01:32
Hi, I'm happy to be back.
Victoria Kickham, Senior Editor, DC Velocity 01:35
Yeah, thank you for joining us again. Economic activity in logistics continued to grow in December, as we saw with the most recent LMI report, although it was at slower rates than we'd seen in the runup to peak shopping season. So I wanted to ask, you know, how would you assess the strength of the industry as we begin 2021?
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 01:52
Right. So just a reminder to your listeners, the way the LMI report works is, it's a change index, where any number below 50 indicates contraction and any number above 50 indicates growth.
So, for the last three months, we had been sort of in like the low 70s in terms of overall growth, and in December, we dropped down to 66.7. Now, that doesn't mean that there's less logistics activity in December than there was in November, October, September. All that really indicates is that the rate of change has gone down a little bit. So still growing, just at a slightly decreased rate. And really, that's driven by what you would expect in December, which is decreases in inventory levels, right, as companies sort of sell goods off around the holidays, as well as an increase in warehouse capacity. So as we get some goods out the door, there's still, there's slightly more warehouse capacity.
I will say, though, that even with those goods going out the door, warehouse capacity was still contracting, transportation capacity was really contracting—I mean, down in the 30s—and prices are growing all over the place.
Victoria Kickham, Senior Editor, DC Velocity 03:11
I wanted to touch on the capacity issues. When you you mentioned the constraint there, how do you see this playing out in the early days of the new year? I know you kind of take a look at future predictions in that, in the survey as well.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 03:25
Right. So we asked our respondents, okay, in the next 12 months, what will happen with all these metrics? And with transportation, respondents do predict a moderate level of growth in terms of the capacity that comes back online. So, a 62, which means there will be significantly more trucks on the road.
With warehousing, interestingly, it came back as a 51, which, you know, 50 means basically no change. So essentially, that's what they gave us. There's, you know, we'll be building more warehouses, but it's not going to be enough to keep up demand. And interestingly, what that really does, is, it keeps a premium on logistics services, is that prices will be high.
Both of our future predictions for price [are] around 80, which is really steep growth. And so, even if capacity does come back online, say, for transportation, respondents are still expecting price to go up. And that's for a number of reasons. One of those is, okay, yeah, supply will go up, but demand will keep going up, and two is that the types of transportation that we need are changing. You know, it's more about last-mile delivery now, or even returns, or all these sort of things where it's really hard to achieve the same economies of scale that we were achieving maybe 10 years ago or 15 years ago, when a lot of logistics networks were designed.
And it's also important to keep in mind that even if capacity does go up, we're working from such a deficit because, you know, in 2020, we had thought that at the beginning of the year, which seems like 10 years ago, we had thought that e-commerce was gonna go up by about 15%. Well, it actually went up by about 40%. And e-commerce requires more warehouses that are closer to consumers, and more trucks. And so, you know, we needed, essentially, three times more than we thought for e-commerce. And so we're really working at a deficit in terms of capacity. So, even if we are building trucks and warehouses as quickly as we can, it's just not going to be enough.
Victoria Kickham, Senior Editor, DC Velocity 05:35
Yeah, thank you. Yeah, you mentioned returns. We're in the midst of this holiday returns season. I wanted to ask you how the increased volume is affecting logistics, and how do you expect that to play out?
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 05:45
Well, it is affecting it significantly. So, e-commerce tends to have returns rates that are two to three times higher, depending on the category, but two to three times higher than brick-and-mortar purchases. And if you think, okay, well, it's two to three times higher, plus e-commerce went up by 40% this year, essentially, what that means is, returns volume is probably up somewhere around 30ish percent. It's going to be over $100 billion of returned goods that we're in the midst of right now. And it's really straining networks.
You know, returns—and I used to be returns manager, before I came back to school, actually—and returns are difficult to deal with. It's really hard to get any economies of scale, because, you know, they go to different places, whether things are going to get salvaged or put back into inventory or thrown away or donated to charity or whatever, everything has to be sort of like an individual decision. You're not making decisions, generally, for whole pallets and whole cases. You're doing individual returns at a time. And so because of that, they take up a lot of space. And you got to go pick them up from all over the place, and it's really a big bubble.
And it's funny, because usually at this time of the year—and we always have returns—but usually, at this time of year, you can kind of slow down a little bit, and we're not seeing a ton of slowdown. I mean, like you said, we did see decreases in the rates of growth, but we're still seeing rates of growth, you know? Last year at this time, transportation prices were a 50, basically meaning, okay, no change. Basically, the transportation market [was] calming down. This year, transportation prices were an 85, in our most recent reading. Inventory levels, even though they're down, are still growing. There at 56. Inventory levels this time last year were a 42. And so, we're not seeing the same sort of depressurization that a lot of times we see in January and gives supply networks [time] to bounce back a little bit after the holiday season, and a lot of that is because of the wave of returns.
The other the other piece of it would be, we're backlogged on inventory. You know, we had like 20 big container ships sitting outside the Port of LA a lot of days in December, waiting to get in. Normally Port of LA maybe processes nine, 12 ships, you know, on a day. And that's because we were so backed up in terms of backlogged inventory coming from China, Asia, overseas, that now all of that's just getting into the system.
