The Pitfalls of Logistics' "Last Leg" Role
Welcome to the 95th edition of The LogTech Letter. TLL is a weekly look at the impact technology is having on the world of global and domestic logistics. Last week, I’m exploring the extent to which technology can keep mid-market forwarders very much in the game. This week,
As a reminder, this is the place to turn on Fridays for quick reflection on a dynamic, software category, or specific company that’s on my mind. You’ll also find a collection of links to stories, videos and podcasts from me, my colleagues at the Journal of Commerce, and other analysis I find interesting.
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For those that don’t know me, I’m Eric Johnson, senior technology editor at the Journal of Commerce and JOC.com. I can be reached at firstname.lastname@example.org or on Twitter at @LogTechEric.
I’ve had this completely untested theory rattling around my brain the last few weeks, and what better way to test it out than in my very own laboratory (ie here, where all of you will keep me honest). Here goes…
I think most shippers are importing products based on an input cost for international logistics and transportation that existed prior to the pandemic. And I think that costing hasn’t really changed much even as we’ve gone on the rollercoaster ride of our logistics lives the past two-and-a-half years. Let me be clear: I am not suggesting that shippers have failed to change their budgeting around transportation as rates skyrocketed to Mt. Everest levels in 2021 and have predictably come back to earth this year.
What I am saying is that a product developed in, say, 2017, was built with an input cost for ocean freight and transit times that is a fraction of what those costs are now. So, in other words, the transportation budgets might have grown, but the underlying cost calculation for the product may not have. Another way to think about this is: would that same product, if developed in 2020, be viable in the market if the shipper factored in what actual ocean freight costs were in 2021?
I suspect that most of the products moving on increased rates since fall 2020 (and rates are still high in historical terms, even in the spot market) still have ocean freight input calculations based on the assumption of an eventual correction. The alternative is probably pretty scary for a shipper, to think that ocean rates will remain two to four times what they were pre-pandemic, and to build that into long-term costing models as opposed to temporary ones.
My suspicion is that the breakdown here can be traced to a lack of coordination between logistics and product development. The traditional supply chain has been a built on a series of internal handoffs - more like a relay race than a crew race. Product development designs the product, sourcing figures out where to make it, operations make it or manage the suppliers that do make it. And then goods become freight. That’s where the logistics and trade compliance teams come in, and the rest of the teams say “here, you take it.” Sometimes, the logistics and compliance teams work in tandem, sometimes not.
In that relay race, if the first three legs run flat out, the job of the fourth leg is pretty straightforward. But if even one of the first three legs gets behind the pack, it’s up to the fourth leg to make up time. The lack of connectivity between product development and logistics (the first and last legs), is a perfect example of how global trade management tools remain criminally underused.
Here’s how this is all manifesting itself in the market. I’ve heard from multiple forwarders in the past week or so say that while big volume shippers that have too much inventory are pulling back on orders (and thus ocean volume), there’s a lot of latent volume of low-cost goods that was priced out of the market until recently. That volume is now finding plentiful capacity, and relatively attractive spot rates. But neither of these scenarios is ideal. The low-cost goods shipper had to sit the market out until spot rates dipped. The higher-priced or seasonal goods shippers paid higher rates but now have too much inventory.
Which makes me wonder whether we’ve entered into a permanently bifurcated ocean market - one where goods that need to move and have the cost basis to afford extravagant ocean rates move during certain points of the year, and where lower-cost goods wait their turn for demand to subside and rates to become affordable. I’d argue this bifurcation is attributable to the lack of agility in how ocean freight as an input cost is accounted for. Whether this bifurcation is temporary or permanent depends on outside factors (like intense demand from a pandemic!) but mostly about shippers being able to account, on the fly, for how the price of an ocean rate will impact a product from design to sale.
There is a forwarder element to this as well. In a conversation this week with a technology vendor catering to the forwarding market, we talked about how some forwarders gain market traction by specializing in a certain niche, whether it be retail, chemical, automotive, or something else. It’s a natural way to build a business, one that helps forwarders scale as much on word of mouth as on an aggressive outbound marketing campaign. But the question is whether forwarders in that mould need to think about diversification. Not just to avoid the classic “too many eggs in one basket” conundrum. But because, as noted above, the international transportation market might be bifurcating. Which means that at some points of the year, lower priced goods might be able to move and at other points of the year, higher-priced or more seasonal goods might need to move, and thus can afford more expensive ocean freight rates.
