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Susan Boylan is a senior research director in the Logistics, Customer Fulfilment, and Network Design team at Gartner. She has a background in logistics, particularly for fast-moving consumer goods and fresh goods, with over 28 years experience in that field.
David Maloney, Editorial Director, DC Velocity 00:01
It's Earth Day. So what's logistics doing to be kind to the earth? Higher fuel costs are being passed on to shippers. And new rounds of funding for supply chain tech.
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 group editorial director at DC Velocity. Welcome.
Logistics Matters is sponsored by Aptean. Aptean is a global provider of mission-critical, industry-specific logistics and transportation management solutions. Aptean routing and scheduling delivers advanced transportation management systems to world-leading brands, helping them streamline daily operational processes. If you're ready to make savings of up to 30% and unlock the value of your transportation operation, Aptean can help. For more information, visit Aptean.com and discover what's next now.
As usual, our 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 today, we celebrate Earth Day, the one day set aside each year for us to take stock of how we're treating our environment. So, how is the logistics industry doing in meeting its sustainability goals? Joining us from Dublin, Ireland, is our guest to discuss that. She is Susan Boylan, a senior research director in the logistics and customer fulfillment team at Gartner.
Welcome, Susan, and thanks for joining us on Logistics Matters.
Susan Boylan, Senior Research Director, Logistics, Customer Fulfillment, and Network Design, Gartner 01:36
Thank you for having me, David.
David Maloney, Editorial Director, DC Velocity 01:37
A recent U.N. report shows that more must be done immediately to keep global warming under the 1.5 degrees Celsius point, above which it's believed that some climate change will be irreversible. So, how are we doing on that goal?
Susan Boylan, Senior Research Director, Logistics, Customer Fulfillment, and Network Design, Gartner 01:52
Not well, David, if I'm going to be frankly honest. There was the hopeful expectation that maybe downturn for Covid-19 would slow the advance of climate change. You've seen the bounce back, and there's no sign, though, that we are growing back greener. Carbon dioxide emissions, they're rapidly recovering after that temporary blip due to the slowdown, and as a result of this, we're not even close to our reduction targets. If anything, if anything, there's an increasing likelihood from several scientific reports that the temperatures could temporarily breach the threshold of 1.5 degrees Celsius above the pre-industrial era in the next five years. So, now, this, of course, has prompted greater focus on reducing carbon emissions from all areas. But there's no doubt about it: It's time to accelerate our activity on carbon-emissions reductions, and it will be that level of increased focus that will dictate whether we can reach the 1.5 degrees Celsius point or not.
David Maloney, Editorial Director, DC Velocity 01:53
And, of course, logistics and transportation accounts for a good portion of that—not the major portion, but a good chunk of it. So, one of the ways that logistics companies are trying to do that is by buying offsets. Are they really just doing penance for paying fees for the pollution that our supply chains produce, or are offsets really making any kind of a change?
Susan Boylan, Senior Research Director, Logistics, Customer Fulfillment, and Network Design, Gartner 03:17
Well, there's no doubt that offsets do provide an—I like to word "penance" there—they probably do provide a certain level of guilt alleviation, if you're thinking about it. And for almost every logistics movement, whether that's a person—yourself—or a product, you are offered the opportunity to offset a lot of supply chain services or products. Now there are benefits to it, obviously, for trees being planted, etc, etc., but they will only go so far, and the more practical levers for CO2 emissions should be leveraged first. Mode optimization, mode changes, customer behavior [nudges?], investments in clean technology. They should be all actioned first, before you consider offsets. At the top of our emissions pyramid at Gartner, the offset's are the top piece, so really more preventative than corrective—which is what offsets are—is the way to go here. I mean, there's still good reasons to buy offsets, and there's a thought process that they would provide greater environmental awareness, but we cannot and really should not rely on the offset market to reverse climate change. Now, some would argue that purchasing offsets is easier than continuing to restrain consumption, and that the feelgood factor of buying offsets could actually be counterproductive, as it can increase consumption, but I suppose that's more down to individualistic behavior rather than the collective good. So, while they are an option, potentially, to bridge a gap, only after you've pulled all your other levers should you look at offsets.
