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Michael Klage, solutions director at TOC Logistics, has more than 12 years of experience in international logistics. His mission at TOC is to solve complex international supply chain problems.
David Maloney, Editorial Director, DC Velocity 00:01
Shippers look to alternative ports. Retailers look to expand their carrier networks. And more consolidation among logistics firms. Pull up a chair and join us as the editors of DC Velocity discuss these stories, as well as news and supply chain trends, on this week's Logistics Matters podcast. Hi, I'm Dave Maloney. I'm the editorial director at DC Velocity. Welcome. Logistics Matters is sponsored by Softeon. Softeon delivers powerful warehouse management, warehouse execution, and distributed order-management solutions delivered on time, on budget, and on results with the market's only track record of 100% deployment success. That's why logistics leaders including KC Stores, the Duluth Trading Company, Do it Best, Saddle Creek Logistics, and many more are powered by Softeon. Visit them at Softeon.com. As usual, our DC Velocity senior editors Ben Ames and Victoria Kickham will be along to provide their insight into the top stories of this week. But to begin today: Ocean ports in Southern California are experiencing an increase in traffic resulting from the Suez Canal incident as well as the huge spike of imports. But some shippers are looking at alternative ports to move their cargo. To explain what's happening, here is Ben with today's guest. Ben?
Ben Ames, Senior News Editor, DC Velocity 01:27
Thanks, Dave. That's right. We have with us here today Mike Klage. He's the solutions director at TOC Logistics International, which is an international logistics management and freight forwarding company based in Indianapolis. Thanks for joining us, Mike.
Mike Klage, Solutions Director, TOC Logistics International 01:42
Thanks for having me.
Ben Ames, Senior News Editor, DC Velocity 01:44
As David said, during our introduction here, I think people who have been observing the industry have seen some of the unpredicted and challenging conditions lately. The Suez Canal blockage, of course, sent ripples, really, around the world, not just in that immediate area, and the Covid recovery is a good thing, but it's also come with some growing pains for the country and the world. We've seen a lot of longer, extended waiting times, ships waiting at anchor off ports to get their containers unloaded. They're really some atypical conditions. Really, it looks like we're in for a whole busy summer of trying to work through that backlog right now. Just how bad are conditions out there?
Mike Klage, Solutions Director, TOC Logistics International 02:29
Bad? Things are actually great if you're an ocean line. They've been waiting a decade for this, and they're making every effort to capitalize on this perfect storm. But for everybody else, it's really bad, as in worst crisis any of us have seen, and hopefully ever will see, in our careers. It's really a catastrophe from both the pricing and the operational aspects. Companies are warned to consider the risks of doing business oversea, but the fact is very few companies have factored anything like this into their financial or production planning. Let's look at Asia. We're in this nasty reinforcing cycle. If you find an empty and buy your way onto a vessel, that vessel is still sailing five to 15 days after the original schedule. It then slow steams across the Pacific, because it knows that it's going to sit anchored for a week or more in LA. By the time that vessel finally berths, we're dumping mega-vessels full of containers into an already congested terminal plagued by understaffing. Then the landside issues begin, with trucking and warehouse shortages in LA. If your cargo's going inland by rail, good luck with that. More congestion for that last leg. The vessel eventually works its way back to Asia, and then it's even later than it was to start the whole process, and the whole cycle starts over. So with these delays and the vessels coming in later, the carriers are then forced to make structural blank sailings, not because they are trying to restrict capacity, but in order to try to get the strings back on schedule. Those blank sailings zap more capacity out of the market, and that leads to all of the pricing effects we're seeing. The on-time percentage in March was only 14% on trans-Pacific eastbound. So, from a pricing perspective, this import boom has importers from small mom and pops up to the mega-retailers in a in a bidding war for space. The traditional power dynamics are flipped on their head. Even the huge importers are begging carriers for space. Sure, there's some cargo moving on long-term contracts that are paying lower rates, but we're seeing spot prices for ad hoc cargo surpassing $10,000 on a port-to-port basis. That's the real price to