Please discuss and apply supply chain management learnings from the attached article to one selected industry and focus company within that industry utilizing supporting information fr

Out of sync

Introduction 1

Executive summary 3 Chaotic conditions and cresting costs 3

Macroeconomics 7 A new level of disruption 7

Air 14 Heavy lift 14

Parcel and last mile 17 Stress spurs innovation 17

Third-party logistics 21 Window of opportunity 21

Freight forwarding 24 Riding high, but for how long? 24

Water and ports 27 Flush times, fresh dangers 27

Motor 30 Fuel for growth 30

Rail 34 A slow switch to growth 34

Warehousing 38 Rising demand, rising costs 38

Pipeline 42 Under pressure 42

Trends and outlook 46 Sustainability 46 M&A 49 Control tower 51

Appendix 54 Estimating USBLC 54

Table of contents

Introduction

Welcome to the 33rd Annual Council of Supply Chain Management Professionals (CSCMP) State of Logistics Report. Volatility and inflation defined the 2021 logistics landscape. Demand in all modes and nodes surged, while the people and assets needed to move and store the goods remained scarce. Under extraordinary pressures, the various parts of supply chains struggled to react in unison, leaving logistics out of sync.

As logisticians navigated the tumult of 2021, they felt like skiers dashing through an avalanche on a familiar yet transformed slope, avoiding known and new obstacles, each moment urgently amplified by the massive headlong rush surrounding them. Most coped with the onslaught, but few would claim they had mastered it.

In 2021, United States business logistics costs (USBLC) rose 22.4 percent to $1.85 trillion, or 8 percent of 2021’s $23 trillion GDP.

Efficient logistics capacity allocation at contracted rates was compromised by stimulated demand for physical goods and disrupted supply, leading shippers to expedite whatever was available at premium rates. Carriers and brokers struggled to honor contracted rates, eroding relationships built in stabler times. Prices for their services and space in their assets rose dramatically on spot markets. Shippers agonized over delayed shipments, blank sailings, and lost sales as carriers were either unable to show up or were lured away by historically lucrative spot prices. Market forces jerked assets from scheduled optimized loads and routes with backhauls to the highest bidder with the greatest urgency.

As always, logisticians proved resourceful when the going got tougher, although the numbers suggest that many of the solutions came in the form of much higher prices for constrained supply. As a result, shipper margins were eviscerated while those of carriers fattened, even in the midst of declining service levels. Rather than rethinking logistics to get better outcomes, the priority seemed to be a rush to get any outcome at nearly any price.

Yet the premiums shippers paid to carriers were just part of the story. Many lessons were learned and many new strategies were developed—some very short term, others taking the long view. As Josh Garrison, head of Cisco Logistics Strategy, Sourcing & Digital Transformation, observed, “Gone are the days of the ‘dive and catch.’” This report seeks to rise above the fray, seeing where innovation and investment positioned logistics players for enduring success, as opposed to honing bullet-dodging skills. What techniques are successful shippers and carriers using? What trends firmed up in 2021? What may lie on the horizon?

1Out of sync | State of Logistics Report

There are certainly more challenges ahead. Barely into the new year, Russia invaded Ukraine and fuel costs spiked; China Section 301 tariffs were set to expire or perhaps renew mid-summer 2022; and the US Fed started a round of aggressive rate hikes. As this report goes to print in June, prices for road, air, and ocean have declined from all-time highs with demand taming, but oil prices are holding far above historical averages, and supply chains remain vulnerable to COVID flare-ups. The longed-for relative certainty and stability have yet to appear.

Some fear that the Fed’s belt tightening could trigger a severe recession. Others anticipate a softer landing because central banks seem less willing to stomach the severe hardships suffered during past economic downturns. On balance, it seems unlikely that carrier capacity will be stretched in 2022 as it was in 2021, which means their extraordinary pricing power will taper, perhaps quite quickly. The frustrating peak convergence of congestion; products stranded in factories, warehouses, and ports; and all-time-high shipping rates may recede in shippers’ memories.

This is not to assert the pendulum will rapidly swing back to capacity abundance and low rates. Some modes and nodes (think e-commerce and the last-mile delivery capacity it requires) will retain structurally high demand, and some supply bottle- necks (for example, congested port capacity and the driver shortage) will not be easily loosened.

The trials of 2021 thrust the logistics profession into a harsh spotlight that revealed strategies and practices must adapt at an accelerated pace, further acceler- ating the need for competency and capability-building within the profession. Internal stakeholders certainly took notice as costs shot up and outcomes deteriorated. Customers and suppliers alike longed for the days when a dip below 90 percent on-time-in-full (OTIF) was a major failure to be escalated. Those who grapple with these new realities by going on the offensive with resolve will disproportionally take their companies to an advantaged position.

