Industry difficulties were so prevalent in 2021 that media outlets, beyond just the typical trade publications, began covering logistics topics daily.
Key Takeaways
- Inventories, which rose to 61.6 on Logistics Managers Index during the holidays, could continue to influence logistics market forces
- Inflation reached 7.1% in December, which may affect durable goods demand and the logistics market
- Infrastructure investments are coming as retailers and logistics service providers with the means will look to add capacity
- Retail sales topped out at $886.7 billion during the holidays, but a shopping slowdown appears likely
What themes will shape the supply chain for the rest of the year? #
Despite thoughts that 2021 would be a respite from the upheaval of 2020, this past year looked similar in many ways. And in some instances, 2021 was more disruptive than its 2020 predecessor. As we head toward the mid-way point of H1, recognizable forces are shaping the rest of the year ahead in the supply chain. Some of the most prominent themes to watch for:
Capacity will be more plentiful, especially in the second half of 2022
Consumer demand for durable goods will soften and reshape the logistics market
Higher input costs and wage rates will put consumer brands in a bind
Labor trends will continue to hamper logistics service providers (LSPs)
Supply chain leaders will invest in automation to solve operational challenges
Sustainability initiatives will impact corporate strategies
eCommerce spending grew to $767.7B in 2021, up by $133B from 2020. That translates into roughly 133 million square feet of needed warehouse space.
Logistics capacity: Look for more of it in the second half of 2022 #
No one can say for sure when the supply chain logjam, apparent in heavily congested port locations, will return to pre-pandemic conditions. It may continue to be a topic dominating media attention, especially during H1 of 2022. And as companies continue adding inventory, warehousing capacity will continue to shrink. The current industrial vacancy rate throughout the U.S. hit 3.2% for the first time ever last month. In transportation, demand has also exceedingly outpaced supply, and the driver shortage will persist into H1 of 2022.
However, the efforts to remediate conditions throughout the domestic logistics marketplace could create a bullwhip effect causing different disruptions. LSPs, retailers, and firms with capital looking to enter the space will invest in capacity. Link Logistics, a Blackrock-owned LSP, is spending $5 billion to build 30 million square feet of new warehousing space.
The investment suggests a burgeoning trend that could manifest in H2 of 2022. LSPs and retailers, with the means, will continue to pour funds into infrastructure investments. The need for warehousing space is high. CBRE Group Inc. estimates that for every $1 billion increase in online sales, the country needs an additional 1 million square feet of warehouse space. eCommerce spending grew to $767.7B in 2021, up by $133B from 2020. That translates into roughly 133 million square feet of needed warehouse space.
With that current need and as eCommerce sales continue to grow, firms will pour money into logistics infrastructure investments. Resource allocation will buoy available warehousing space for LSPs and allow shippers to find available fulfillment solutions more easily.
However, it’s possible that new construction could create enough supply to outstrip demand. Analysts at Goldman Sachs predict 3.8% GDP growth in 2022—down from its initial prediction of 4.2%—as consumer spending declines amid inflationary concerns.
Efforts to add trucking capacity, like opening positions to younger drivers, will increase the labor pool. Similar to the warehousing market, trucking experienced a boom cycle for the past two years due to increased freight volume driven by consumption.
As consumer spending declines, industrial real estate and freight markets may find that supply exceeds demand, which broadens capacity availability in the back half of 2022. If the scale tips drastically, this could spell issues for businesses that overprovisioned capacity or locked in contract freight rates early this year.
Consumer trends: Durable-goods demand is still at record highs, but a slowdown is coming #
For the past two years, demand and subsequent consumption of durable goods drove the logistics market. Both 2020 and 2021 were full of record consumer spending, capped off by holiday sales in 2022 reaching $886.7 billion, a growth of 14.1% over the previous high.
Experiential purchases, like dining and entertainment, dropped precipitously at the start of Covid-19, which caused an abnormal spike in durable-goods purchases. The demand for consumables remains the most important macro variable for supply chain disruption in 2022. From spending more on experiential goods to depleted savings from spent stimulus payments to new concerns around inflation, durable-goods consumption is declining.
The Consumer Price Index continues to rise, outstripping modest wage gains made by workers last year. This negating action created by inflation, which rose 7% in 2021, is decreasing spending and shaking Americans’ economic confidence. According to a survey conducted by Momentive on behalf of The New York Times, “Overall consumer confidence is at the lowest level in nearly five years.” Inflation contributes to the less than rosy outlook, as nine in 10 respondents reported being “somewhat concerned” about it while six in 10 stated they were “very concerned.”