secure equipment and space. The container indices that you see out there don't take into account the premium surcharges the carriers are levying, nor the margins applied by master loaders who have the best access to space on short notice. We've got clients with thousands of containers a year who are struggling to secure space, even with the top 10 global forwarders. They're coming to us for help and willing to pay huge premiums to get on the water, because being on the water at any price is better than paying for air cargo or sitting in a warehouse at origin. When everyone's making those calculations, with every vessel and container already deployed globally, that price is going to continue to soar until the U.S. thirst for consumer goods begins to wane. And a lot of people see this as an Asia issue, and with all the focus on Asia, it's easy to overlook the troubles on the Atlantic side. Europe's seeing the most volatility in a decade as well, and it's happening really fast. Over the last several weeks and couple of months, things are changing really rapidly. It's really all the same factors that are hitting home on the EU North America trade is what's happening on the Pacific: Lack of empties, vessels are full and overbooked, record U.S. import demand, etc. Carriers have started employing all the same tactics that have been successful in Asia. The massive GRIs [general rate increases], peak-season surcharges, allocation controls, and it's really leading to a similar highes-bid-wins environment. This was exacerbated tremendously with the Suez situation, because you had a complete halt of inflow of empties to Europe for two to three weeks. They're flowing again now, but many inland depots beyond base ports don't have adequate stock of containers. That's requiring truck and transloads at the port, and all sorts of different routings coming out of Europe. The carriers are firmly managing allocation out of Europe in a way they've never done before, not allowing changes in strings and routings. It's requiring a lot of creativity to keep the goods flowing on whatever routing or vessel that equipment and space can be secured. The risk of not using these alternate routings is that you end up with a cargo backlog building at the suppliers' facilities. Same as I said on Pacific, on the water's better than not. So, going forward, now that the carriers have learned to manage the capacity to keep rates high, even once the demand eases, we're unlikely to see things go back to the old power dynamics. Carriers will just restrict the capacity through blank sailings and limited strings to keep the supply and demand in their favor.
Ben Ames, Senior News Editor, DC Velocity 07:37
Yeah, really striking. Some of those numbers, I mean, you know, sailing five to 15 days late, 14% on-time percentage—that just really doesn't work with lean supply chains and with just-in-time practices. Looking for solutions, I understand that some of those shippers dealing with some of those really tough challenges that you described, are redirecting their shipments and and overflowing their freight into some of the somewhat lesser-used U.S. ports, like the eastern part of the U.S. Can you give some examples, and tell us how effective that is?
Mike Klage, Solutions Director, TOC Logistics International 08:14
Sure. So, a lot of importers that traditionally use LA are looking at options on the East Coast, or the Gulf Coast, or even Canada or Mexico, and depending on your final destination, there are a lot of good alternatives to LA on paper, and in some cases, those can be used. But with a lot of these options, there's huge constraints. Houston and Savannah are already running at record levels now, so everyone who typically uses those ports also are dealing with the same import boom and have increased volumes, so that there may not be space left for new cargo to these ports. Also, the vessels are restricted to Panama Canal size limits, especially in Houston. There's only three vessel strings that are servicing it from Asia, and only from a few major base ports. You don't have the same number of direct calls going into Houston as you do going into the West Coast. And those strings are dominated by the mega-importers, so when they're shipping, there's very little space left for everyone else. So, it can be a good option, but we're finding that space is even harder to find on the East Coast and Gulf Coast than it is on the West Coast. It's gotten so bad that we're seeing some importers begin to use Los Angeles, even when their natural flow would be the Gulf or the East Coast. They're doing that despite the congestion in LA, because that's the only port where the space can be secured. So, in effect, we're actually seeing LA used an alternative to the Gulf and East Coast, which is completely the opposite of the premise of your question, so in a lot of ways, everyone's just getting space wherever they can find it.