Multi-shoring efforts are poised to accelerate, reflecting a growing demand for logistics option- ality—and for higher levels of organizational competency in carrying out the various functions that such optionality entails. And to mitigate ongoing disruption and uncertainty, we anticipate sharply rising demand for visibility across logistics segments and geographies. Shippers are already stepping up investments in technologies that can provide such visibility and enhance their capacity to adapt to unexpected demands and events. Leading global supply chains require new talent and skill sets that set apart those who (prior to the pandemic) had set their sights solely on optimization. Now we need leaders who can withstand and take on the headwinds with courage, conviction, and a will to attempt multiple paths to achieve desired outcomes.

In this 33rd edition we provide a narrative on macroeconomic factors affecting logistics, insights from industry leaders, discussion of important trends, detailed analysis of each major logistics sector, and a strategic assessment of the industry. The explora- tions of control towers and sustainability added in 2021 are further developed this year, as is the topic of acquisitions, fueled by rising profits. As always, the report is rooted in calculations of USBLC, co-developed by Kearney, CSCMP, and a diverse set of industry partners.

Once again, Kearney is honored to partner with CSCMP and Penske Logistics in authoring the State of Logistics Report. In compiling the report, we collabo- rated with a long list of contributors, including but not limited to: Penske Logistics, The Clorox Company, the Federal Reserve Bank of Cleveland, Cisco, IHS Markit, and Walmart. We thank all of them, and others too numerous to name, for sharing their time and perspectives. We hope the data and analysis in this report help you plan your business strategy for the remainder of 2022 and beyond. Please contact us with any questions or comments on the issues covered in the report, or to suggest improvements that could make next year’s edition more useful.

2Out of sync | State of Logistics Report

Executive summary

Chaotic conditions and cresting costs In last year’s State of Logistics Report, we said the COVID-related challenges of 2020 signaled a new era in which companies must simply learn to expect continual change. This turbulence was only extended and amplified in 2021, as the stubbornly durable and adaptable pandemic kept intense pressures on the entire logistics sector.

As services spending gave way further to the purchase of goods by consumers adjusting to new norms of work and social life, clogged ports and paltry capacity failed to meet surging and often desperate demand. Inventory-to-sales ratios dropped to near-record lows and capacity adds from carriers were in no way near the levels required by shippers.

Disruptions in all logistics networks effectively destroyed capacity, as ships loitered at ports; equipment waited to be unloaded; and trucks rushed out half-empty, dashing off to the next high-paying load with little regard for backhauls.

Even as companies furiously added capacity in trucking, parcel, air freight, and warehousing, it was just as quickly snapped up—with the partial and promising exception of the motor sector, in which the infusion of more vehicles and drivers did alleviate some pressure on ground transports.

But even such glimmers of hope were overshadowed by the larger reality facing the logistics sector in 2021: persistently rising costs. United States business logistics costs (USBLC) rose by 22.4 percent and came to represent 8 percent of the nation’s entire GDP, a level not seen since 2008 (see figure 1).

Notes: USBLC is United States business logistics costs. YoY is year-over-year. WACC is weighted average cost of capital. Includes 5.4% inflation for 2021 numbers

Source: CSCMP's 33rd Annual State of Logistics Report (see report appendix)

Figure 1 USBLC rose by 22.4 percent, and came to represent 8 percent of the nation’s GDP ($ billion)

Transportation costs Full truckload Less-than-truckload Private or dedicated Motor carriers Parcel Carload Intermodal Rail Air freight (includes domestic, import, export, cargo, and express) Water (includes domestic, import, and export) Pipeline Subtotal Inventory carrying costs Storage Financial cost (WACC x total business inventory) Other (obsolescence, shrinkage, insurance, handling, others) Subtotal Other costs Carriers' support activities Shippers' administrative costs Subtotal Total US business logistics costs

77.1

2021

332.2 83.0

415.2 830.5 134.5

71.9 16.4 88.3 52.7 32.4 67.3

1205.7

186.4 164.5 150.4 501.3

62.9 140.0

1,847.02

2020

301.6 73.3

298.0 672.9 116.8 60.2 14.1

74.3 44.2 25.7 56.9

990.9

155.4 123.3 119.4

398.1

62.4 57.7

120.1 1,509.09

YoY 2021/2020

10.2% 13.2% 39.3% 23.4% 15.2% 19.4% 15.9% 18.8% 19.2% 26.3% 18.2% 21.7%

19.9% 33.4% 25.9% 25.9%

23.6% 9.1%

16.6% 22.4%

5-year CAGR

4.5% 7.8% 9.6% 7.2%

11.4% 4.5%

–1.0% 3.3%

–6.4% –4.1% 8.7% 6.1%

7.6% 2.4% 5.0% 5.0%

7.9% 5.6% 6.8% 5.8%

3Out of sync | State of Logistics Report

Like so much else that occurred in 2021, logistics inflation was at least partly attributable to the lingering pandemic. COVID was sidelining logistics workers as it disrupted their supply chains, and those who remained on the job saw their wages shoot up even as overall capacity flatlined or suffered further depletion.

