Distribution & Supply Chain Insights

Distribution & Supply Chain Insight

FedEx Announces Layoffs as Volumes Decline

This week FedEx announced its quarterly earnings, and the results weren’t good, further highlighting the decline in shipping volumes. Partly due to the decline in ecommerce volumes, FedEx stated that it will cut 25,000 workers by May of this year. These efforts are to try and streamline costs in efforts to boost profitability.

This is on the heels of layoffs in the broader freight markets.  Per the WSJ - trucking, warehousing and parcel-delivery companies cut a combined 16,900 jobs in February, following a drop of 2,200 jobs in January, according to seasonally adjusted preliminary employment figures released Friday by the U.S. Bureau of Labor Statistics.

What does this mean, and what to do about it:

• This comes at a time when UPS is beginning deep union negotiations to avoid a strike, while FedEx is looking to improve their on-time delivery, etc.  This can certainly lead to uncertainty in carrier delivery should UPS not negotiate a deal with the union. 
• Take this opportunity to determine whether additional costs that can be negotiated out of your current carrier contracts, also understand how regional carriers can potentially reduce risks with UPS or FedEx. 
  
  

Supply Chain by the Numbers 

St Patrick's Day Consumer Retail Spending

According to the NRF, consumers are sparing no expense to go all out for the holiday this year. Consumers plan to spend a total of $6.9 billion — $1 billion more than last year — or an average of $43.84 per person.

And men are ready to spend more than anyone else. For as long as NRF has tracked the holiday, men have spent substantially more than women on St. Patrick’s Day festivities. This year, they are spending $48.71, almost $10 than women’s $39.15. What are they spending it on? Well, women buy more of every category than men except one — beverages. Sláinte, lads!

What does this mean, and what to do about it:

• Outlook reflects a consumer that is still holding up the economy in certain segments. 
• Grab a green beer, or favorite non-alcoholic beverage, and enjoy some time away from the office with friends or family!
  
  

Inside Look at Freight & Transportation

In this industry, we have always viewed the freight and transportation side of the business as a view into economic health, and a barometer as to whether things are headed.  Changes in shipping volumes, whether raw materials or finished goods, are felt in the transportation industry long before economic indicators begin pointing to a trend.  

We are in a period where those changes are the transportation side are visible, and the outlook isn't favorable for shippers or carriers. 

From the carrier's side of the ledger

•  Retail inventories are building, forcing many companies to begin planning markdowns. 
• Outlook form major retailers such as Walmart and Home Depot provided soft or weakened guidance from the consumer perspective. 
• Consumers have the lowest savings rate since 1960, leading many to speculate the consumer can't prop up the economy much longer.  

•  According to TI, Driver wages, insurance, equipment and truck parts cost more than a year ago. For example, Trailers that used to be $20-25K now cost $60-80K.
• High interest rates make financing large capital expenses, like truck purchases, even more difficult.
• Additionally, freight rates have fallen nearly 40% since January 2022, reducing carrier income significantly. Combined with higher costs, this has led to the most carriers going bankrupt in 
  2022 since 2008. 2023 will be worse.
  
  

Carrier Forecasts for Q1/Q2 2023

• Small parcel capacity constraints are projected to begin to subside in 2023, as carriers continue to address challenges. 
• Small parcel carriers continue to extend peak surcharges beyond peak season. Select surcharges are now in effect “until further notice” with UPS renaming them “demand surcharges.” This is not expected to change.  
• The record rate increases, UPS at 6.9% up from 5.9% in 2022, comes at a time when shipping volumes are softening.  There will be a point at which shippers will be motivated to contractual discounts and carriers will become more competitive for that business.
• The lead up to the UPS/Teamsters contract negotiations, and the results of the contract negotiations, will have a direct impact on how UPS prices contracts. 
• LTL carriers see the first half of 2023 as being potentially soft.  Many are seen as lowering costs and streamlining operations instead of lowering rates, as of now.  
• Many LTL carriers are taking loads they wouldn't have otherwise accepted previously, this is expected to continue for the first few quarters. 
• Carrier bill counts are down. However, LTL carrier rates will not decrease drastically due to less 
  fragmentation and more pricing power in the LTL market versus the TL market.
  