The shift in economic attitude is likely an accurate indicator of a slowdown in spending coming this year, tamping down retail sales and the movement of goods throughout the domestic supply chain. Unfortunately, many businesses forecasted incorrectly and reacted to Covid-induced spending spikes, bringing in inventory to accommodate past quarters’ consumption. This trend could mean excess inventories could be a fixture for the year.
Between Sept. and Nov. 2021, approximately 13.1 million Americans quit their jobs.
Labor: Demand for workers will continue to exceed supply #
The Labor Force Participation Rate has taken a substantial hit during the pandemic. As Covid entered reality for the U.S., millions of Americans retired early or left the labor force altogether. Despite rescinding unemployment benefits to spur a return to work, an employee shortage persists.
Lower labor force participation and record job quits acutely affected frontline worker availability, especially temps and lower-wage positions critical in supply chain functions where wage increases have been slow to react to the remainder of the market. Record numbers of employees are resigning their positions to find better pay roles elsewhere, particularly in logistics. Between Sept. and Nov. 2021, approximately 13.1 million Americans quit their jobs. Of those, more than 11% worked in logistics, often citing pay or physical demand issues as reasons for leaving.
But demand remains high for workers in the sector, and leverage now favors employees, not employers. And it’s driving competitive wages and benefits packages to attract and retain talent. Despite efforts, industry perception still indicates that the labor shortage will continue into 2022 so LSPs are employing new solutions to shrink the employment gap.
The long-term implications of a high reliance on labor are clear: Automation in warehousing is no longer just nice to have but an imperative for sustainable growth.
Technology: Supply chain leaders will invest in automation to solve operational challenges #
In 2022, the debate will not center around whether supply chain leaders should invest in tech. Instead, it will be about how much they should invest in automated advancements.
While some LSPs and retailer-fulfillment operations increased pay to find workers, others looked to technological investments to improve productivity despite turnover. Logistics tech is a continually called-upon investment for all parts of the supply chain; however, it's now more critical than ever to incorporate.
According to a McKinsey report about the intersection of labor and warehouse tech, “the long-term implications of a high reliance on labor are clear: Automation in warehousing is no longer just nice to have but an imperative for sustainable growth.”
Some operators, with an adequate workforce, may choose to implement WMS scanning barcodes or automated conveyable systems to help employees increase productivity and efficiency, thus delaying deeper automation investments until they are more ubiquitous. In contrast, others may want more predictable cost inputs than rising worker wages and will invest in more automated planning solutions or full-robotic warehouses.
Regardless of what the solution looks like, supply chain leaders, irrespective of industry, will continue to invest in technological innovations in 2022 to solve labor shortages and cost inflation.
Consumer goods shippers: Higher input costs force bifurcated strategies #
Prevailing trends are not limited to shoppers, LSPs, and retailers. They also extend to consumer brands. Higher input costs and wage rates will result in CG companies accepting lower margins or continuing to pass costs down to consumers. Which route a brand employs depends on its vertical. While some in the CPG space may be able to hike prices for end-customers, others in the food and beverage industry operate with thin margins and are typically unable to pass costs down to shoppers.
Forward-looking brands are utilizing supply chain flexibility to shorten the length of their supply chain and find better regional labor pools. Those that can stand to mitigate cost hikes and labor disruptions will fare better than their peers. Flexibility was a hot topic in 2021. Look for it to be even hotter in ‘22.
More than one-third of consumers are willing to pay more for sustainable products.
Sustainability: Consumer-backed interest will drive corporate supply chain strategies #
Another long-running theme that is increasingly important is corporate sustainability initiatives. The concept remains a highly critical purchasing consideration for consumers. A recent study found that more than one-third of consumers are willing to pay more for sustainable products.
There are few better ways to find dependable sustainability solutions than in the supply chain and increasing logistics efficiency will be where many look to improve sustainability in their operations this year.
Concepts like shortening last and middle-mile delivery distances and nearshoring suppliers will be prevalent in supply chain planning. These aspirations aren’t just strictly sustainability-centered initiatives either.
Each also provides distinct business advantages and is part of what supply chain leaders have learned from the pandemic. Supply chain flexibility remains a critical component of increasing operational efficiency and sustainability.
Building sustainable, flexible supply chains is not limited to a firm or vertical. This practice of overhauling what challenged business since Covid’s outbreak will radiate through every facet of the supply chain in 2022.
Conclusion #
Although more unseen forces are awaiting to upend the broader supply chain, these predictions provide the industry's framework in 2022. After two years of continual disruption, an uneventful four quarters in the supply chain is unlikely. Some of the pandemic’s initial shocks have not yet fully played out, nor have the demographic changes accelerated by its arrival been resolved. As 2022 kicks into gear, be prepared to see more upheaval.
