“Out of Sync” is the title of the 2022 State of Logistics report issued by the Council of Supply Chain Management Professionals (CSCMP), and it couldn’t be a more appropriate title the current state of the nation’s supply chain.
“It’s not surprising that we are continuing to see ongoing disruptions related to the pandemic, but the scope and impact of disruptions continue to weigh heavily on the minds of logistics providers – as they do for all companies contributing to the U.S. economy,” commented Balika Sonthalia, lead author of the 33rd annual report and a partner with the Kearney consulting company which produced it for CSCMP.
The report’s sponsor is Penske Logistics, which highlighted the strength and resilience of those managing the supply chain in these difficult times.
“We have seen an incredible amount of resiliency among private truck fleets and dedicated contract carriage truck fleets,” said Andy Moses, senior vice president of sales and solutions at Penske Logistics.
“Demand has been up sharply year-over-year and these fleets continue to manage the complexities they face in the trucking supply chain including headwinds caused by shortages of parts, equipment, drivers and most recently, rising fuel costs.”
Of course, the bulk of the research was conducted before the recent events impacting supply chain management occurred, including persistently high inflation, the stock market slide and the looming threat of an economic recession, which appears to be more likely with each passing day.
Last year’s supply chain crisis is continuing, with services becoming less reliable and more expensive, including record levels of port congestion, steadily worsening railroad service performance and a trucking industry unable to find enough qualified drivers.
The difficulty in finding other skilled and semi-skilled workers, one of the lingering effects of Covid 19, along with rising inflation pressures also contributed to driving up supply chain costs in 2021 – another trend that continues to this day.
“Business inventories dropped to near historic lows, but the costs to store, handle and finance them spiked,” the researchers pointed out. At the same time, “inventory carrying costs rose by 25.9% and transportation costs – driven by in all modes and nodes – were up 21.7%.”
However, anyone who is hoping for demand relief in 2022 might end up finding themselves getting a little too much of it soon in a recession.
“In short, the logistics sector must simultaneously contend with the hangover of red-hot demand and worries of a revenue-diminishing and inventory-swelling downturn,” the researchers said.
When it comes to warehousing, supply chain changes have created a new set of demands transforming the industry.
“In an era of increased vendor lead times, uncertain supply, and sharply rising customer expectations, shippers have been motivated to rethink lean operations and keep more inventory on hand,” the researchers observed, which will lead to a reduction in warehouse space availability and higher costs.
Net absorption rose 48%, while the vacancy rate fell from 5.1% in 2020 to just 3.7% last year. Warehouse rents rose by 9.5% in 2021, nearly twice as fast as in 2020. Warehouse square footage under construction grew by 54% year-over-year,
“Much of this surge in warehousing demand stemmed from companies competing to cater to customers’ lofty expectations for choice and speed,” the report claimed.
SKU proliferation (especially in CPG) is already returning to pre-Covid levels, increasing pressures on warehousing. More than 60% of shoppers now expect deliveries within 48 hours, requiring companies and logistics providers to expand and reimagine their warehousing footprints.
These pressures will only increase, with a 10% compound annual growth rate (CAGR) projected for omnichannel commerce over the next five years, according to the report.
Why not simply build even more warehouses, even faster? A big reason is in the dearth of available labor to both build and to staff them.
Amazon has driven up front-line warehouse employee wages by offering signing bonuses of up to $3,000. The average front-line warehouse employee at Amazon is paid $15 per hour, slightly above the national average of around $13 per hour.
In Southern California, the Bay Area and Seattle – where shippers, carriers, and 3PLs are all competing for scarce labor — wages are up to $19 per hour, nearly 50% above the national average.
These pay increases have not entirely addressed the warehouse worker shortage, since annual turnover in the sector is very high — approximately 43%. In attempting to fill the gap, companies resorted to costly overtime and temporary-labor arrangements, the researchers explain.
“These expedients can add up: overtime work is often at double the regular hourly rate, while bringing in a warehouse temp generally costs somewhere between 15% and 30% more than an equivalent full-time employee.”
Adding to the mounting costs the trends toward omnichannel DCs, flexible warehouse operations and increased automation require labor reskilling – another layer of ongoing expenses, they said.
“Companies that long viewed warehousing as a sleepy backwater need to recognize it is now an essential strategic competency,” the researchers stressed, “Warehousing is more vital to supply chain strategy than ever before.”
Their guidelines for maximizing this resource:
Integrate with planning and transportation. The future warehousing footprint should be shaped through seamless collaboration with commercial strategy and operations planning.
Now is a good time to rigorously assess inventory mix and geographic deployment, in conjunction with the emerging shape of demand. Transportation planning is vital, the researchers stress, especially at strategic delivery nodes where carrier disruptions can clog up the product flow.
Use analytics to optimize labor. Forward-looking companies will aggressively apply analytics to transform how labor is deployed in warehouses. They will utilize dynamic staffing based on anticipated workload to curtail labor costs, and restructure shift sizes and profiles to more tightly align with changing operational requirements.
Prioritize warehousing. Companies that long viewed warehousing as a sleepy backwater need to recognize it is now an essential strategic competency. They need to confront this new reality by asking some basic questions. Should we develop our warehousing competency internally, outsource to trusted partners or some combination of the two?
“The trials of 2021 thrust the logistics profession into a harsh spotlight that revealed strategies and practices must adapt at an accelerated pace, further accelerating the need for competency and capability-building within the profession.,” the researchers conclude.
(We will have more about the report next issue).