Covid lockdowns in China. Moderating demand easing capacity constraints. Softening e-commerce sales as brick-and-mortar stores make a comeback. Is it just an early, temporary seasonal lull for parcel carriers or a harbinger of a shifting market?
Gary Frantz is a contributing editor for DC Velocity and its sister publication CSCMP's Supply Chain Quarterly, and a veteran communications executive with more than 30 years of experience in the transportation and logistics industries. He's served as communications director and strategic media relations counselor for companies including XPO Logistics, Con-way, Menlo Logistics, GT Nexus, Circle International Group, and Consolidated Freightways. Gary is currently principal of GNF Communications LLC, a consultancy providing freelance writing, editorial and media strategy services. He's a proud graduate of the Journalism program at California State University–Chico.
A year ago, parcel carriers were awash in e-commerce–fueled shipments as homebound consumers, flush with Covid-stimulus cash, flocked online to buy everything from foodstuffs to furniture to home-improvement goods. Home deliveries and overall parcel volumes exploded. E-commerce levels once expected to take four years to reach arrived with a vengeance in 2021, stressing carrier service levels and consuming capacity.
A year later, e-commerce continues to drive strong parcel volumes. Despite consumers once again cruising the aisles at shopping malls, department stores, and big-box warehouses, those millions who discovered the ease and convenience of buying online and home delivery during the pandemic aren’t abandoning their digital shopping carts. They’re online, they’re staying there, they’re ordering nearly as much as ever, and they’re not going back.
The first quarter of 2022 saw parcel carriers report strong earnings and growth. Yet despite confidence in continued growth, the picture coming into focus for the remainder of 2022 is muddled. Challenges abound from issues already present and on the horizon: Painful, persistent inflation. Shrinking consumer paychecks and increasing living expenses across the board. Rising interest rates. Record-high gas prices. Continued supply hiccups impacting the production of everything from refrigerators to automobiles. And a stubborn resurgence of Covid-19 cases in China that’s locked down Shanghai’s port, has delayed ships, and threatens a repeat of last year’s port logjams and supply chain delays.
John Janson is senior director of global logistics at promotional products company SanMar, which operates eight distribution centers around the country and dispatches some 100,000 parcel shipments each night. He recalls seeing a recent overhead view of the Port of Shanghai and the surrounding waters. “You could hardly see water,” there were so many ships parked offshore, he notes. And stacks and stacks of containers waiting on shore. Rising Covid cases had dramatically curtailed port operations.
As cases subside and the port plays catchup, he fears “the potential to throw us right back into a very congested period” as a delayed surge of goods—a “bullwhip effect,” if you will—begins to make its way across the ocean, hitting U.S. ports in early to mid-June. “You look at the number of container moves Shanghai can do in an hour, and what they can do at [the ports of] Long Beach and Los Angeles. Just do the math. It will be hard for Los Angeles and Long Beach to catch up.”
He adds that the current negotiations between U.S. port operators and the International Longshore and Warehouse Union, which began in mid-May, create another potential concern. “We can’t afford to have the West Coast go on strike,” Janson says. He estimates that a one-week strike, timed just as the China surge of ships is arriving, “will cause three- to four-week delays in supply chain flows.”
David Gonzalez, VP analyst with research firm Gartner, echoes Janson’s China concerns. “We … expect service issues [on the Asia trades] and maybe some [canceled] sailings by ship lines as they try to recover from the delays.” He also notes that any significant resurgence of Covid cases in the U.S. would have supply chain implications as well, as rising cases could disrupt the pool of warehouse workers, truckers, and other logistics personnel who keep parcel volumes flowing.
THE CHALLENGE OF “UGLY” FREIGHT
Nevertheless, shippers are devising strategies and parcel carriers are marshaling their resources to meet the challenges, and hopefully continue the momentum they’ve enjoyed so far this year. Some dynamics that all players seem to agree on: Rates will increase, fuel and peak surcharges and accessorials will continue to be imposed, and carriers will do all they can to avoid odd-sized “ugly” shipments that are difficult and expensive to handle.
“Carriers have become very disciplined in understanding the effect of large and bulky packages,” notes Satish Jindel, chief executive officer of analytics firm ShipMatrix, adding that “it’s only ugly if it has bad pricing. When one of those [big and bulky shipments] displaces 10 or 20 smaller parcels, [carriers] are intent on making sure that the big and bulky shipment generates the same, or closer to the same, amount of revenue.”
Jindel adds that those shippers who want to secure reliable capacity will do best by forecasting their needs more precisely and updating them regularly; making their freight as efficient as possible for parcel carriers to pick up, process, and deliver; and helping carriers maximize use of every cubic foot of space on the truck.