Ben Ames, Senior News Editor, DC Velocity 10:03
Wow. And, I mean, as you said, you know, with ships arriving at LA or other ports, where there's already a back load, and then those, you know, massive container ships coming in with new loads and, and existing users already, you know, tapping up the capacities of Savannah or Houston. But we all know that it's not just about the maritime flow, because those containers have to go somewhere. How's that shift of freight having domino effects on other modes of transport. I mean, that all the freight has to come onto trucks, has to go into rail to get out of those port, right?
Mike Klage, Solutions Director, TOC Logistics International 10:37
Absolutely, and we can often see what the next domestic flashpoint's going to be based on what's happening on the ocean. To overgeneralize it, every coast is hugely deficit in trucking and rail capacity. Rail's a harder problem to solve because of the fixed assets. Trucking's solved more easily, because truckers are mobile and will chase the highest profits. So, when we see spikes in certain ports, they seem to level off after a week or two as the market responds and more drivers enter that area. That said, the recovery usually means a higher plateau than before, and also means generally rising rates nationwide, because those drivers are coming from somewhere. We're also starting to see delays and shortages on the LTL sector, which is not something that has typically happened in the past. That goes to show the depth of the demand boom, and also the driver and trucking supply crisis.
Ben Ames, Senior News Editor, DC Velocity 11:37
Yeah, interesting, and that's some issues that we've been covering for a long time. We were covering stories very frequently, before the pandemic ever came along, about labor shortages, about truck driver shortages, some of those constrictions that create the capacity there. You know, looking at these high hurdles, what do they spell for the summer ahead? We're in May now, but before you know it, people are going to be—retailers—building up for peak season, as far away as that sounds. How soon will we be able to chip away at this problem?
Mike Klage, Solutions Director, TOC Logistics International 12:17
I hesitate to even attempt predictions these days. They're almost guaranteed to sound silly in a couple of weeks, but we'll give it a shot. So, based on the trajectory of ocean-vessel load factors, what's happening in the spot market, we're looking at overloaded ports through at least August. If demand fell off tomorrow, it would take that long just to work through the backlog. Of course, demand's probably not going to fall off tomorrow. We've got [the] rest of the summer season, and a lot of the summer merchandise hasn't come in yet, because the importers can't get the space. So, that's still happening, and then you've got back-to-school, followed by the holiday season. So, there's a realistic possibility that things stay at a similar elevated pace all the way through China New Year 2022.
Ben Ames, Senior News Editor, DC Velocity 13:13
Wow.
Mike Klage, Solutions Director, TOC Logistics International 13:13
Keep in mind, February to April are usually the slow season on ocean, and we're just starting to ramp up at this point in the end of May. And, if we look at what's happened over the last three months, it's not exactly been slow. So, barring any major shifts in Americans' spending habits, this is going to continue for some time. They can't build vessels overnight. They're building containers as fast as they can, but that's only half of the problem. So, I believe it's going to continue until we have Americans shifting their spending to services, travel, dining, etc, instead of on goods. So, that really is the driving factor here. Gotcha. Gotcha. Yeah. Boy, so many changes that we're seeing play out here during the recovery. Mike, we really appreciate your being here with us on the podcast today and describing what some of the conditions on the ground are out there. Absolutely. Thanks for having me.
Ben Ames, Senior News Editor, DC Velocity 14:17
And we've had—our guest today was Mike Klage, solutions director at TOC Logistics International. Back to you, Dave.
David Maloney, Editorial Director, DC Velocity 14:25
Thank you, Mike and Ben. Now let's take a look at the other supply chain news from the week. We moved from the ocean to the land. And, Victoria, you reported this week how retailers are expanding the number of carriers that they use in an effort to achieve better on-time performance. What did you find?