  

What does this mean, and what to do about it:

• In these market conditions, it is critical to at least get a quick gut check to see what challenges should be address, and what opportunities exist in your supply chain.  
  
  It's as easy as just a simple discussion with FCBCO & TI to understand your shipping characteristics and volumes.  From there, we can share our perspectives. 

Supply Chain by the Numbers 

New Industrial Construction Fell 24% in 4th Quarter

With high interest rates, it should be no surprise that investors and developers have slowed the rate of new industrial construction, including warehouses and distribution centers.  This according to WSJ and Costar in a recent report, adding "Developers began building about 137 million square feet of new warehouse space, the lowest amount of new space to start construction in a quarter since the beginning of the Covid-19 pandemic." 

With the average large scale distribution center taking roughly 13 months to complete, this is certainly going to have a negative impact on future distribution centers in Q2 2024.  This comes as existing occupancy rates remain extremely high.  Pushing lease rates and 3PL storage costs to some of the highest levels encountered by retailers. 

What does this mean, and what to do about it:

• Companies that are considering a facility move, or expansion to the current number of DCs, should consider expediting the decision making process.  This would include any distribution network analysis studies, or the potential use of 3PL options, as available space will impact most models. 
• Continue to find ways to optimize the current facility from a utilization and capacity perspective.  Focus on getting the most out of the current facility, without risking the flow of goods, safety or efficiency.  A facility that remains above 85% for extending periods of time is considered "full". 

Valentine’s Day Spending to Hit Nearly $26 Billion

According to the NRF, Valentines Day sales were expected to hit nearly $25.9 billion this year, up from $23.9 billion.  The NRF states, "More than half (52%) of consumers plan to celebrate and will spend an average of $192.80. This is up from $175.41 in 2022, and the second-highest figure since NRF and Prosper started tracking Valentine’s Day spending in 2004. "

Of the $17 increase in per-person spending, $14 comes from gifts for pets, friends and co-workers, along with classmates or teachers.

Bloated Retail Inventories Will Continue to Drive Inflation

There has certainly been a significant focus on interest rates and inflation, not just in the US but abroad.  And rightfully so, as consumers have seen escalating price increases across all major categories.  While some of the latest economic data shows some areas plateauing, there are still supply chain pressures that will keep pushing costs on to consumers.

Even though ocean freight has dropped in cost, and trucking carriers have excess capacity, retail inventories have been piling up.  As inventory levels remain elevated, or in some cases continue to climb,  there is less available warehouse space to store them.  

This problem has led many companies to look at everything from keeping inventory inn containers at ports, to outsourcing warehouse operations to ease the burden.  With decreased warehouse availability and options, retailers are paying the highest storage costs in recent history. 

These costs will inevitably passed onto the consumer, furthering inflation fears. 

What does this mean, and what to do about it:

• Companies must continually scrutinize forecasts and make adjustments as quickly as possible within their supply chain.  Challenge all aspects when the forecasts drops - i.e., can you cancel or modify existing POs, how  quickly can you liquidate or markdown inventory to relieve storage pressures and cost. 
• Consider all 3PL options if you are in need of offsite storage.  There are significant cost differences in long term versus short term storage.  What you are storing will also have direct impacts on 3PL storage costs. 
• Scrutinize your internal supply chain storage facilities, ensure that you are optimizing warehouse bin and storage locations throughout.  Identifies areas where you can recapture storage space.  This should include reprofiling locations to maximize cube utilization. 

Where and How Companies Plan to Invest in Automation

Automation continually is improving and becoming more affordable for a wide range of businesses.  In a recent study conducted by Modern Materials Handling (MMH), shows some slight declines in how much capital companies are planning to invest in automation. 

According to MMH, "The average estimated spending level came in at $1.57 million, down from a $2.02 million average last year, and almost identical to the $1.579 million average two years ago."

Here is how respondents the importance of the each of the following when evaluating automated solutions.

The following depicts where investments are being made within the operations. 