By the way, warehouse space is at a premium too, so that’s an additional variable. I’ve written in this newsletter about inventory management being key and this is an area where we might start to see sophisticated shippers become better at moving inventory at the right time. That means not just aligning the movement of inventory according to when it needs to sell, but according to when warehousing space is available and affordable, and when ocean and air freight capacity is more plentiful and reasonable. It’s the very definition of a multi-dimensional problem and lends credence to the idea that supply chain is not the sufficient term for what shippers need to manage anymore.
Quote of the Week:
“As a shipper, I need guidance that isn’t bullshit in 30 days.”
Neal Peart Lyrics of the Week:
Cities full of hatred, fear and lies
Withered hearts and cruel, tormented eyes
Scheming demons dressed in kingly guise
Beating down the multitude and, scoffing at the wise
Here’s a roundup of recent pieces on JOC.com from my colleagues and myself (note: there is a paywall):
The big news this week was two very well-known names in the truckload space suing one another, a story we broke on JOC.com Monday. In a nutshell, DAT Freight & Analytics, by far the biggest US load board, is suing freight broker Convoy for breach of contract and theft of trade secrets. In response, Convoy is countersuing, saying DAT’s behavior is anti-competitive. I explored some of the wrinkles (but definitely not all) in this case in this piece. There’s definitely more to come on this one.
Earlier this year on JOC.com I wrote about how the mosaic of public and private maritime data initiatives might be confusing to the very entities they were all trying to reach. In fact, I wrote in more depth about this topic in this newsletter in March. Which made a piece of news that surfaced this week about the US Federal Maritime Commission (FMC) committing to use Digital Container Shipping Association (DCSA) standards all the more interesting.
The issue of duplicate freight bills has been a thorn in the side of shippers for a while, but we’re finally getting some numbers now. First, my colleague Teri Errico Griffis reported on a shipper being hit with nearly $1 million in duplicate detention and demurrage bills in a case in front of the FMC. And then this week, I reported on case study from the audit automation vendor OpenEnvoy, which found that one segment of ag exporter Scoular’s $6 billion business saw nearly $2 million in duplicate invoices over a six-month period. As new shipping regulations force carriers and NVOs to invoice accurately, this is likely an issue that will keep cropping up.
And here are some recent discussions, reports, and analysis I found interesting:
For a real deep dive, with someone who actually understands some of the legal ramifications of the DAT-Convoy case, I highly recommend catching Chris Jolly’s discussion this week with attorney Matthew Leffler. They somehow managed to make civil lawsuits about freight quoting and pricing informative and entertaining.
Make sure to also catch Nate Shutes’ discussion with Petere Miner about her career and bootstrapping the logistics tech provider CoLoadX.
Here is some interesting fodder from WiseTech Global on the link between technology and productivity for forwarders.
The NYSHEX podcast crew, which I’ve referred to a few times here, does a great job, and this episode about the NVO market with DSV is no different.
Some upcoming events I’ll be involved in:
Business Insider reporter par excellence Emma Cosgrove is my guest on today’s LogTech Live episode at 10 am ET. We’ll run down some of the stories she’s done of late, our view on the technology and funding markets, and dig into last mile more than I usually do (because I know very little about last mile!). The best way to keep track of new LTL episodes and updates is to subscribe.
Our Inland Distribution Conference in Chicago Sept. 26-28 is now less than two months out. I’ll be doing a one-on-one with Emerge CEO Andrew Leto and then leading four tech-oriented discussions, including the one on small carrier tech, as well as sessions on LTL tech, freight procurement advances, and venture’s future role in trucking. Don’t miss this - it’s the most substantive surface transportation conference in the market.
Disclaimer: This newsletter is in no way affiliated with The Journal of Commerce or S&P Global, and any opinions are mine only.