Victoria Kickham, Senior Editor, DC Velocity 14:42
Exactly Dave, yeah. So, retailers are accelerating their last-mile investments and adding delivery partners, as you said, to meet higher customer expectations. This is something we've been reporting on quite a bit, especially over the pandemic this past year, but we saw some data on it from a Texas-based last-mile technology firm called Convey this week. What they did was, they surveyed 600 retail decision makers and they analyzed their own performance and market-share data for the big carriers—FedEx, UPS, the postal service, and also regional carriers—to really, essentially assess recent and future last-mile delivery trends. And what they found was quite a bit. But the main points were that the majority of retailers—almost 60%—have expanded their carrier network over the past year. And even more, exceeding 80%, are focused on investing in what they call more complex last-mile initiatives over the next 12 months. Those initiatives include things like adding carriers, but also implementing a lot of the practices we've heard a lot about over the last year, especially buy online, pick up in store; curbside pickup; ship from store; pickup lockers. It also includes other strategies like generally placing merchandise in closer proximity to shoppers, forward-stocking, dark stores. And also, even more creative solutions, like offering discounts on slower delivery methods, or hosting things like e-commerce sales events, where you, that are store pickup only. So, essentially what they found is that retailers are really investing in, as I say, these more creative solutions to service the last mile—of which, again, is something we've seen accelerate, certainly since the pandemic began. The reasons behind all this, according to retailers, are pretty simple: They want to meet customer demand for faster delivery. They also are looking for ways to sort of balance their delivery costs with customer expectations. And it's also a way to offer innovative delivery options to stay competitive in this market that we find ourselves in. There were a couple of other interesting points from the survey. Their analysis, Convey's analysis showed that on-time performance, as you mentioned at the top, for package delivery has stabilized since the start of the pandemic last year. They analyzed, Convey analyzed its shipment data for April, which it says includes tens of millions of packages shipped from more than 500,000 locations across North America, and they found that 82% of parcel shipments were delivered on time in April, and that's up from 77% the same month last year. So, that was some of the basic data that they had from their analysis.
David Maloney, Editorial Director, DC Velocity 17:24
Yeah, it's good to see that that on-time performance is increasing. Did they give a reason for those improvements?
Victoria Kickham, Senior Editor, DC Velocity 17:29
Yeah, they did. They said it's most likely because volume-related network stress has really decreased. We don't see the panic buying we saw this time last year, and even through the summer. And brick-and-mortar stores reopening has really helped, too, so there's less stress on just the the e-commerce side of the equation. But they also pointed out that on-time performance hasn't quite caught up to where it was two years ago. April 2019, they showed an 89% on-time performance rate. And they said that stems from performance issues—at least that they saw in April—at FedEx, which maintains the largest share of the market, according to their data. But FedEx performed lower than other carriers this past April. They had a 71% on-time performance rate, compared to 88% for UPS and 90% for the postal service, with most of the company's most inexpensive service levels hit hardest. This is something Convey said it'll continue to watch, especially because FedEx recently announced a large number of open positions in its ground-service division, and they want to see if those new hires maybe have a positive effect on the on-time performance. So some interesting numbers on where the industry is with the last mile and how performance is going.
David Maloney, Editorial Director, DC Velocity 18:45
Yeah. Well, those are trends we will definitely continue to track. Thank you.
Victoria Kickham, Senior Editor, DC Velocity 18:49
You're welcome.
David Maloney, Editorial Director, DC Velocity 18:50
And Ben, you wrote this week about another growing trend, and that is private equity investors buying up multiple logistics firms. Can you tell us why they're making these acquisitions?
Ben Ames, Senior News Editor, DC Velocity 19:02
Yeah, of course, Dave. And this really ties in to what Victoria was just talking about with some of that sky-high retail demand, as well as what our guest was speaking of in terms of that unending U.S. thirst for consumer goods. So, when investors see that kind of, you know, really hot demand, it's a business opportunity. So, in response, we've been seeing a period of consolidation in the logistics technology side, as investors seek to combine a handful of smaller vendors, and they build sort of a one-stop shop for supply chain services. Some experts think that that growth trend in e-commerce will eventually slow down as we continue to emerge from the pandemic. But even if it slowed, it would still be growing at rates that were above previous forecasts. So, to take advantage of those kind of mega-trends, in the first half of this week, we learned that there's a barcoding and data-collection provider called Peak-Ryzex that our readers might be familiar with. They bought up another auto ID provider called Bar Code Direct. That wouldn't be too surprising on its own, but Peak-Ryzex's owner is a financial firm—a private equity group called Sole Source Capital, and this deal marked its eighth purchase of companies providing automatic identification scanning tools since 2020. Other deals on that list of eight included companies like Optical Phusion and Inovity. So, when they merge them together, the type of applications for the combined company will be auto identification, as I said, scanning jobs that are performed by warehouse workers, freight truck drivers, in-store associates, package delivery—so, with all the jobs that really make retail demand work on time.
