If you are a supply chain manager or logistics operator, you are deep in planning for the upcoming peak package delivery season.
In this Formaspace Logistics and Supply Chain report, we identify some of the new and unexpected challenges facing operators in 2023 – as well as offer six ideas that you might consider to make your operations more efficient and productive.
Economic Forecast for the 2023 Peak Delivery Season
The US economic conditions for the rest of 2023 are rather mixed.
Inflation has come down significantly in recent months, but it’s still higher than the Fed would like to see. After a series of interest rate hikes, the Fed has helped slow real estate and car loan transactions, but it hasn’t really cooled the economy as much as expected, and the labor market remains tight (although there are signs job openings dipped in May).
Recession has been avoided so far. The Commerce Department issued a revised estimate of the first half of 2023 growth at an annualized GDP rate of 2%, beating its earlier 1.3% growth estimate.
However, rising car repo rates are a good indicator that lower-income level households are struggling to pay their bills after months of inflation, stagnant wage growth, and the end of covid pandemic financial assistance.
But when it comes to the long-predicted economic recession, the more well-off American consumers have confounded the experts by continuing to spend, despite signs of job losses among high-earning tech workers.
Verdict: if we enter a recession, it will likely disproportionally affect lower-income earners. Middle to upper-income households will likely continue to spend as we enter the holiday season.
For Importers, the Cargo Shipping Market Has Changed Again, with New Risks Looming Ahead
Cargo shipping rates from Asia and other international regions skyrocketed during the pandemic, making it one of the most important drivers of increased inflation. We can see how unusual this period was by looking at the net income of container shipping companies – between 2016 and 2020, the industry teetered between posting narrow quarterly losses and profits. But when the pandemic hit, industry profits went through the roof, peaking in the third quarter of 2022 at over $60 billion in net income. Now they are coming back down to earth, with 2023 Q1 net profits estimated at just over $10 billion.
What’s driving the decrease? Lower container shipping rates.
This should be good news for importers, but there are still some major supply chain hazards on the horizon.
The first is cargo shippers are reducing the number of container ships traveling between Asia and the North American west coast in favor of Asia – European routes. This could lead to longer shipping lead times and increased prices for American buyers importing goods from Asia.
The second issue is another round of problems traversing the Panama Canal. The water level in the freshwater lakes in the middle of the canal has dropped significantly, which could severely restrict the depth of container ships passing through the canal.
Third, a restriction on Panama Canal traffic could halt the recent trend of importers electing to book cargo ships to land on the Gulf Coast and the eastern seaboard – to avoid strike-prone West Coast ports.
Worker Strikes Ahead? Proceed with Caution
Late last year, the Federal government imposed a settlement with US rail workers to prevent a strike.
But labor negotiations at West Coast ports remain in a precarious state.
As of this writing (July 2023), a tentative agreement between the labor unions and the West Coast port employers was reached by the June 30 deadline, averting the immediate threat of a strike.
This agreement will have to wend its way through the union voting process before it’s ratified by the rank and file – or not.
Things are not so rosy at the moment in British Columbia, however. The International Longshore & Warehouse Union representing Canadian dock workers was not able to reach a new contract agreement and went on strike at thirty west coast ports as of July 1.
Adding to the supply chain interruptions is the news that the ILWU US West Coast chapter announced its workers would not work on any Canadian-bound shipments diverted to US ports.
What about US East Coast ports? The answer is, so far, so good. East coast and Gulf coast port workers are represented by the International Longshoremen’s Association (ILA) which began negotiations in February 2023, far ahead of the current deal’s expiration on September 30, 2024 – offering some good news for the 2023 peak holiday shipping season.
However, more potential strike action looms ahead.
Workers at United Parcel Service (UPS), represented by the Teamsters Union, had threatened to strike on August 1, 2023, over issues such as eliminating the two-tier wage system for regular employees and UPS contractors.
It’s hard to overstate the impact that a prolonged UPS strike would have on air cargo and land transportation logistics across the USA. UPS is the largest American-owned private employer in the US, with over 340,000 workers nationwide. A strike would not only interrupt its air cargo operations, it would also bring package deliveries to a halt (including deliveries performed under contract for the USPS) – estimated at 20 million packages a day – as well as interrupt the extensive contract logistics services it operates on behalf of its major customers.
Right now, things are looking very problematic. Supply chain managers were holding their breath when a tentative agreement was reached last week, which ratcheted temperatures down somewhat, but negotiations have hit another roadblock, so the stakes remain very high.
Savvy shippers are setting up arrangements with FedEx now, because FedEx has made it clear that if there is a UPS work stoppage, they will give priority to existing customers. USPS has also promised to help with additional shipping capacity, but given that UPS helps the USPS deliver a significant number of packages, it’s not clear if this effort will be enough to make up the difference.
What Can Supply Chain Managers Do Now to Prepare for the Challenges of the 2023 Peak Delivery Season?
Let’s take a look at six key areas that Supply Chain managers can focus their attention on to prepare for the coming holiday peak season.
1. Increased Stockpiling in Response to the Pandemic
One thing that the pandemic taught us is that we can no longer count on Just-in-time inventory management during times of supply chain unpredictability.
Many companies are building up and holding onto larger inventory stockpiles, switching from Just-in-time to Just-in-case.
This is often accompanied by simplifying and reducing the number of stocked SKUs.
Unfortunately, increased stock on hand can make it harder to match inventory to demand – and this approach is also expensive, as it ties up working capital into inventory.
Retailers especially can get caught out, as Target learned recently when their clothing inventory on hand wasn’t selling through due to changed consumer taste, causing them to have to liquidate millions of dollars of inventory.