And so we're dealing with two things right now, that maybe we normally wouldn't be dealing with, which is a really heightened returns—a heightened level of returns—and a huge influx of inventory to a level that we normally wouldn't be seeing in these first few weeks of January.
Victoria Kickham, Senior Editor, DC Velocity 08:54
Yeah, thank you. Yeah, it's certainly a complex landscape.
I wanted to ask you, too, you know, between capacity concerns that you've mentioned, and the volume increases we were just talking about, you know, is there any relief in sight for logistics companies? I mean, it just still continues.
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 09:12
Hopefully, at some point, there will be.
You know, one thing that's helping now is that, okay, now, it's clear that this really is a shift. You know, I think at the beginning of the pandemic, we saw firms that were slow to really build up truck capacity, and that's because we didn't know how long it was gonna last. You know, some people thought, "Oh, maybe we'll be back at church by Easter, it's over in six weeks," you know, "this isn't gonna be that bad." And that's—you know, it ended up being, now, 10 months later. And so, I think that we kind of thought, “Oh, maybe this is a blip and we don't want to make big cap-ex investments.”
Well, now, clearly, even though, okay, maybe we're all getting the vaccine in the next four months, maybe—which is another logistics challenge, by the way—we just have so, kind of, much to do, and so, I think it's going to be really difficult to catch up, because people aren't going to just stop buying the groceries online just because, "Oh, now I can go back to the grocery store." I mean, I think a lot of people have found a lot of convenience in all the e-commerce we've been doing. I don't think—like, I don't think the rate of e-commerce is going to go down next year. I mean, maybe the rate of growth will certainly go down. It's not gonna be 40% again. But it's not like we're gonna have less trucks that need to be on the road, or people who are fine with slower delivery than they were this year.
And so, I think we're going to need to keep building out capacity for quite a while, and because of the hole that we're in, it will take a little while to grow up. You know, really, in terms of the need for, the demand for logistics services like trucks and warehouses, we probably went forward somewhere between three to four years in about 10 months. So, it's gonna take a while to build up out of that hole.
Victoria Kickham, Senior Editor, DC Velocity 11:05
Yeah, it is amazing.
I want to just, finally, just ask if you had any other thoughts or concerns once the new year gets underway, with anything else you wanted to kind of mention here?
Zac Rogers, Assistant Professor of Supply Chain Management, Colorado State University 11:16
Um, well, I can't believe the Bears made the playoffs. That doesn't make any sense to me.
But, other than that, I guess, you know, there is a lot of, just, demand is gonna stay high. I do wonder, now.
You know, we're on the right on the other side of all these extra elections that we had, because, you know, we had bonus elections this year, and so now it does seem like there will be some stimulus, which will be interesting to see, and might help, I think, on the consumer side is really—you know, one of the things I've been worried about was, well, maybe after Q1, we're gonna see a slowdown, because [of] the unemployment rate, and you know, people may be running out of stimulus and unemployment benefits and all that stuff. Now that I think that we have, the elections turned out the way they turned out, I think—and, you know, Wall Street thinks so, too—the potential of significant stimulus is higher, and that might sort of, you know, grease the skids a little bit for increased consumer spending—which, I mean, is good for the overall economy, but for people who already didn't have enough trucks, it is going to present an additional challenge. And I don't think that maybe that relief that you normally see is going to be a sharp this year.
Victoria Kickham, Senior Editor, DC Velocity 12:43
Lots of challenges ahead, for sure.
Zac, thanks so much for being with us today. I really appreciate it.
Back to you, Dave.
David Maloney, Editorial Director, DC Velocity 12:51
Thank you, Zac and Victoria.
Now let's take a look at some of the other supply chain news from the week. Ben, it appears that the pandemic is continuing to bring tough conditions for shippers so far this year. What are you seeing in the numbers from the market?
Ben Ames, Senior News Editor, DC Velocity 13:06
That's right, Dave. And some of these points really echo what Zac Rogers was talking about, with the contractions of transportation capacity and rising prices. When you add those two things together, it means that many shippers are really seeing some tough conditions. They've seen some of those throughout the past year, of course. We've all seen some of the impacts of the pandemic about spikes in demand for certain goods, and challenging job-safety conditions for those essential workers.
But this week, we've learned that some of those conditions—also as Zac was referring to—might also extend into the first few quarters of 2021. So, to put a little more color on that: This week, Freight Transportation Research—FTR, which is a transportation analysis group—said that its Shipping Conditions Index had shrunk in October to negative 11. And that's its lowest reading in three years. That's an index number, so if it's negative, that means that it's predicting tougher conditions. If it were positive, it would be predicting looser conditions for shippers. And while the firm FTR forecasts that that index number might rise slightly after October, it's not expecting it to get into positive numbers until at least late 2022, which is almost two years from now, so.
