The supply chain typically operates behind the scenes, unnoticed and taken for granted by people who aren’t directly involved in keeping the flow of materials and goods moving. That all changed in 2020, when the pandemic disrupted supply chains across the globe.
The supply chain remained front and center in 2021, as disruptions continued and transportation and logistics professionals looked for new ways to move materials and products.
The holiday season is expected to put even more pressure on the supply chain, and many analysts are anticipating shortages and delays. Everyone is wondering what 2022 will bring for the supply chain. But to understand how next year might unfold, it’s helpful to take a closer look at how earlier events shaped the landscape. Here are three trends that changed the supply chain during since last year.
The driver shortage. The concerns about a shortage of truck drivers are real. Supply chain professionals have been worrying about it for the past 10 to 15 years, as drivers began aging out of the job in greater numbers. But the pandemic exacerbated an already dire situation. Inconveniences of being away from home, driver school shutdowns, and additional government assistance caused a massive tightening of supply due to a lack of drivers. In addition, as the economic recovery kicked into gear, opportunities in construction and short-haul driving caused the driver shortage to persist.
Some analysts thought the widespread distribution of vaccines would stabilize rates and speed up the return to normal, but then the Delta variant hit. Spending remained strong, but as manufacturers reopened to meet demand, they encountered supply chain issues of their own on the materials side and port backlogs on the finished goods front, further complicating over-the-road transportation. In short, it was a perfect storm that made an already critical driver shortage worse.
Demand-side changes. The pandemic also shifted consumer demand in two major ways, as millions of office workers left commercial buildings to work from home. It changed people’s buying habits significantly, resulting in a heightened focus on e-commerce. Hunkered down at home and spending less on travel and outside entertainment, consumers turned their attention to their immediate surroundings. Some created home offices or took on major home renovation projects. They bought new furniture and purchased household goods. This increase in home-focused demand had a major impact on delivery routes, shifting last-mile carriers from commercial centers to residential areas.
Mergers and acquisitions. While uncertainty due to the pandemic slowed activity in the first half of 2020, deals ramped back up as transportation and logistics providers rose to new challenges, using technology to find capacity in a fragmented market. Earnings grew, sparking M&A activities as investors saw value in execution.
M&A trends in the transportation and logistics sector were off the charts in the first half of 2021. A PwC report says deal value grew 86% in the first half of 2021 compared to the previous year. Average deal size grew 158% (driven in part by a multibillion-dollar railroad purchase), and analysts expect M&A in the sector to remain high due to increased infrastructure spending.
With the current landscape in mind, the 2022 outlook comes into sharper focus. Here are three trends to watch in the year ahead.
The transportation market will remain tight. Maybe this is just stating the obvious, but it seems highly likely that we now have a new normal when it comes to transportation. Higher truckload rates are attracting drivers back to the industry, but it’s going to take some time to make a real difference. We’re likely to continue to see significant pressures that will impact the entire supply chain. The truckload sector has always experienced the greatest volatility in rates, mainly due to significant fragmentation and low barriers to entry. This dynamic causes capacity to rise and fall based on market conditions. However, other segments like less-than-truckload (LTL) are much slower to adapt, especially to a tight capacity situation. When capacity is loose, carriers can drop rates to attract more shippers to utilize services. But when capacity is tight, they need terminals, drivers, equipment, warehouse labor and the like to expand capacity and maintain service. These complicated and capital-intensive requirements mean that things aren’t likely to shift any time soon, especially considering what we all expect to be a continued shift from traditional retail to at-home delivery.
Technology requirements for third-party logistics will escalate. Digital entrants have plowed their way into what some call traditional brokerage, with a promise to end people-intensive processes to match capacity to shipper needs and manage service in an unpredictable environment. The influx of capital attracted to this idea has upped the ante in a huge market, and every major participant is building out their own version of a digital marketplace. Players with the capital to invest, scale to operate and predictive data solutions will be the ultimate winners, as shippers look for creative solutions to drive efficiency and consistent reliable service.
Investment opportunities may help ease volatility. Recent events shined a bright spotlight on the vulnerability of the supply chain. At the same time, increasing concerns over climate change and the need for greener solutions are driving investment in electric and autonomous trucking. While the industry is unlikely to feel any relief in the short term, over the longer term more stability is a potential outcome.
The challenges that transportation and logistics professionals struggled with in 2020 and 2021 will continue to influence how the industry operates in 2022. In addition, M&A activity is likely to remain high in 2022, as strategic players see the sector in a new light. Transportation and logistics players — especially those that are tech-driven — have faced unprecedented challenges, and overcome them with ingenuity and persistence. That’s the spirit that will drive success in 2022 and beyond.
Dave Menzel is president and chief operating officer at Echo Global Logistics.
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