2. Reshoring Manufacturing is on the Rise because North American-based Supply Chains are the Most Secure
Overseas manufacturers have been making some hard decisions lately, in many cases moving production from Chinese factories to more “friendly” countries, including India and Southeast Asian states such as Viet Nam – a process that’s become known as “Friend-shoring.”
There is also growing interest in “Reshoring” manufacturing operations to North America to take advantage of free trade agreements between the US, Canada, and Mexico.
Construction of new manufacturing facilities in the US has hit a new record this year, according to the Wall Street Journal, with factory construction spending in May 2023 up over 75% compared to 2022.
The increasing number of North American-based factory suppliers allows supply chain managers the option to increase their resiliency by diversifying their procurement networks to include vendors closer to home.
Of course, nowhere is perfect. Extreme high temperatures this summer have left many Mexican cities without power, and Canadian wildfires have threatened air cargo operations across Canada, the upper US Midwest, and the eastern seaboard.
3. Investing in Business Intelligence and Analytical Tools for Better Supply Chain Forecasting and Inventory Insights
Achieving real-time, end-to-end inventory transparency is the holy grail of supply chain management.
And, thanks to better tools (often powered by AI), we are getting there, from smarter tracking labels and increased automation, matched with big data software and ERP systems.
Of course, implementing any one of the big systems takes time (often measured in years) so it’s too late to fundamentally change your systems now to have an impact on this year’s peak shipping season.
However, there is time to investigate to see if the systems you already have in place are working as expected and to shore up any shortcomings you find to improve operations as we head into the holiday season.
4. The Rise and Rise of the Omnichannel Retail Model
Major retailers are adjusting to changing consumer preferences and increased expectations, particularly with online shopping and delivery.
For this, we can thank the pandemic, which taught customers that they can rely on online sales and overnight (or even same-day) home delivery to meet most of their shopping needs.
Customers have also embraced the omnichannel model and now expect a seamless experience of ordering online, curbside pickup up at stores, and returning goods to stores – oblivious to the heavy-duty lift retailers have had to make to make it happen.
Rapid, same-day delivery is becoming a new sales differentiator as consumer expectations move beyond overnight delivery. (We’ll talk about some of the strategies to achieve this below.)
Returns management is also an emerging issue for online retailers. For example, when a recall is issued, companies need to track and replace affected goods.
Customers also have grown accustomed to free, no-questions-asked returns, leading retailers to look for polite ways to curb the bad behavior of “frequent returners” who, for example, order clothing in six different sizes, expecting to return five and only keep one that fits.
Constraining the cost of returns is not the only issue; retailers must also create sustainable practices to resell/reuse/donate returns that cannot be resold, avoiding the practice of dumping unwanted goods into landfills.
5. New Approaches in Warehousing Operations to Service the Last Mile
How can retailers speed up the delivery of goods to consumers?
Many logistics operators are rethinking their warehousing operations with an eye toward speeding up the expensive part of the journey, the last mile of delivery to customers.
One new approach is called Co-warehousing, in which warehouse operations are redesigned to accommodate both human workers and so-called cooperative robots, known as “co-bots.”
The Proteus robot deployed by Amazon is an example of a new-generation co-bot. It seeks to make warehouse operations safer and less tedious for human workers by offloading the most boring, backbreaking, and potentially dangerous tasks.
Warehouse designers are also using demountable wall systems to increase the flexibility of warehouse layouts; these moveable walls allow different areas to grow (or shrink) as the seasons change.
In some cases, warehouse overhead storage needs to be reconfigured to accommodate drone operations that “fly” goods from inside the warehouse or from rooftop-mounted landing pads to remote locations.
Worker amenities are also on the rise, which was unheard of in times past. Warehouse operators are adding features such as walking/running tracks and basketball courts for workers to relax and exercise, as well as increasing the amount of natural light flowing into the warehouse.
To speed up local delivery, many major warehouse operators are investing in new types of warehouses, including dark stores and micro- and nano-fulfillment centers.
What is a dark store? One good example comes from the grocery giant Kroger, which essentially operates one of its major store locations as a product stocking warehouse – but it’s not open to the public, hence the term “dark.”
In urban areas, retailers such as Amazon are investing in so-called “micro” fulfillment centers, which allow them to stock items for rapid delivery to surrounding customers. New “nano” fulfillment centers take the concept further, with even smaller operations that target individual urban neighborhoods.
6. Can the Gig Economy Help with Same Day Delivery?
As we mentioned at the start, the labor market remains tight, with historically low unemployment.
Warehousing and delivery jobs are going unfilled, so operators are ratcheting up offers of increased hourly wages and even signing bonuses to encourage new hires.
Despite the increased wages, turnover continues to plague the industry, putting additional pressure on new hire training and onboarding. Some companies have invested in AR/VR tools to train recruits in safe material handling practices and operating procedures –to speed up training while avoiding unsafe conditions and potential accidents.
In many cases, there are just not enough workers to meet the ever-increasing delivery goals, causing some companies to look at external partnerships with “Gig” delivery services to make those last-mile deliveries under contract.
There are a couple of new terms for this phenomenon; some call it “crowd-shipping,” while others use the term “crowdsourced delivery.”
Either way, it refers to handing off the last-mile delivery of packages to local courier services and/or non-professional gig worker drivers. Examples of this include DoorDash and UberEats, which have expanded beyond food deliveries to add package deliveries as well.
Interestingly, even a company as large as Amazon is investigating the idea of crowd-shipping. It has launched a new local business delivery network initiative called the Amazon Hub Delivery program.
According to a report from Axios, Amazon says the Hub Delivery program will pay local businesses about $27,000 a year to receive goods in a secure space within their facility and then deliver an average of 30 packages a day to the surrounding area. (Axios calculates this would earn participants about $2.50 per package.) Amazon is reportedly looking to partner with 2,500 businesses in its first year of operation.
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