What does this mean, and what to do about it:

• While the planned level of investments is down from a wide range of companies, it potentially opens the door for those looking to make additional investments.  If investments drop, many vendors will be more aggressive with service offerings and investment required. 
• This environment is a great opportunity to understand where and how automation and technology could benefit your operations.  
• Understand where the opportunity is to reduce labor costs in using automation and technology. 

Consumer Spending Remained Strong in January

One of the bigger surprises this week was the strength of consumer spending.  Retail sales for the month increased 3%, compared with expectations for a rise of 1.9%.  According to CNBC, On a year-over-year basis, retail sales increased 6.4%, which was exactly in line with the consumer price index move reported Tuesday.

In speaking with many retail clients, the results have been mixed.  There are a significant number of retailers that have seen sales pull back to being inline with previous, pre-pandemic forecasts.  This has created challenges, as noted above, regarding bloated inventory positions, etc. 

There still do remain many strong, growth oriented retailers - some of these resilient categories is in luxury goods.  

What does this mean, and what to do about it:

• As noted above, quickly identifying changes in purchasing and customer demand must be reflected in the forecast as quickly as possible.  
• Consider how more robust vendor compliance programs can help streamline your operations. 

DISTRIBUTION & SUPPLY CHAIN INSIGHTS - WEEK of 2/6

Industrial and Warehouse Space Still at a Premium

At the end of Q4, the market for available industrial and warehouse properties had eased a bit.  According to a CNBC report, warehouse storage rates on a national level remain elevated.  Fortunately the rates seem to have plateaued, at least for the current period, with no rise in rates quarter over quarter in Q4 2022.   Stating, "Even as supply chain inflation slows, warehouse rates are high because there is a lot of inventory, which leaves less available space. The price for that space is sold at a premium. ".

Even in Richmond VA, headquarters of F. Curtis Barry & Company, the "...combined overall industrial market occupancy has slightly decreased to 94% in Q$ 2022", according to Porter Realty.  This is down from 95% in Q3 2022.  An additional 6 million square feet of new industrial construction underway.  Asking rents grew by about 11.7% by EOY 2022, with 2023 on pace for 7.7% increases. 

What does this mean, and what to do about it:

• With even markets like Richmond in tight availability, it is important to focus on maximizing warehouse capacity and utilization of the existing facilities in your supply chain.
• Perform a warehouse operations assessment to ensure that the existing operations are as finely tuned as possible. 
• With landlords still firmly in control, and 5+ year leases being the normal, consider the benefits of 3PLs in your supply chain.  

Freight Capacity Eases & UPS Teamsters Agreement

Freight still remains front and center for most supply chain professionals.  According to most supply chain and transportation analysts, there is capacity available in all modes of transportation, and carriers are open for business.  Carriers are seeking to add volumes to their networks and are willing to negotiate rates to secure the volumes. 

Especially concerning to retailers, and ecommerce companies, all eyes are on the current UPS negotiations with the Teamsters and its 340,000 UPS workers.  UPS President Carol Tome stated that a "win-win-win" agreement would be reached prior to the end of July.  

What does this mean, and what to do about it:

• As most have missed their forecast for volumes, they are willing to negotiate rates, its time to understand what carrier options exist for your business.
• If your business is concerned with a potential UPS strike, now is the time to negotiate with FedEx and regional carriers for small parcel volumes.  If a work stoppage occurs with UPS, it will be too late to shift packages. 

Warehouse and Transportation Adds 23,000 Jobs Last Month

At this point, distribution professionals could practically forecast the monthly jobs report themselves.  According to the Bureau of Labor and Statistics, the warehousing and transportation industry added 23,000 jobs, which is in line with the 2022 average.  The most recent data points to roughly 1.9 job openings for each unemployed individual. 

What does this mean, and what to do about it:

• Labor remains a top concern for most distribution professionals, companies must ensure that facilities are running at optimal performance to drive down labor costs, consider an operational assessment.  
• Ensure that you are managing warehouse labor appropriately, given your management objectives and customer expectations. 
• Understand how automation and technology can reduce your dependency on labor in your warehouse operations.