David Maloney, Editorial Director, DC Velocity 04:51
That certainly makes sense. One initiative that the maritime industry is taking is the IMO 2023 regulations. Can you explain what the goals of those regulations are and the expected progress that will come from them?
Susan Boylan, Senior Research Director, Logistics, Customer Fulfillment, and Network Design, Gartner 05:06
So the International Maritime Organization has agreed to a proposal to improve carbon intensity of ships by 2% annually between 2023 and 2026. Now, that may not sound like much, but ultimately, they're looking for a 40% reduction in the carbon intensity of fleets by the existing fleet by 2030. Now, that's a big ask. There are two requirements. First of all, there's the carbon intensity indicator, where ship owners will have to calculate the carbon intensity factor for each ship annually and then develop a plan to cut the carbon intensity to meet those targets set out by the IMO, and this is—the aim of this is to improve the energy efficiency of oceangoing vessels. In addition to that, ships will have to calculate their energy-efficiency existing ship index—EEXI—for ships over 5,000 gigatons, and they will have to establish their carbon intensity indicator rating, and they'll have to have their classification. So, the ships will get a rating of their energy efficiency, based on these two measurements, of an A, B, C, D, or E, obviously, A being best. Now the IMO are going to be quite vociferous around this. They're encouraging administrations, port authorities, and other stakeholders to provide incentives to ships rated as an A or B. Ships rated D or E for three consecutive years most submit a corrective plan to show how the required index of C or above can be achieved. Now, what does this mean to shippers and service providers? Well, there are three options essentially for those D and E ships: Recalibration, where the ship is dried docked and it's recalibrated to meet the standards; they may look at the ship, the vessel itself, and say, "Well, the juice isn't worth the squeeze here. We will scrap the vessel;" or slow steaming, which allows you to reduce your carbon emissions from from your oceangoing vessel. Now, these are available, but they also have the potential to shrink ocean-vessel capacity. So, now is the time to have the conversation with your ocean freight forwarder to see what are their plans around IMO 2023 and what impact it's going to have on you as their customer.
David Maloney, Editorial Director, DC Velocity 07:21
Right. Of course, ocean shipping is just part of the puzzle. The biggest polluters, probably, in logistics would be those over-the-road vehicles, and we see steps to move public, private, and commercial transportation to electric vehicle platforms. Yet we also have seen reports in the news lately of the shortage of lithium needed to make all those future batteries, and we of course lack the charging infrastructure that's going to be needed to make that all happen. So, is moving away from internal-combustion engines realistic?
Susan Boylan, Senior Research Director, Logistics, Customer Fulfillment, and Network Design, Gartner 07:52
To be honest, Dave, I don't think we're go—I think the reality is that we will have no choice but to move away, and either legislatively or based on the input from your various stakeholders, particularly in the light of the lack of progress we have seen in terms of reducing CO2 emissions. Yes, I've also read the reports around the lithium shortage, but there are other activities that are underway to try and mitigate the amount of lithium needed. I read a few articles on how this is going to be achieved: recycling, so that you don't have to mine each time for lithium. But again, this is the very start of its life, so, in its infancy, so that must be escalated. You know, many are searching for a replacement for lithium. Salt, or sodium, is a close chemical to lithium, but it's also three times heavier, so that causes a problem—lower cell voltage. A team at the Karlsruhe Institute of Technology in Germany has developed a prototype battery based on seawater, which I thought was super interesting, and also iron could be, perhaps, a strong lithium substitute. So, while we are looking at the reality of moving away from internal-combustion engines, I think considering this, the lack of progress for CO2 emissions reductions, that's going to happen. It's just, how do we solve the problem of how we power these batteries, and there's plenty of activity to try and find substitutes for lithium, as well as using lithium for that.
David Maloney, Editorial Director, DC Velocity 09:19
Well, let's hoped that future technology makes it here as soon as possible.
