If the authors of the 34th annual State of Logistics report are right, third-party logistics warehouse operators need to invest in preparations for dealing with a supply chain facing tumultuous change.
The report, which is published annually by the Council of Supply Chain Management Professionals, is written by logistics experts from the management consulting firm of A.T. Kearney Inc. and enjoys financial support from the giant 3PL services provider Penske Logistics.
The logistics system has been seriously out of whack since the disruptions inflicted by Covid 19 began. Contributing factors were systemic disruptions in port traffic and rail operations practices that emptied shelves and raised prices.
All of these and other factors such as rampant inflation, combined to drive up the overall cost of logistics in the U.S. to the highest it has been in history, the researchers found.
In 2022, business logistics costs, topped $1,1494 billion, or 9.1% of nominal GDP – the greatest percentage seen in the report’s 34-year history — and grew 19.6% year-over-year from the level measured by the same researchers in 2021.
The 2023 report probes the current state of the supply chain, and how it is being shaped by macroeconomic trends as well as the actions taken by service providers, shippers, and their customers to confront economic and operational challenges.
For example, the researchers are not shy about criticizing the management of the major freight railroads for their disastrous embrace of extreme cost cutting practices instead of the seeking to work closely with their customers to create additional efficiencies while growing their business.
“At this moment, then, railroads and shippers have a converging interest in both innovation and collaboration,” the report’s authors declared. “It’s a moment that both sides would do well to seize.”
Controlling Inventory Risks
The Covid 19 pandemic spurred skyrocketing demand for warehouse space, but that had waned by 2022 resulting in overstock. Warehouse vacancy rates fell sharply, to as low as 2.9%. This was down 41% from the 4.9% high recorded in 2021, and well below pre-pandemic levels, which tended to hover around 6.5%.
The low vacancy rates resulted in higher rents, although new construction continued at a healthy pace. However, as available space is increasing, companies are hesitating to occupy it as they try to get rid of excess inventory and use existing space more efficiently.
Net absorption peaked in the second quarter of 2022 but decreased nearly 20% by the fourth quarter.
As a result, pricing and availability ended up becoming more favorable for shippers in 2023 as inventories built and rates fell.
Negatively impacting warehouse owners and 3PL warehouse providers were what turned out to be overoptimistic retail forecasts based on the surges in ecommerce, resulting in an inventory glut that companies have been trying to shrink over the course of this year.
Many retail companies adopted aggressive inventory management practices to reduce “days on hand,” the standard measure of how long it takes to sell inventory. Those measures included heavy reliance on discounts and promotions, liquidation sales, repurposing, and recycling, and even the outright donation of lingering goods.
Also helping with the situation this year is the fact that consumers are continuing to buy, particularly through digital channels, despite the lingering inflation and growing economic uncertainty.
“We have seen in recent years just how suddenly consumer appetites can shift, and how vulnerable the warehouse sector has been to such sharp adjustments in demand,” the researchers stress.
Even if consumers keep buying retail goods, the continued strength of the retail market and smarter inventory management is not likely to be enough to fill up all new construction that is in the current pipeline, note the report authors. In fact, a very high proportion of warehouse construction now in progress – 83% — is speculative in nature.
“Our sense is that the recently constructed square footage and the availability of lease-break options are likely to result in a level of warehousing supply that will outstrip projected demand,” they predict. “Under such a scenario, companies will look for alternative ways to make the most of all this excess square footage, or to get out of it entirely.”
They suggest that potential courses of action for warehouse owners can include consolidation through square footage reduction; the repurposing of warehouse space for other operations, including manufacturing; and, where feasible, the subletting of space to other companies.
One challenge continuing to bedevil both private and 3PL warehouse operators is the difficulty in finding the workers they need. Labor available for warehouse work continued to be a scarce resource, and the hourly cost for workers rose steadily.
Last year concluded with the nationwide average hourly wage of warehouse workers at $16.16 per hour, with the low range at $10.26 and high at $25.43. This represented a 7% increase from the already inflated 2021 labor rates.
3PLs Need to Become 4PLs
Warehouse operators who cast themselves as providers of a wide range of logistics services, must prove to be capable of keeping up with rapidly changing technology demands.
The challenge for smaller 3PL warehouse companies will be keeping up with the necessary investments in technology ranging from using warehouse robots to take pressure off the need to add more employees, and deploy sophisticated TMS and WMS systems to help manage customer needs.
These are systems must be capable of analyzing data to better manage the entire supply chain, from sourcing raw materials to delivering shipments to the ultimate customer’s front door, which requires adoption of a 4PL model.
Amid the supply chain shocks and reconfigurations of the pandemic era, shippers are more reliant on 3PLs to manage increasingly stressed and complex logistical networks. As a result, capabilities involving data management, visibility and analytics are moving firmly to the forefront of what shippers look to 3PLs to provide.
These capabilities typically fall outside the shippers’ areas of expertise and are not easy to build on their own because they entail addressing massive complexity (for example, systems interfaces), intensive resource requirements, large capital expenditures and long lead times.
4PLs strive to ideally manage all aspects of their client’s supply chains and act as the single interface between the shipper and multiple logistics service providers. The more advanced ones go even further and help shippers design their supply chain.
“For 3PLs, moving into a 4PL role can be an attractive prospect; it inherently deepens the relationship with the customer. As shippers increase their trust in the 4PL model, they allow providers to manage more of their freight.”