David Maloney, Editorial Director, DC Velocity 20:51
Well, that really is a lot of acquisition activity in the past year. Is that trend happening just in the barcode scanning area?
Ben Ames, Senior News Editor, DC Velocity 20:59
No, it's much more widespread than that. Of course, the scanning is a critical step within the retail store, within the warehouse, but freight has to move as well, and in fact, just yesterday, we heard that another private equity group called Accel-KKR said that it has acquired a fleet-management software provider called GPS Insight, and, likewise, it will merge it with two other transportation-tech firms that it already owns. Likewise, Accel-KKR said it's trying to create what it calls a "single-point solution," for the medium-duty trucking sector. That's Class 3 vehicles to Class 6 vehicles. Class 8, of course, is the tractor-trailers that we see on the highway, so Class 3 to 6 is more of the home delivery and store delivery. So the new owner is going to merge GPS Insight with a company called InSight Mobile Data and another one called Rhino Fleet Tracking. Typically, they serve sectors like garbage trucks, construction trade, food and beverage distribution. So, together, when they're combined, their capabilities, the three firms can sell services like GPS tracking for those vehicles; fleet utilization; scheduling; dispatching; driver safety. But even more broadly, again, this acquisition is just Accel-KKR's latest deal. There were five other deals in 2020. They bought some other big names that our readers have heard of, like the logistics connectivity provider, TrueCommerce; a yard-management software vendor Pinc Solutions; rail industry software RailcarRx; and a TMS software vendor, ShipperConnect and ShipXpress. So, really a whole lot of investments going on and consolidation happening as financial folks really see opportunity in the continuing boom here.
David Maloney, Editorial Director, DC Velocity 22:56
Yeah, that really does seem to be a trend in those acquisitions, and we'll see how they will end up impacting the market. Thanks, Ben.
Ben Ames, Senior News Editor, DC Velocity 23:03
Of course, we'll be on it.
David Maloney, Editorial Director, DC Velocity 23:04
And we encourage listeners to go to DCVelocity.com for more on these and other supply chain stories, and also check out the podcast Notes section for some direct links on the topics that we discussed today. Thank you, Ben and Victoria for sharing highlights of the news this week.
Ben Ames, Senior News Editor, DC Velocity 23:19
Always glad to, Dave.
Victoria Kickham, Senior Editor, DC Velocity 23:21
Yes, you're welcome.
David Maloney, Editorial Director, DC Velocity 23:22
And again, our thanks to Mike Klage of TOC Logistics International for being our guest today. We encourage your comments on this topic and our other stories. You can email us at podcast@dcvelocity.com. We also encourage you to subscribe to Logistics Matters at your favorite podcast platform, and to give us a rating. We appreciate your feedback, and it really does help people to find us. The new episodes of Logistics Matters are uploaded each Friday. And a reminder that Logistics Matters is sponsored by Softeon. Softeon helps companies orchestrate order fulfillment at the network level with distributed order management and at the DC level with Softeon WMS+ warehouse execution system. Meet customer demand at the least possible operating cost with Softeon solutions. Learn how at Softeon.com. We'll be back again next week with another edition of Logistics Matters, when we will discuss how better visibility in the warehouse can help distributors deal with product shortages and transportation backlogs, so be sure to join us. Until then, please stay safe and have a great week.
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