The Silver Linings Rule BookPosted by: Steve Beda
Optimistic Observations and Lessons Learned from 2021 to Inform Future Strategy
Shouldn’t we really rename 2021 The Big Short? A year hamstrung by every kind of shortage that stretches from raw materials for manufacturing, to empty shelves at retail and covers just about everything in between. A lack of drivers and dock workers making an already constrained market even tighter. And the same story with warehousing and fulfillment operations from coast to coast. Given all of that (and more), as an industry we could be forgiven for drowning our sorrows in an extra glass or two of eggnog and shutting up shop for the year. In fact, Gartner sums that up best, citing resiliency, agility and purpose driven strategies as the key industry themes of 2021. So as we turn the corner on the year in the next few weeks and consider both operations and budgeting for 2022, let’s raise a glass to the innovative spirit of our industry and toast not the problems of the past 12 months but instead the silver lining learnings we’ve all gathered to steer strategy on the road ahead into the New Year and beyond.
A YEAR IN THE REAR VIEW MIRROR
Colliding Conditions Created the Perfect Storm
2021 is mostly in the rear view mirror but it’s impacts on the market are still with us. There are some signs of improvement on the horizon, however, and while nobody should expect an immediate easing of the capacity constraints or issues we’ve all witnessed, conditions will improve:
Capacity: demand for air travel is up 175% year-on-year as of September and more commercial airplanes in the skies will increase air freight capacity to begin alleviating at least some constraint. We should too begin to see evidence of capacity improvements thanks to equipment investments by some carriers in order to meet booming demand which will begin to address the supply and demand dynamic.
Labor: employer wage increases and aggressive recruitment of new workers, especially in trucking, and other sectors of the transportation logistics industry should begin to pay dividends too.
Supply chain: the supply of raw materials for manufacturing is beginning to improve. One major exception is integrated circuit chips. In 2021 the shortage cost the global auto industry $210 billion in lost revenue, a reduction of 4 million cars on production lines, slowed plant production and impacted shift workers. Analysts believe that backed-up demand may mean this one, hugely-impactful problem may not be resolved until new chip manufacture rights the market sometime in 2023. The silver lining? Auto manufacturers are starting to reinvest in U.S. based production to reduce reliance on overseas manufacture which in time will create jobs. Many too are examining just-in-time practices which, during stable market conditions can be highly efficient, but amid turbulence can exacerbate shortages and slow inventory.
Pricing: increases have taken their toll. Chief among these was the escalating cost of fuel – up more than one dollar per gallon since the start of the year. But as we near the close of 2021, stabilization is occurring. The average price of a gallon of gas fell to $3.34 a gallon, down 6.9 cents per gallon since early November, and both the Biden administration and Opec are making moves to increase supply and drive down cost.
Inflation: what initially seemed like a short term hiccup from the early days of pandemic impact, has endured longer than most experts foresaw and likely will until surging demand and limited supply rebalance. In October the inflation rate climbed sharply above 6 percent – the highest since 1990 – and while it will continue to overshoot bank predictions, analysts believe we’ll see something closer to 2.3 percent as it begins to decelerate into 2022.
So Just How Did Companies Weather the Storm
Those companies that built agility into their operations in 2021 fared better than others. Shippers with access to end-to-end data visibility across their operations were best placed to optimize where they could and put into place strategies or focus on projects to offset the escalating costs of meeting crushing consumer demand. Most shippers around the globe industry did what they had to do to secure capacity. That meant resorting to the inflated rates and high competition of the spot market, driving up overall transportation costs across the board from ocean to air freight. Some shippers managed to negotiate slightly more favorable mini bids, locking in 30-60 day (and even bi-weekly in some cases) rates to guarantee at least some short term stability amid tough market conditions that may finally be beginning to ease. In November The Wall Street Journal reported the cost to move a container across the Atlantic fell by a quarter, signaling perhaps a decline in Asian imports as ports begin clearing the backlog of cargo ships. We should expect continued inventory shortages but this too is easing with the U.S. Census Bureau reporting in September a year-on-year 13% rise in warehousing inventories and a decline in short term charters sailing.
Silver Linings and Lessons Learned
- Resiliency from Improved Choice
Although no-one escaped 2021 unscathed, those companies that fared best had options. To overcome an obstacle of any kind you have to be able to change tactics and adapt to evolving conditions. In a super constrained marketplace with both limited and often unreliable capacity that means knowledge from having the right operational fundamentals in place. Having the visibility across global operations, transit times and costs to spot opportunity for efficiencies and cost savings. Or being able to instantly access data to pinpoint network redundancies and create opportunities from switching or optimizing multiple carriers.
While data-driven decision making is nothing new, those companies that had the right data foundations in place, we're in a better position to understand and cope with 2021’s volatile conditions: labor shortages, capacity constraints, supply constraints, and material price increases. Understanding the influencers of cost per KPIs and how to mitigate those increases was the conversation of most supply chain executives – and must continue to be going into 2022.
- Intelligent Routing
Having a solid set of LSP/carrier partners and using a TMS with intelligent routing capabilities was important to ensure carrier choice and ensure optimal execution. Those with a reliable feedback loop of performance and spend data from a Transportation Spend Management program were even better off. Static routing alone was not good enough in 2021 and having access to real-time data to avoid constraints as well as tender rejections permitted important execution decisions to be made systemically.
- Redundancy (Inventory/LSPs)
Mitigation of risk by proper alignment of suppliers in your network along with LSP/carrier choice will enable companies to avoid single source bottlenecks and balance redundancy with spend leverage. Ultimately, cost, service and potential disruptions all must be considered when building an optimal execution strategy.
If we’re looking for any true silver lining from 2021, consider these thoughts. What the industry dealt with has focused attention beyond the short term to longer range risk-mitigation strategies that can protect business in turbulent times. Constantly evolving market conditions have spotlit the critical need for data-driven business operations that will only continue to improve industry standards. Labor shortages have brought about long-needed increased wages and salaries for many industry workers helping with job satisfaction and worker retention. And Biden administration policy, as well as a faltering reliance on foreign production, has lit the fuse on a new era of domestic manufacturing for many U.S. industries and businesses that will lead to job creation for years to come. Not such a bad holiday gift when you look in the rearview?
Happy Holidays from The Trax Family.