Freight logistics forecast: What 3PLs face ahead of the curve

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Third-party logistics (3PL) providers, which saw global market revenues skyrocket to more than $1.4 trillion in 2021, are highly in demand to manage the shipping and fulfillment needs for the majority of the nation’s Fortune 500 companies.

As they move forward, 3PLs should remain aware of the current impact a soft import market is having on their industry and map out how they’ll travel any curves in the highway ahead.

“The import market has softened because the COVID-19 pandemic has caused significant disruptions to the global supply chain,” said Ryan Polakoff, president of Nexterus, a 77-year-old, privately held global supply chain management and 3PL services provider. “This has impacted the availability and cost of imported goods.”

The softened import market means fewer goods are coming into North America, which may reduce the demand for transportation services, Polakoff added.

Paul Bingham, director, Global Intelligence & Analytics and Transportation Consulting at S&P Global Market Intelligence, agreed, noting that U.S. import demand has weakened in the face of efforts by businesses to reduce inventory levels and weakening underlying demand from households and businesses for many categories of imports where consumption had “surged unsustainably during the pandemic.”

The U.S. Federal Reserve Board’s tightening of monetary policy raising interest rates to combat high inflation also has contributed to this slowdown, Bingham said.

For example, increased mortgage interest rates in the past year have reduced home sales and related imports of furnishings, fixtures, and appliances, he said.

“Businesses also face higher costs of capital, which has increased inventory carrying costs, providing further downward pressure on inventories and therefore on import orders,” said Bingham.

At the same time, Tim McManamon, general manager at RCT Logistics, a Rocky River, Ohio-based 3PL company, told Transportation Today that higher inflation in the United States has slowed down the economy.

“Prior to the pandemic, a good portion of manufacturing had just-in-time inventory,” McManamon explained. “Due to supply chain issues, manufacturers ordered excess inventory and warehouses are now full due to high inventory. This created a surplus of trucks due to lower volume.”

Nexterus’ Polakoff pointed out that consumer spending has been down since the pandemic, as well. “New duties on industrial goods, including aluminum, have been announced by the Biden administration as the war in Ukraine passes the one-year mark and has also softened the market,” he said.

John Piatek, vice president of consulting at GEP, a global supply chain and operations consulting company that also provides supply chain software and managed procurement and supply chain services, said that while recent years have seen some record highs, they aren’t carrying forward into 2023.

“Excess upstream inventories and falling consumer demand have resulted in a steep drop in import volumes,” said Piatek, and the subsequent impact varies in different segments.

For instance, he said truckload margins are being squeezed as driver wages are increasing and there’s downward pressure to reduce prices due to falling demand.

Simultaneously, “ocean container prices have cratered while capacity has increased,” Piatek said. “The improved port conditions have reduced equipment shortages which have, in turn, further reduced prices.”

Meanwhile, rail capacity has returned to normal as most supply issues have been resolved, though Piatek said this is driving further downward pressure on trucking companies.

“3PLs have been less impacted than freight companies as their margins are also made on fixed costs (leases/storage space), making them a bit more resilient to volume drops,” he said.

Stay alert

For the remainder of 2023, sources eye-balled some ongoing challenges to consider, as well as a few bright spots for 3PLs.

McManamon at RCT Logistics anticipates a continual decline in volume until the third quarter, which will drive transportation costs lower.

“Costs have dropped to pre-Covid levels but with less volume, more carriers and providers are shutting down,” he said.

S&P’s Bingham said that the freight logistics industry faces challenges from weakening demand combined with lingering inflation and continued labor availability pressures in 2023.

“The outlook starts to improve later in 2023 as inflation weakens further and recovery in demand spreads with seasonal volume increases towards peak season,” said Bingham. “Overall freight capacity should remain more than adequate without a repeat of 2020-2021 congestion.”

Additionally, Bingham said downside risks to the forecast outlook remain dominant in 2023 with geopolitical and pandemic-related risks “still elevated.”

Supply chain challenges will continue in 2023 with a lack of truck drivers, lowered demand, and rising freight costs, said Polakoff at Nexterus.

“Companies will have to stay prepared to handle these challenges, and they must be ready for the unknown,” Polakoff told Transportation Today. “As these challenges persist, companies will get stronger and better. Investing in technology to automate manual processes, increase visibility, and managing risk will help businesses not only survive, but thrive.”

One bright spot, according to Polakoff, is that 3PLs have learned how to overcome disruptions and help each other, from employees to customers.

“The supply chain is no longer a back-end function,” Polakoff said. “It’s a strategic and potentially differentiating part of a company’s interior and exterior. Those who embrace this and recognize its value will stand to gain the most.”

“Recession, inflation, war, extreme weather — there is no shortage of pressures that can make 2023 worse,” added GEP’s Piatek. “A bright spot is that this market is not likely going to be as stressed as they were in 2020-2022, a period in which the supply chains of many firms burst.”