Reflections on an Eventful 2021 — And a Look Ahead to 2022
Reflections on an Eventful 2021 — And a Look Ahead to 2022
The supply chain typically operates behind the scenes, unnoticed and often 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 2020-2021:
- Driver shortage: The concerns about a shortage of truck drivers is real — supply chain professionals have been worrying about it for 10-15 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 all resulting from the pandemic 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 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, turning heightened focus to ecommerce. 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 & acquisition activities: 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 the 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 activity 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:
- Transportation market overall will remain tight. Ok, maybe I am just stating the obvious, but it seems highly likely we now have a new normal when it comes to transportation. When you break it down, 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 seen the greatest volatility in rates, mainly due to the 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, they 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 things aren’t likely to shift any time soon, especially in light of what we all expect to be a continued shift from traditional retail to at home delivery.
- Technology requirements in the 3PL space continue to escalate. Another multi-year trend is not going away anytime soon. 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 a relatively unpredictable environment. The influx of capital attracted to this idea has upped the ante in a huge market, and every major market participant is building out their own version of a digital marketplace. Players with the capital to invest, scale to operate and build predictive data solutions will be the ultimate winners as shippers continue to look for creative solutions to drive both efficiency and consistent reliable service to meet their transportation needs.
- Look for more opportunities for long term investment to solve the ongoing volatility in the segment. Recent events shined a really bright spotlight on the vulnerability of the supply chain challenges that exist today. In addition, the increasing concerns over climate change and more green solutions to make an environmental difference drive investment to electric and autonomous trucking. Obviously, the idea of getting two birds with one stone, making an impact to the driver shortage as well as addressing the long-term concerns associated with climate change are strong drivers to make this change. While the short-term challenges are unlikely to feel any relief from this, longer term, more stability to a volatile industry is a potential outcome.
This look ahead suggests that the challenges transportation and logistics professionals struggled with in 2020-2021 will continue to influence how the industry operates in 2022. The immediate past usually influences future events to some extent, but the scale of the issues the industry confronted over the past year and a half makes it more likely that these factors will continue to impact the sector.
It’s also important to keep opportunities in mind. M&A activity is likely to remain high in 2022 because strategic players see the potential in the sector in a new light. Transportation and logistics players — especially those that are tech-driven — faced unprecedented challenges and overcame them with ingenuity and persistence. That’s the spirit that will drive success in 2022 and beyond.
(This content originally appeared on SupplyChainBrain)