Supply Chain Resiliency Requires More AI and Automation as Capacity Profile Changes

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2Q 2022 | IN-6545

The spot market for freight is down double digits at the same time that UPS saw U.S. average daily residential volume decline by about 611,000. Amazon reported that online sales declined by 3%, influencing its first quarterly loss in 7 years. Technology adoption is needed for enhanced agility to better anticipate and respond to these fluctuations.

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Demand Softens and Available Capacity Grows

NEWS


Since the beginning of March, U.S. freight demand has been falling with shippers’ outlooks on rates reaching lows not seen since May 2020 during the pandemic lockdowns. According to the Bank of America, shippers’ views of trucking demand is down 23% Year-over-Year (YoY), nearly hitting “freight recession levels,” while outlooks on capacity and inventory levels have reached their highest levels since May 2020. The spot market, which makes up 20% of the U.S. trucking market, is also down with truckload spot rates falling around 15% according to DAT Freight & Analytics.

Bigger May Be Better for Now

IMPACT


The decline in demand for trucking may be an early sign of an economic downturn as freight is often considered an indicator of economic performance. Trucks transport 72% of all freight, so falling demand suggests consumers are not buying as much and business activity is beginning to slow. A 2019 study by trucking brokerage firm Convoy found that 6 out of 12 trucking recessions since 1972 led to economic recessions. Spot rates became negative in April and historical trends estimate that this may continue for another year or two. By early April, the Dow Jones Transportation Average dropped almost 5% in one of its most dramatic single-day results in memory.

This decline in parcel volume is linked to slowing e-commerce growth, as the tremendous increase in online sales fueled by the pandemic begins to recede. E-commerce grew just 2.6% YoY in March, the weakest growth in more than 3 years. Inflation is another factor leading to shoppers and businesses altering their behavior. Over the last year, the personal consumption price index grew 6.6%, from 6.4% in February, and inflation rose 8.8% in March., the largest increase in more than 40 years. Record-high gas prices cut consumer spending. The Russia-Ukraine war has also impacted inflation and growth, increasing costs for fuel, raw materials, and agricultural products.

At least for 1Q 2022, some of the largest commercial fleets and Third-Party Logistics (3PL) providers have not yet taken a hit, with C.H. Robinson, Knight-Swift, Kuehne + Nagel, Covenant, and others reporting record volumes, earnings, and profits. However, demand is expected to soften further in 2Q 2022. Many large enterprise fleets have long-term contracts that provide more protection of capacity and freight rates at least for some period of time. The lower spot rates are particularly brutal for owner-operators, who are also addressing higher fuel prices and competing for drivers. Those small fleets grew exponentially, as did freight rates, with more than 10,000 new carriers registering with the Federal Motor Carrier Safety Administration (FMCSA) monthly over the last year or so.

DHL (the largest global contract-logistics supplier) remains more bullish on avoiding a full recession, with its head of transport for supply chain sharing that he does not yet see a downturn in bigger-ticket items, based on backlog and more dispersed demand. The company still sees manufacturing, automotive, engineering, life sciences, and healthcare going strong, yet with a concurrent demand shift to more services.

Fundamentals, Flexibility, and Predictive Analytics

RECOMMENDATIONS


Fundamentally, the same approaches that were required during the early stages of the pandemic apply. Companies must know and track all of their suppliers and their suppliers’ suppliers. Signals need to be read constantly End-to-End (ETE). Everything—from orders to inventory and staffing to transport and logistics—needs to be balanced, with the risks of overshooting understood. This is where integrated and predictive supply chain solutions from FourKites, project44, and Blue Yonder can help. Supply chains must be flexible and adapt to the conflicting signals in the market. This means fine-tuning the omnichannel strategy to minimize inventory and maximize turns. New contracts will be particularly challenging, especially longer-term agreements. Companies must be able to move quickly based on changing demand signals, which requires digitization and integration across the supply chain.

At the same time, investments in cybersecurity must continue as threats are only growing and recent examples like Expeditors demonstrate the terrible risk to staff and customers, and the ability to run operations, as well as the value of the company itself. Resources, including recruitment and retention of key staff, such as drivers, and investment in limited warehouse space remain at a premium and require continued focus.

Other longer-term considerations during a potential downturn include investing ahead of the market in automation, from fulfillment to last-mile delivery, especially road-based Autonomous Mobile Robotics (AMRs). These can provide an attractive Return on Investment (ROI) on everything from staffing to fuel (through Electric Vehicles (EVs)). They can also support rapidly growing markets like quick commerce for sub-30-minute delivery as consumers’ desire for fast delivery has not waned. The timing of returns can be advanced through newer Robotics-as-a-Service offerings and partnerships with companies like Nuro, Waymo, and Starship Technologies.

 

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