Carol Tomé, chief executive officer of parcel giant UPS, in its first-quarter 2022 earnings conference call, noted as well the focus on quality traffic, improving productivity, and strengthening customer relationships. “We continue to pivot toward opportunity,” she said. “We are leveraging the power of our data to become much more agile. Under our ‘Better, not bigger’ framework, we are investing in the capabilities that matter most to our customers … this is about creating a frictionless customer experience.”
Technology investments are driving both better customer experiences and productivity gains at UPS. One initiative, its “Digital Access Program” (DAP), is helping speed the customer onboarding process, particularly with small and medium-sized businesses. In the first quarter, UPS created more than 500,000 DAP customer accounts, which is more than three times the number created in the first quarter of last year, Tomé said.
Investments in automated facilities along with productivity initiatives have enabled the company to eliminate 1,300 trailer loads per day. And the rollout of RFID (radio-frequency identification) technology, to be completed at 100 sort centers in 2022, is expected to eliminate manual scanning by pre-loaders and help reduce mis-sorts. “We’re really about putting our resources where we can get the highest return,” Tomé said.
As for pricing, “[it’s] really a function of demand and supply, and there is still a demand and supply imbalance, particularly in certain geographies around the world,” she said.
With respect to e-commerce behemoth Amazon, Tomé commented, “We have a very good relationship with Amazon. They are our largest customer,” she said, adding “we’ve reached agreement with Amazon about the packages that we will take in our network and the packages they will deliver on their behalf. And it’s a mutually beneficial relationship.”
POOR PACKAGING PRACTICES RAISE COSTS
Still, as shippers struggle to cope with the steady rise in parcel rates and challenges securing ample, consistent capacity, there remain cost-saving and efficiency-driving steps they can undertake to make their parcel traffic more attractive to carriers.
One area is packaging. “Shippers can focus on smarter packaging,” notes Helane Becker, who follows the parcel carrier market as senior research analyst covering airlines and air-related industries for investment firm Cowen & Co. “The one thing we still hear constantly is all these trucks cube out before they weigh out,” she says, noting that too often, shippers are putting a tiny box into a large box, wasting precious space and paying more than they should.
She recommends that shippers take advantage of services and resources available from both UPS and FedEx, which offer packaging tips “to help them ship more ‘ecofriendly’ and more efficiently, with less wasted space.”
ShipMatrix’s Jindel agrees. “[Shippers] need to work on getting rid of the ‘one-pound product tossed in a box that is designed for 15 pounds’ mentality,” he notes. He cites the example of a tube of mascara, which a colleague recently ordered. “A one- by three-inch tube, already packed in a small (1.5- by 1.5- by 3.75-inch) box came in a five- by eight- by 11-inch box. That’s 50 times the cube of the package it was already in. That’s a tremendous waste of packaging and shipping capacity. And the consumer is paying extra” for that unused space.
“Transportation is perishable,” explains Jindel. “If you don’t use it on the day you have it, it’s gone the next day.”
FINDING PILOTS, TRUCKERS, WAREHOUSE WORKERS
Cowen’s Becker points to another intractable, and likely worsening, issue for shippers and parcel carriers: finding and keeping enough skilled workers to work in warehouses and fulfillment centers, drive trucks, deliver parcels, and fly freighter aircraft. “We talked a lot about this during the past peak season,” she notes. “In 2018, UPS was hiring seasonal workers for $13 an hour. This past peak, it was hiring at $25 an hour. That’s a huge increase in labor expense.”
She also cites the projected retirement of aircargo pilots. “UPS and FedEx have a fair number of pilots retiring this decade,” she notes. At the same time, the traditional pool of replacement pilots, which normally come from regional passenger airlines, is under pressure from all-cargo airlines like Atlas Air and Amazon’s growing freighter fleet, which are hiring aggressively.
“We think pilot attrition in the regional airline industry is somewhere between 10% and 25%,” Becker says. “Forecasts project that the airline industry will have to hire 10,000 pilots a year to make up for attrition,” she notes. Yet the U.S. “only trains 5,000 a year.” She cited a comment by United Airlines’ CEO, who projects the shortage will last five years.
In the meantime, Becker says, “to the extent they can, [parcel carriers] will try to shift all they can from air to road,” where they will run smack into a shortage of drivers for trucks. “If you have to pay more to attract drivers, you are going to raise rates to cover it, and that just creates additional inflationary pressure.”
At the end of the day, “shippers who have undesirable freight will pay a heavy price for it,” says SanMar’s Janson. “Those who pit one carrier against [another] are the ones who will struggle and will face capacity constraints. [Parcel carriers] want to work with shippers who recognize the challenges they face and will work with them to help optimize their networks and the finite capacity they have available.”