Susan Boylan, Senior Research Director, Logistics, Customer Fulfillment, and Network Design, Gartner 09:23
Indeed.
David Maloney, Editorial Director, DC Velocity 09:25
What steps should carriers be making to reduce their carbon footprints?
Susan Boylan, Senior Research Director, Logistics, Customer Fulfillment, and Network Design, Gartner 09:30
I suppose it depends on where you are on your sustainability journey, Dave, to be honest. Like, the first thing you've got to establish—let's imagine you're at the start—is to establish what your current CO2 emissions are. Collect your baseline data over a 12-month period, and this will give him your starting point. However, a lot is going to depend on the carbon neutrality targets of your customers. So, it's important to understand what your customers' targets are, and whether you're in a position to either, a) help or, b) hinder your customers deliver their objectives. And you also need to understand what investment will be required if you're to meet both theirs and your targets. You can, as a carrier, expect an increase from your customers in terms of requests around your sustainability targets and capabilities. Questions around sustainability are becoming far more prescriptive in RFPs and RFQs, and carriers will need to be able to answer these questions comprehensively. And you need to keep abreast of the latest developments and best practices in the industries. Some 3PLs are negotiating at a scale on behalf of their subcontractors to convert to sustainable transport. If you're operating on behalf a 3PL or you're a subcontractor, it's worth engaging with them on their sustainability strategy, and see, can you leverage their economies of scale to bring you along on that sustainability journey?
David Maloney, Editorial Director, DC Velocity 10:51
We just talked about carriers. What are some of the practical things that shippers can do to move to more sustainable supply chains?
Susan Boylan, Senior Research Director, Logistics, Customer Fulfillment, and Network Design, Gartner 10:59
Well, there's a lot you can do, but there are tradeoffs. Dave, to be honest. I mean, you can look at how you're increasing the mode. Two of the biggest levers that we see shippers pulling is the change to mode—so, moving, say, from air to sea freight. If you're in the last-mile sector of the of the logistics business, increasing cargo bikes—I mean, it depends on your your end product, of course. If you've got a big Caterpillar digger, it's not going to go on the back of a cargo bike, so you need to kind of be product-savvy when it comes to how you change your mode freight. Load optimization, huge piece. You know, how much more can you get for your CO2 emissions buck, so to speak? Note your behaviors, note your customers' behavior, actually—excuse me, note your customers' behavior. Find out if they are willing to have a more sustainable journey for your product, even if it means an increased leadtime. You can look at empty movements. You can look at your network design. You can look at your current policies. Are they up to scratch? Where do you want to see yourself? Do you want to see yourself as being a basic compliant, you know, where you're just looking at risk avoidance from a sustainability perspective, or do you want to be a first mover in this space, where sustainability is going to be a source of your competitive advantage? And the other thing is—and I call it the prickly pear of cost—understand the cost of your transition. You need to assess your green premium and your capability to invest, whether that's within an in-house environment, or whether that's alongside your 3PL, but, again, those areas. Cost, capability, customer behavior will be three that I will be looking at straightaway.
David Maloney, Editorial Director, DC Velocity 12:40
All very good advice. We've been talking with Susan Boylan, a senior research director in the logistics and customer fulfillment team at Gartner. Thank you, Susan, for joining us.
Susan Boylan, Senior Research Director, Logistics, Customer Fulfillment, and Network Design, Gartner 12:52
You're very welcome, David. I thoroughly enjoyed the conversation. Thank you so much.
David Maloney, Editorial Director, DC Velocity 12:57
Now let's take a look at some of the other supply chain news from the week. And, Victoria, you wrote this week about [how] higher fuel costs are forcing higher expenses for shippers. Can you share the details?
