Over the past year, the transportation and logistics industry has faced a range of challenges due to the Coronavirus disease (COVID-19) and its attendant impacts on markets worldwide, extreme weather from climate change and rapid shifts in the employment pool. With the holiday season swiftly approaching, companies will soon be under even greater pressure to perform on time and to meet client and customer expectations.
There are four significant challenges that organizations in the transportation and supply space will face as we enter the back-end (and busy season) of 2021. Namely, they will be facing congestion delays, an ongoing labor shortage, especially among truckers and retail workers, disrupted transit times and spot rate increases.
With growing demand and significant congestion delays at ports across the nation, matched with skyrocketing logistics costs, companies are searching for alternatives to international sourcing of goods. Relying on offshored manufacturing was efficient when transportation and ocean cargo rates were not a major concern, but that has changed. Onshoring manufacturing is an emerging trend that requires significant investment in infrastructure, equipment and job creation, but will result in significantly greater control over your own supply chain.
The costs incurred from such an investment are eligible for significant grants, tax credits and incentives from the federal government, states and municipalities, as well as public and private utilities. These grants and credits can help reduce the overall capital expenditures for market entry, expansion or relocation of operations.
Examples of discretionary incentives that can be offered include land or property donations, utility rate reductions, railway extensions and port fee reductions, among others. Common pitfalls to not obtaining or maximizing incentives and credits include announcing too early or too late, disclosing too much information and failure to identify incentive programs that can directly offset project costs. Companies should pay special attention to maximize the amounts obtained and identify incentives and grants that are provided from sources other than statutory ones found on a state’s economic development agency’s website.
An ongoing labor shortage
Labor shortages are common in the transportation industry, and as we move into the holidays, it is likely that employees will become increasingly difficult to find. This has many business owners rethinking how to distinguish themselves from their peers for prospective employees. This differentiation cannot be entirely based on salary because this leads to increased operating costs across all transportation and logistics companies. Securing new business is not as much of an issue in today’s market, which makes investing in your workforce more important. Improving the drivers’ or warehouse workers’ experience by modernizing with digital technology is a good start towards retention.
Lower driver turnover can lead to significant savings by reducing administrative burdens, advertising and training costs. It can also be difficult to find the right balance to recruit new drivers with sign-on bonuses while still needing to provide additional compensation to retain existing loyal drivers in order to avoid the scenario where your current drivers leave to get a signing bonus at another company. Analyzing dwell times for drivers is also important because dwell times reduce earning potential for drivers and companies and can be a reason employees leave. It is important in such a tight labor market to analyze the impact of keeping customer business vs. retaining drivers.
As the holiday season kicks into gear, the effects of severe weather due to climate change are disrupting transit times. Due to an increasing amount of severe weather, ports are forced to perform increased annual maintenance like dredging berth space, while roadways are also requiring increased maintenance to repair damage by wildfires, tornadoes and severe flooding. These extreme weather events are causing an already overburdened, and in many cases, outdated transportation infrastructure to deteriorate faster than originally estimated. These factors contribute to increased transit times in a period of severe congestion.
Spot rates and market conditions are increasing costs
The logistics business at its core is no stranger to a volatile business environment. While in years past, revenue was the main catalyst for growth and success of the organization, it is not as much of an issue in the current environment. With spot rates increasing because of tight capacity, carriers have been raising driver pay to keep up with the demands of shippers. Many of these shippers were loath to enter into long-term contracts late last year and instead chose to be part of the spot market. That was fortunate for many logistics providers because it is unclear who the real winners and losers are as it can be a challenge to keep up with rising costs as spot rates continue to rise.
With such tight capacity, operating profitability is the bottom line. Large prominent shippers are chartering their own cargo ships and airplanes to be in control of their capacity during peak shipping season. While popular, this approach also brings new risks inherent in charter or lease agreements.
While big shippers can get creative with their transportation, smaller shippers do not have the capital to afford such security. Instead, they are stuck paying increased spot rates given that they anticipate that current rates will decline and normalize. To address this, some small shippers have pooled resources and formed partnerships and co-ops with logistics providers to remain competitive.
Although transportation continues to be a volatile industry, many companies are leveraging new technology and creating new strategies that are allowing them to thrive in this complex market. The most successful companies in the space are seeking out innovations (in both tools and strategy) to mitigate their risks. Developing a comprehensive review of strategy to account for disruptive events as well as implement innovative solutions will get you through the holidays and set you up for growth in the new year.