Business inventories dropped near historic lows, but the costs to store, handle, and finance them spiked. Inventory carrying costs rose by 25.9 percent, and transportation costs—driven by increases in all modes and nodes—were up by 21.7 percent.

As a result of these factors, producers struggled with availability and put customers on allocation (limiting what each customer could purchase) even as they raised prices to compensate for soaring materials, logistics, and labor expenses while also expanding production. As Rick McDonald, chief supply chain officer at The Clorox Company, related, great feats were accomplished as hard lessons were learned. “The pandemic created demand for products that could help stop the spread of infection. As an essential business, we responded by doubling capacity of disinfecting wipes, going from an empty space to a high-speed automated line in nine months, and that meant our carriers also had to respond. We got a much closer look at what our transportation partners could and couldn’t do, which informed who we’re going to be working with.”

Rising costs were not the only sources of agitation. Operationally, the sector’s pain seemed to grow throughout the year as logistics and materials shortages created a vicious cycle of failed arrivals of materials and goods. Shippers started to pull orders forward to meet seasonal and holiday demand, which made capacity shortages more acute as increasing demand chased congested and shrinking supply.

Stepping back for a moment, it may sound a bit odd to speak of “agitation” and “pain” in the context of a year in which the logistics industry grew by 22.4 percent, to $1.85 trillion. But this was growth accom- panied by chaos and high costs—and so far, 2022 seems to be offering little respite. Russia’s invasion of Ukraine and massive pandemic shutdowns in China have created new pressures on the global supply chain.

Then there are the uncertainties facing the US national economy. It grew at a healthy clip in 2021, expanding by 5.7 percent to $23 trillion, but that growth rate is slowing to an estimated 2.8 percent in 2022—still hot by historical standards. That’s obviously good news at the bottom-line level, but it also means relief on the demand side of the logistics is not coming fast enough.

In addition, there is a possibility that anyone seeking such demand relief might be about to get a little too much of it. As the inflation rate hit 8.5 percent in the spring of 2022, pressures for fiscal tightening became more acute. While hospitality, restaurants, and airlines were recovering strongly, the booming sectors of durable goods, retail, housing, home improvement, and e-commerce saw a slowdown as rising interest rates and expectations of lower future inflation began to bite into current demand. In short, the logistics sector must simultaneously contend with the hangover of red-hot demand and worries of a revenue-diminishing and inventory-swelling downturn.

4Out of sync | State of Logistics Report

A rundown of main sectors

Turbulent circumstances and rising cost pressures were the story of 2021 in all major logistical sectors. Here’s a summary of how these forces played out across each one.

Air. Air freight costs increased by 19.2 percent, as demand continued to exceed supply throughout the year. Shippers made major moves to obtain more air capacity as ocean capacity proved insufficient. More planes were converted to cargo carriers, and cargo firms took in more plane deliveries, but air freight hubs were clogged by the surge in cargo demand, and this spilled over into secondary airports. Passenger routings did not recover substantially in 2021, putting a lid on the return of capacity, but 2022 sees passenger traffic returning and with it the belly-freight capacity.

Parcel and last mile. The explosive growth of last-mile delivery volumes continued, driven by the increased popularity of work-from-home and other social-distancing behaviors. E-commerce grew by 10 percent to $871 billion—13 percent of all US retail sales. The parcel sector was a direct beneficiary, growing by 15.6 percent and turning in the highest five-year compound annual growth rate (CAGR) of any of the cost components, at 11.4 percent. However, there is evidence that e-commerce growth has begun slowing a bit as shoppers return to stores.

Third-party logistics (3PLs). Amid all the uncertain- ties roiling the logistics sector, shippers increasingly turned to 3PLs to address scarce capacity, supply chain complexity, service disruptions, and surging customer demands.

Freight forwarding. The freight forwarding market expanded significantly in 2021 as shippers scrambled for available capacity and contended with wide- spread port congestion. Sustained high demand helped forwarders drive their gross margins high above historical standards.