Victoria Kickham, Senior Editor, DC Velocity 13:08
Absolutely. Dave. Yeah, we just can't seem to escape the effects of inflation, and it's really hitting shippers hard. They continue to struggle with high freight and transportation costs, for example, and it's driven by surging fuel prices and other market forces that are simply raising rates across the board. This was reinforced in a recent second-quarter outlook report from Cowen Research and third-party logistics service provider AFS Logistics. Their Cowen/AFS Freight Index analyzes AFS Logistics freight data across different transportation modes, including less-than-truckload, parcel express, parcel ground, and truckload. The most recent report, which was actually released last week, predicts record high rate levels for parcel and LTL shipments in particular—and again, driven mainly by fuel, particularly the fuel surcharges carriers are implementing. Just for a bit of background, AFS manages about $11 billion in freight spending for clients in North America, and this quarterly index, which is a relatively new report covering the logistics market, offers a sort of forward-looking view of transportation and freight-industry trends. The companies use a team of data scientists, who analyze AFS's client data to track trends over time and also predict conditions a few weeks out. So, the report is released about the second week of each quarter, so it can provide that forward-looking view of what they expect to see in the remaining weeks. Back to the numbers, market conditions have pushed LTL carriers to adjust fuel surcharges, and that drove huge increases in fuel-related costs in the first quarter of this year. According to the index, the average fuel charge among LTL carriers grew from about 28% in the fourth quarter of last year to 42% in March—so, a really big increase there. Parcel costs grew as well. Both FedEx and UPS implemented changes to fuel surcharges, which our listeners will be familiar with, and that resulted in increases of about 129% in express parcel and 89% for ground parcel, compared to last October. Now, again, that's based on the Cowen/AFS data, which measures what they call the net effective fuel charge, and that's the actual fuel paid as a percentage of total spend across their network. So, this looks at a very specific set of data, but the bottom line is that shippers are paying a lot more to move freight today than they did just six months ago.
David Maloney, Editorial Director, DC Velocity 15:40
Certainly seems that way. You said that the index also tracks trends in the truckload market. What's the situation there?
Victoria Kickham, Senior Editor, DC Velocity 15:48
Yeah, that's right, and conditions are—seem to be a bit better in that segment. The index predicts slowing rate growth in truckload, primarily due to anticipated softening demand this year compared to last year. The monthly data point to continued rate per-mile increases, but at a slower pace compared to last year. The index is expected to grow from about 25% in the first quarter to plateau at around 27% in the second quarter, which the researchers said is just a much lower growth rate than they've seen previously. I spoke to AFS's CEO Tom Nightingale about the report, and he was pretty clear that, in general, higher costs are really going to continue for some time. When we spoke last week, diesel fuel prices had risen from [$]3.61 a gallon in early January to [$]5.14 a gallon at the beginning of the second quarter. He said the expectation is that those prices should come down to a more reasonable—I put that in quotes—level of $4 to $4.50 a gallon, but he noted that that pricing, of course is still very high. Nightingale did offer some advice for shippers in this tough environment. He said it's important to look at your freight spend holistically, and what he meant by that was that, you know, you shouldn't focus solely on, you know, negotiating more favorable incentives on surcharges, or fuel, or a specific mode, but you should be looking across all modes of transportation for opportunities to save. He suggested looking at alternate mode options, such as, you know, converting parcel to LTL, LTL to multistop truckload, and truckload to volume LTL, and also looking for nonpremium parcel options that may still meet your required timeframe. So, some opportunities there to look into, but, again, the overall outlook is for much of the same for the time being.
David Maloney, Editorial Director, DC Velocity 17:41
Right. Thanks, Victoria.
Victoria Kickham, Senior Editor, DC Velocity 17:43
You're welcome.
David Maloney, Editorial Director, DC Velocity 17:45
And, Ben, you reported this week on the latest waves of investment funding coming into logistics tech startups. What more can you tell us?