Jeremy Van Puffelen grew up in a family-owned contract warehousing business and is now president of that firm, Prism Logistics. As a third-party logistics service provider (3PL), Prism operates a network of more than 2 million square feet of warehouse space in Northern California, serving clients in the consumer packaged goods (CPG), food and beverage, retail, and manufacturing sectors.
During his 21 years working at the family firm, Van Puffelen has taken on many of the jobs that are part of running a warehousing business, including custodial functions, operations, facilities management, business development, customer service, executive leadership, and team building. Since 2021, he has also served on the board of directors of the International Warehouse Logistics Association (IWLA), a trade organization for contract warehousing and logistics service providers.
Q: How would you describe the current state of the contract warehouse industry?
A: I think the current state of the industry is strong. For those that have been focused on building good client relationships over the years, I think it’s a really exciting time. Coming out of all the challenges of the past few years, I think there’s a lot of opportunity for growth and deeper partnerships. It’s fun to see the automation and AI (artificial intelligence) integration starting to evolve [in a way that’s] similar to what we saw with WMS (warehouse management systems) in the early 2000s.
Q: You are now president of your family firm. Is it an advantage having grown up in the business as opposed to working elsewhere?
A: I definitely believe it was an advantage growing up in the business. Whether it’s working with family or someone else in the industry, there’s always an advantage when you have mentors[to guide] you. I’ve been blessed to have several mentors, some in the industry, others just in life, and I’m thankful that they were willing to mentor me and that I was willing to listen to them.
Q: What are the biggest challenges currently facing 3PLs, and how are you addressing them?
A: Labor and legislation are both tough right now. The two seem to have a lot to do with each other, and it can make it tough to find and retain people. So I think we’ll see more and more automation of processes industrywide.
Q: Third-party service providers often must handle a wide variety of products for a lot of different clients. Does this variety make it difficult to invest in automation and other new technologies?
A: It can make things more difficult when looking at certain automation, but it’s in the “difficult” that a lot of opportunities lie. It would be tough to find a single solution that fits every client’s needs, but there are always opportunities to improve in certain areas. It just takes a bit of vision and commitment, and a willingness to invest in your own long-term success.
Q: As a 3PL, what do you look for when selecting the clients you work with?
A: Quality relationships that will last a long time. When both parties are happy and working together in the same direction, everyone wins.
Q: You’ve been a board member of the International Warehouse Logistics Association since 2021. Why is your involvement with this organization important to you?
A: I think it’s important to understand what’s happening in the industry. IWLA is a great resource for staying up to date and getting a solid education when it comes to the latest logistics trends. I also think it’s important to give back and pass along what we’ve learned to those just getting started in the business. As important as it is to have a mentor, it’s just as important to mentor and help others.
“While there have been some signs of tightening in consumer spending, September’s numbers show consumers are willing to spend where they see value,” NRF Chief Economist Jack Kleinhenz said in a release. “September sales come amid the recent trend of payroll gains and other positive economic signs. Clearly, consumers continue to carry the economy, and conditions for the retail sector remain favorable as we move into the holiday season.”
The Census Bureau said overall retail sales in September were up 0.4% seasonally adjusted month over month and up 1.7% unadjusted year over year. That compared with increases of 0.1% month over month and 2.2% year over year in August.
Likewise, September’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.7% seasonally adjusted month over month and up 2.4% unadjusted year over year. NRF is now forecasting that 2024 holiday sales will increase between 2.5% and 3.5% over the same time last year.
Despite those upward trends, consumer resilience isn’t a free pass for retailers to underinvest in their stores by overlooking labor, customer experience tech, or digital transformation, several analysts warned.
"The 2024 holiday season offers more ‘normalcy’ for retailers with inflation cooling. Still, there is no doubt that consumers continue to seek value. Promotions in general will play a larger role in the 2024 holiday season. Retailers are dealing with shrinking shopper loyalties, a larger number of competitors across more channels – and, of course, a more dynamic landscape where prices are shifting more frequently to win over consumers who are looking for great deals,” Matt Pavich, senior director of strategy & innovation at pricing optimization solutions provider Revionics, said in an email.
Nikki Baird, VP of strategy & product at retail technology company Aptos, likewise said that retailers need to keep their focus on improving their value proposition and customer experience. “Retailers aren’t just competing with other retailers when it comes to consumers’ discretionary spending. If consumers feel like the shopping experience isn’t worth their time and effort, they are going to spend their money elsewhere. A trip to Italy, a dinner out, catching the latest Blake Lively and Ryan Reynolds films — there is no shortage of ways that consumers can spend their discretionary dollars,” she said.