Water/ports. US water shipment costs surged 23.6 percent, with ocean carriers earning more profit in 2021 than in the previous 20 years combined. Note international ocean expenditures, which grew much faster, are not reflected in this report as those revenues are earned by non-US carriers. Much as in the trucking sector, sea-dependent shippers expressed growing frustration with logjams and rising costs. Yet while ocean carriers did indeed hold back on adding capacity in 2021, it’s hard to see how even a radical increase in ships would have made much of a difference, given continued port congestion.

Shippers increasingly turned to private and dedicated fleets and had to pay more for their drivers and the trucks, driving captive fleet costs up 39.3 percent.

Motor. Road freight, the biggest segment of US logistics expenditure, rose powerfully in 2021, growing by 23.4 percent to $831 billion. Carriers that had cut or delayed capacity early in the pandemic went into overdrive, spending at unprecedented levels to attract new hires and buy new trucks. Shippers worried about lost sales proved more than willing to pay ever-in- creasing spot rates. This sustained high demand at high prices powered profits, with top US carriers seeing profits rise by 50 percent, 100 percent, or more even as their own costs of operation continued to surge. However, troubles may be looming. Shippers miffed by low service levels increasingly see the development of their own “captive” truck fleets as a more reliable alternative that has become more affordable and the drop in demand and rates underway in Q2 of 2022 will squeeze carrier margins. As Andy Moses, SVP sales and solutions at Penske Logistics, observed, “Captive fleets rose to the occasion as they became more valued, driving an accelerated adoption that remains with us today. We’ve seen shippers that have gone 10 years without a private or dedicated fleet get into them.”

5Out of sync | State of Logistics Report

Rail. Rail costs in the US were up 18.8 percent overall, but network speeds and service levels worsened due to the same kinds of disruptions seen by other modes, including port congestion, chassis shortages, and tight labor markets. Intermodal volumes were up modestly thanks to high prices and scarcity in trucking, and intermodal prices shot up accordingly. While carloads were up in both volume and price, leading railroads invested heavily to position for intermodal growth in such areas as infrastructure, visibility, and end-to-end solutions.

Warehousing. Consumers kept up their demand for ever-faster deliveries for a wider range of goods, and companies responded by buying more warehousing space, especially high-end facilities close to urban and suburban consumers.

Pipeline. The pipeline sector was up 18.2 percent, amid rising pressure on a variety of fronts, including an increasingly hostile regulatory environment, more frequent severe weather events, and geopolitical turmoil that could soon pose severe tests for the North American network.

Seeking sync: new game, new rules

As mentioned in last year’s report, COVID-19 showed that turmoil in logistics is the new rule of the game. But if getting back in sync still seemed out of reach as this current report went to print, shippers were already acting to build new resilience and agility in the face of a “no normal” context.

One way this has manifested is through merger and acquisition (M&A) activity—historically a popular way for railroads, trucking companies, and other logistics players to beef up capacity. But many have sought to address the current challenges at a deeper, more intrinsic level—by evolving their delivery offerings and seeking to bring greater efficiency to capabilities that had been stood up rapidly or accelerated at the onset of the epidemic in 2020.

Beyond such continuous plan redevelopment and adaptation, logistics must be permanently about embedding resilience and agility into its capabilities before shifting its focus back to such questions as cost minimization and efficiency. Relative stability may or may not return, so the logistics sector must invest now in controlling what factors it can.

This includes the further development of technology, especially in parcel tracking and automation. But it also means a deepening commitment to multi- shoring or friend-shoring, which in turn requires greater optionality as companies coordinate a more complex array of transit modes and facilities. Such enhancements of resilience and agility require better and more collaborative relationships among customers, suppliers, and third-party providers.

Finally, a true commitment to resilience will also incorporate sustainability—not only as a market- friendly signal to increasingly environment-minded customers and corporations, but also as a means of reducing fuel-cost vulnerabilities and abating the risk of future weather-related disruptions even more severe than the ones that rocked supply networks in 2021.

To sum up, 2021 was a flush year for the logistics sector—but also a deeply unsettled and trying one. For the industry to get back in sync and return to a more balanced long-term growth trajectory, it will need to invest in the ideas and capabilities that will make it more resilient—come what may.

Relative stability may or may not return, so the logistics sector must invest now in controlling what factors it can.

6Out of sync | State of Logistics Report

Sources: Oxford Economics; Kearney analysis

Figure 2 After an optimistic 2021, volatility and uncertainty have hit the US economy in 2022

US economic growth (chained 2012 prices, $ billion) The economic forecast for 2022 was revised down as the situation in Ukraine unfolded and the impact of the resulting sanctions on the US economy became clear.