We've also seen a similar trend in air freight. The International Air Transport Association, which is a trade group many people see monthly statistics from, said November freight volumes had improved slightly from October, as economies open up, and as we begin to see the early impacts of vaccinations, but they still remain, obviously, depressed compared to 2019. But meanwhile, air capacity has shrunk even faster, due largely to the loss of a lot of space—belly space—in airplanes, because passengers simply aren't flying, so the number of planes in the air is smaller.
And even, as well, on the oceans, we've seen real snarls, with ships and shortages of containers at sea ports. So, as Zac had referenced, there are waiting lines for some of the ships arriving at U.S. West Coast ports, and that continues to make ocean capacity, also, very tight.
David Maloney, Editorial Director, DC Velocity 15:21
Ben, do you see any specific moves from companies to work around those challenges?
Ben Ames, Senior News Editor, DC Velocity 15:26
Right, great question. Some companies are turning to new technologies. Some are trying to work with new partners. But the very biggest ones can make their own arrangements, and this week, we actually saw that Amazon.com, which is of course, one of the biggest of the big, had bought 11 new cargo jets to carry its e-commerce orders. These are Boeing 767 planes that a lot of us have traveled on, back when we were flying around, and those are being actually converted from passenger seats into cargo space, by Delta Airlines, and by WestJet Airlines, which is an economy Canadian line.
So, although Amazon's air capacity is still a lot smaller than familiar names like UPS and FedEx that have hundreds of airplanes, Amazon's growing fast. Its air arm was launched just back in 2016, and it already had a fleet of more than 80 planes before this latest deal, so adding 11 starts to bring it close to 100. So, it's, the company is really looking to build up its own travel lanes in relation to the real shortages that we're seeing in the standard transportation market.
David Maloney, Editorial Director, DC Velocity 16:35
Well, we'll keep tracking those long term impacts that Amazon makes on the air market, and hopefully some of these other conditions get better for shippers as well. Thank you, Ben.
Ben Ames, Senior News Editor, DC Velocity 16:44
David Maloney, Editorial Director, DC Velocity 16:45
And Victoria, poorly packed containers can be dangerous for anyone that has to handle them in the supply chain, and now there are new calls to better assure safety. What can you tell us about those initiatives?
Victoria Kickham, Senior Editor, DC Velocity 16:57
Sure, yeah. Happy to. Thanks, Dave.
Well, this week, two international groups—the transport and logistics insurer called TT Club and a shippers advocacy group called the Global Shippers Forum—urged shippers to take greater responsibility for supply chain safety and security this year, as you mentioned. And this is particularly when it comes to dealing with damage and disasters that occur from poorly packed shipping containers. Container ship fires are among the most cited types of incidents. They're the ones we hear about most. But the groups say poor container packing can lead to a wide range of other problems as well, including things like contamination and other types of environmental issues and challenges.
So, both groups pointed to industry analysis showing that, I think it was something like two-thirds of cargo damage incidents, including fires, are either caused or exacerbated by poor practices at the time of packing the goods into freight containers. And the result is, can be catastrophic, but also, you know, multimillion dollar losses every year for companies, so.
They say the responsibility falls to retailers, manufacturers, traders, exporters, and importers, all of whom rely on global supply chains to transport a wide variety of goods. And the issue affects, you know, all kinds of products. It could be everything from chemical cargoes— you know, things like paint, fertilizers, that kind of thing—to everyday items—you know, electronics, appliances, automobiles—pretty much everything. You've got to be really careful about how you pack things in.
David Maloney, Editorial Director, DC Velocity 18:18
So, exactly what do these groups say shippers could do to improve safety?
Victoria Kickham, Senior Editor, DC Velocity 18:23
Yeah, so they're recommended—recommending—adhering to an industry guideline known as the Code of Practice for Packing of Cargo Transport Units, or CTU code. This is a joint publication of several international groups, and it essentially provides guidance on packing and securing cargo freight containers, either for sea or land transport.
The code is comprehensive and can be a bit complex to navigate, they say, so the two groups that I mentioned earlier partnered to produce what they call a quick guide to the CTU code, and that aims to help make it a bit more manageable and accessible to a wider audience, so we include links to both the code and the guide in our story this week. So, it was really just an interesting look at, you know, what people can do, what shippers can do, as I say, to kind of promote more safety and security.
David Maloney, Editorial Director, DC Velocity 19:08
Yeah, that's always a good idea to promote safe practices within the industry. Thank you, Victoria.
Victoria Kickham, Senior Editor, DC Velocity 19:14
David Maloney, Editorial Director, DC Velocity 19:15
We encourage listeners to go to DCVelocity.com for more on these and other supply chain stories. Go there to check it all out.
Thanks, Ben and Victoria, for sharing highlights of the news this week.
Ben Ames, Senior News Editor, DC Velocity 19:27
Thank you, Dave. I always learn a lot.
Victoria Kickham, Senior Editor, DC Velocity 19:29
Yeah, thank you. Happy to be here.
David Maloney, Editorial Director, DC Velocity 19:31
And again, our thanks to Zac Rogers of Colorado State University for being with us today. We encourage your comments on this topic and our other stories. You could email us at podcast@dcvelocity com.
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We'll be back again next week, when we'll look at handling all those holiday returns. Be sure to join us. Until then, please stay safe and have a great week.