Editor's note:This article was revised on October 18 to correct the attribution for a quote to Matt Pavich instead of Nikki Baird.
The market for environmentally friendly logistics services is expected to grow by nearly 8% between now and 2033, reaching a value of $2.8 billion, according to research from Custom Market Insights (CMI), released earlier this year.
The “green logistics services market” encompasses environmentally sustainable logistics practices aimed at reducing carbon emissions, minimizing waste, and improving energy efficiency throughout the supply chain, according to CMI. The market involves the use of eco-friendly transportation methods—such as electric and hybrid vehicles—as well as renewable energy-powered warehouses, and advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI) for optimizing logistics operations.
“Key components include transportation, warehousing, freight management, and supply chain solutions designed to meet regulatory standards and consumer demand for sustainability,” according to the report. “The market is driven by corporate social responsibility, technological advancements, and the increasing emphasis on achieving carbon neutrality in logistics operations.”
Major industry players include DHL Supply Chain, UPS, FedEx Corp., CEVA Logistics, XPO Logistics, Inc., and others focused on developing more sustainable logistics operations, according to the report.
The research measures the current market value of green logistics services at $1.4 billion, which is projected to rise at a compound annual growth rate (CAGR) of 7.8% through 2033.
The report highlights six underlying factors driving growth:
Regulatory Compliance: Governments worldwide are enforcing stricter environmental regulations, compelling companies to adopt green logistics practices to reduce carbon emissions and meet legal requirements.
Technological Advancements: Innovations in technology, such as IoT, AI, and blockchain, enhance the efficiency and sustainability of logistics operations. These technologies enable better tracking, optimization, and reduced energy consumption.
Consumer Demand for Sustainability: Increasing consumer awareness and preference for eco-friendly products drive companies to implement green logistics to align with market expectations and enhance their brand image.
Corporate Social Responsibility (CSR): Companies are prioritizing sustainability in their CSR strategies, leading to investments in green logistics solutions to reduce environmental impact and fulfill stakeholder expectations.
Expansion into Emerging Markets: There is significant potential for growth in emerging markets where the adoption of green logistics practices is still developing. Companies can capitalize on this by introducing sustainable solutions and technologies.
Development of Renewable Energy Solutions: Investing in renewable energy sources, such as solar-powered warehouses and electric vehicle fleets, presents an opportunity for companies to reduce operational costs and enhance sustainability, driving further market growth.
A real-time business is one that uses trusted, real-time data to enable people and systems to make real-time decisions, Peter Weill, the chairman of MIT’s Center for Information Systems Research (CISR), said at the “IFS Unleashed” show in Orlando.
By adopting that strategy, they gain three major capabilities, he said in a session titled “Becoming a Real-Time Business: Unlocking the Transformative Power of Digital, Data, and AI.” They are:
business model agility without needing a change management program to implement it
seamless digital customer journeys via self-service, automated, or assisted multi-product, multichannel experiences
thoughtful employee experiences enabled by technology empowered teams
And according to Weill, MIT’s studies show that adopting that real-time data stance is not restricted just to digital or tech-native businesses. Rather, it can produce successful results for companies in any sector that are able to apply the approach better than their immediate competitors.
“ExxonMobil is uniquely placed to understand the biggest opportunities in improving energy supply chains, from more accurate sales and operations planning, increased agility in field operations, effective management of enormous transportation networks and adapting quickly to complex regulatory environments,” John Sicard, Kinaxis CEO, said in a release.
Specifically, Kinaxis and ExxonMobil said they will focus on a supply and demand planning solution for the complicated fuel commodities market which has no industry-wide standard and which relies heavily on spreadsheets and other manual methods. The solution will enable integrated refinery-to-customer planning with timely data for the most accurate supply/demand planning, balancing and signaling.
The benefits of that approach could include automated data visibility, improved inventory management and terminal replenishment, and enhanced supply scenario planning that are expected to enable arbitrage opportunities and decrease supply costs.
And in the chemicals and lubricants space, the companies are developing an advanced planning solution that provides manufacturing and logistics constraints management coupled with scenario modelling and evaluation.
“Last year, we brought together all ExxonMobil supply chain activities and expertise into one centralized organization, creating one of the largest supply chain operations in the world, and through this identified critical solution gaps to enable our businesses to capture additional value,” said Staale Gjervik, supply chain president, ExxonMobil Global Services Company. “Collaborating with Kinaxis, a leading supply chain technology provider, is instrumental in providing solutions for a large and complex business like ours.”