Percent change US GDP

2019

$19,032

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

$26,000

$24,000

$22,000

$20,000

$18,000

$16,000

$14,000

$12,000

$10,000

$25,000

$23,000

$21,000

$19,000

$17,000

$15,000

$13,000

$11,000

$9,000 $8,000

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

5.5%

4.5%

3.5%

2.5%

1.5%

0.5%

-0.5%

-1.5%

-2.5%

-3.5% -3.0%

2.3%

3.4%

5.7%

3.1% 2.0% 2.0% 2.3% 2.1% 2.0% 1.9% 1.9% 1.9% 1.9%

$18,385 $19,427

$20,034 $20,440 $20,858 $21,329 $21,787 $22,228 $22,649 $23,073 $23,509 $23,962

Macroeconomics

A new level of disruption Fueled by trillions in COVID relief and signs that the pandemic might at long last subside, the US economy offered cause for optimism in 2021, posting 5.7 percent growth, the strongest gain since 1984. Economic activity was particularly robust in the latter half of the year as businesses replenished depleted inventories to prepare for a strong holiday season and an accelerating economic resurgence. As the world edged out of the pandemic, the major concern was whether supply chains could accommodate the surge of pent-up demand.

Despite that promising picture, volatility and uncer- tainty roiled. Supply chains remained backlogged. Shippers were in a state of anxiety over spotty material and product availability. The labor market was tight as workforce participation remained below historical averages. The highly contagious new Omicron variant emerged in December, raising the specter of another round of dislocations, shutdowns, and delays. Monthly inflation rates spiked from below 2 percent early in the year to 7 percent in December 2021 (see figure 2).

7Out of sync | State of Logistics Report

In sum, the global economy rounded into 2022 with a sense of hope, tempered by concerns.

Russia’s invasion of Ukraine, however, cast a shadow over hopes that 2022 would feature a post-lockdown global economic recovery. In response, Western nations imposed historically severe sanctions on Russia, led by the US banning the import of Russian oil, natural gas, and coal on March 8. These constraints are already hampering global growth. While Russia and Europe are expected to bear the harshest burden as the war persists, the conflict’s economic repercussions will be felt around the globe for years to come. Developing countries, especially, will continue to see harsh impacts amid shortages and rising food and commodity prices.

In fact, American consumers are already feeling the pinch at the pump. The price of gas has averaged well above $4 per gallon thus far in 2022, as compared to about $3 per gallon in 2021 and roughly $2.60 per gallon in 2019. President Biden released record levels of oil from the Strategic Petroleum Reserve and has urged oil and gas companies to increase production, even calling on Congress to make companies pay fees on unused wells. This is a proverbial drop in the bucket though, and US consumers will continue to feel gas prices lightening their wallets.

The situation in Europe is even more precarious. Russia was the largest supplier of natural gas and oil to the EU in 2021. Germany blocked regulatory approval for the Nord Stream II pipeline project with Russia, which was expected to be a mainstay of Europe’s future LNG supply. It also committed to an EU ban on Russian coal imports and has announced plans to phase out Russian oil imports by the end of 2022 and gas imports by mid-2024. A partial EU ban on Russian oil was announced on May 31.

Sustained high energy costs may erode consumer spending enough to seriously slow global GDP growth, thus reducing demand for logistics even as fuel surcharges for shipments increase. Recent forecasts anticipate 3.1 percent global growth in 2022, with a gradual decline to 2.0 percent in both 2023 and 2024, as compared with the 1998–2018 average global growth rate of 2.94 percent. Notably, India, China, and the US are expected to register average GDP growth rates of 6.6 percent, 5.2 percent, and 2.4 percent respectively over the 2022–2024 period, raising concerns that still-backlogged supply chains will not be able to absorb the expected activity.1

Ukraine and Russia are also major providers of important commodities including neon (essential to microchip fabrication), nickel, copper, grain, and aluminum. Sharply diminished supply from the region could add another layer of challenges for global supply chains.

International financial institutions have also expressed increased concern over a slowdown in global economic growth amid the fallout of the conflict in Ukraine and broadening price pressures. The IMF’s April 2022 World Economic Outlook downgraded its global growth projections by 0.8 and 0.2 percentage points for 2022 and 2023 over January estimates. Projections for US growth were also lowered by 0.3 percentage points for both 2022 and 2023. Moreover, economic ministers at this year’s Spring Meetings of the World Bank and the IMF underscored that global economic recovery is at risk amid geopolitical tensions, rising food and energy prices

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