Ben Ames, Senior News Editor, DC Velocity 17:53
That's right, we've been covering many rounds of investment coming into startup firms in recent years. They come from sources like venture capital and private equity firms, as well as large corporations, and you sometimes we even see some of the wealthier tech executives themselves. Investors just seem to love logistic tech startups, and they obviously see a lot of potential for big future growth. This week, we saw the latest example of that, which was a $260 million round for the digital freight-matching startup Convoy. It's actually even more than that, because the total includes three parts. There's $160 million, equity round; a $100 million venture investment; and a $150 million dollar line of credit. But in total, the investments value Convoy at [$]3.8 billion. with a B, so you can see that this stuff is getting serious. We've seen some big investment rounds before. This is among the largest. It also signifies that this sector of small startups is starting to mature. For example, the Convoy round was what's called a Series E investment round, starting at Level A, B, C, etc. That E level is typically the last stop before a startup goes public. And also, its valuation has got to grab attention, that bottom-line number. In investment lingo, we've talked before, it's a big deal when a startup gets over [$]1 billion in value. They call that a unicorn. And that 3.8 billion, Convoy, of course is nearly four times that now. So, I asked the company how long these investment rounds for logistics tech startups can keep going—whether the little guys can just keep growing, or whether we're going to see some consolidation, maybe, where they combine and get rolled up into bigger companies—and Convoy's cofounder and CEO, Dan Lewis, said that historically, the freight industry has underinvested in technology, and over time the traditional players have managed to still hold on tight to their market share, but between this flood of outside investment and the rise of new technologies and the turbulence caused by the pandemic, conditions might be right for those tables to start to turn.
David Maloney, Editorial Director, DC Velocity 20:06
Well, sure that makes sense, but isn't that what startup firms usually say?
Ben Ames, Senior News Editor, DC Velocity 20:11
Yes, fair point. He's—they're pretty much paid to say that, right? But there are a number of reasons to think that Lewis is right about this one. I asked him whether his smartphone app that Convoy has designed works better just because we're currently in a historically very tight freight market, where there's a ton of demand for truck space, but he said that the digital model actually works in any market, because, as he says, efficiency is always king. So, Lewis agreed that freight markets actually might be softening a little bit right now from their very, very, very tight mark on the curve there, and that could tip the scales back toward shippers and away from carriers. I know shippers all hope that that's true, those who are listening to us today. But, Lewis said right now, we're at yet another challenging point for the U.S. supply chain. Logistics leaders have been through one of the most volatile periods in freight history, and drivers are being squeezed by record high fuel prices that have nearly doubled year over year. Businesses that run the most efficiently, Lewis said, will be better positioned to thrive when the market is tight and when the market is soft. So, in Convoy's view, if a logistics firm is nimble enough, it can deliver a better experience for both shippers and carriers in any environment. And if that's true, of course, they'll win more users. So, Lewis said, quote, "We expect to see some consolidation. It will be less about combining digital players, and more about those tech-led companies consolidating business from traditional incumbents that are unable to keep up with the rapid pace of innovation." So, time will tell if he's right, but we can all agree we're certainly living through some of those really turbulent times he described in the transportation sector, and sometimes those kinds of forces is what's needed to lead to real change.
David Maloney, Editorial Director, DC Velocity 21:59
Right. I guess about the only thing that's constant in this industry of late is change. Thanks, Ben.
Ben Ames, Senior News Editor, DC Velocity 22:05
Glad to do it.
David Maloney, Editorial Director, DC Velocity 22:07
We encourage listeners to go to DCVelocity.com for more on these and other supply chain stories. And check out the podcast Notes section for some direct links on the topics that we discussed today.
And our thanks to Susan Boylan of Gartner for being our guest today. We welcome your comments on this topic and our other stories. You can email us at podcast@dcvelocity.com.
We also encourage you to subscribe to Logistics Matters at your favorite podcast platform. Our new episodes are uploaded each Friday.
And speaking of subscribing, we encourage you to check out our sister podcast Supply Chain in the Fast Lane. It's coproduced by the Council of Supply Chain Management Professionals and Supply Chain Quarterly. This past Tuesday we discussed the state of the rail market; next Tuesday we'll look at the 3PL market. Subscribe to Supply Chain in the Fast Lane wherever you get your podcasts, and be sure to catch the past episodes.
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We'll be back again next week with another edition of Logistics Matters, when we'll talk to Michael Makitka of MHI and Warehousing Education and Research Council, so be sure to join us. Until then, please stay well and have a great week.
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