December 8, 2020
Five Predictions to Shape Supply Chains in 2021
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The infinite surprises of 2020 have defined the year as one of the most challenging in global trade and supply chain management. Virtually every corner of the industry has been rocked by disruption. And while the year began with uncertainty around IMO 2020, trade wars, and Brexit, the surge of Covid-19 was, and continues to be, a debilitating force that no one anticipated.
As the year draws to a close, the big lesson learned is that forecasting—or, at least, developing plausible contingent scenarios—is paramount to success in volatile times. Ahead, Flexport offers five key predictions to help shape perspectives for a hopefully easier 2021.
1. Pandemic and Economy
Since the spring, Covid-19 has churned up nearly every aspect of the supply chain industry. The knock-on effect has caused many brick-and-mortar businesses to shutter, reopen, and shutter again, driving more consumers to e-commerce. With pandemic-related factors accelerating the shift to e-commerce by up to 5 years, struggling retailers have scrambled to survive amid an intense new set of distribution demands. And for those in logistics, it has been one challenge after another.
As the pandemic first swept the globe, there was hope of a quick rebound, in which the malign effects would pass quickly. As the pandemic persisted, leading businesses had to grapple with a ruthless reality: Not all companies would make it. A $3 trillion stimulus package helped, but only temporarily. In both health and in business, the pandemic would leave its mark.
“While the long-term impact of this scarring is still unknown, the possibility of a V-shaped recovery is now far behind us. The volatility of the W-shaped recovery may be more likely—especially as Covid infection rates re-surge and the lack of additional stimulus leaves people reluctant to spend,” notes Flexport Chief Economist Phil Levy.
Businesses are up against steep challenges. Questions to consider now center around consumer patterns and the economic viability of a pattern even emerging:
- Will consumer spending increase or decrease? Confidence is key. A new stimulus package or widespread vaccine availability will likely be determining factors.
- Which product categories will surge and which will fall off? Outdoor equipment replaced restaurants, for instance, but what will trend next?
- How do trends shift? What evolving consumer habits or preferences can companies expect to leave lasting impact?
Prediction: Businesses will have to vie for relationships with suppliers and compete for exceptionally limited space with carriers. With a tightening market, especially in hard-hit verticals like fashion, for instance, finding cost-efficient sources of manufacturing, transport, and warehousing—or other storage space—will be crucial.
Contingency plans, redundancies, and solid partnerships will be key. If one supplier comes up short, another can rescue the supply chain from stalling and causing lost sales opportunities. The key to these pivots will be speed. In logistics and transportation, the post-COVID winners will be companies that:
- Remain in touch with customer demand during a time of rapid shifts;
- Reinvent business models with robust ecommerce strategies; and
- Stay agile to move through obstacles and find new competitive advantages.
2. Tariffs and Trade
After two years of trade war between the US and China, a series of tariffs, retaliation, and threats of retaliation still ricochets back and forth. The “Phase One” trade deal reached in January 2020 was shaken by Covid-19; and current indications show that China will not have met numerical targets for US exports by the time President-Elect Joseph Biden takes office in 2021.
How the President-Elect will manage trade agreements with China, the EU, and other trading partners remains to be seen, so companies are wise to plan for the uncertainty.
Prediction: Tariffs are likely to remain steady, at least for the foreseeable future. “It’s likely that tariffs will only be removed in return for other political gain—with the extent of removal or imposition dependent on filling key administration positions,” says Tom Gould, VP of Global Customs at Flexport. Citing the China 301 tariffs, Gould notes tariff talks are led by the US Trade Representative (USTR), rendering change there unlikely before the President appoints, and the Senate approves, a new USTR.
In addition, with the news that US Customs and Border Protection issued a Withhold Release Order on products made with cotton from the Xinjiang region of China on December 2, unexpected customs concerns may crop up. One possible consequence could be an increase in inspections of shipments importing cotton goods to determine their place of origin.
Amid all the strategic reconfiguring, shippers have turned to ocean options such as fast boats, guaranteed delivery, and other premium services to keep the supply chain as agile as possible. In some markets, they have had to pay a high premium just to get an empty container.
In 2020, the ocean market was marked by blank sailings from the start of the Covid-19 pandemic and continuing throughout the summer, operating under the assumption of low demand.
Most years, when demand is expected to be weak, ocean carriers ratchet down rates to win or keep market share. This year, however, carriers showed remarkable discipline in capacity management, with availability dropping by as much as 40%. Yet surprisingly, demand recovered quickly, creating a friction that has resulted in record-high rates. Despite the topsy-turvy conditions, peak season has shown no signs of slowing down.
"As businesses have transitioned to ecommerce to withstand the impact of continued Covid-19 lockdowns, peak season has continued full steam. At the same time, consumers have shifted their spending from services to online goods. We expect this to continue into the new year—possibly even into the 2021 RFP season," notes Nerijus Poskus, Flexport’s VP of Ocean Freight.
Prediction: The high spot rates in place now will seep into fixed rates and affect contract negotiations in 2021. Overall, supply and demand have shifted to the advantage of carriers.
In addition, a well publicized equipment shortage that is plaguing the industry is also expected to continue, possibly through the first part of the new year. Globally the industry has enough containers. But, they are in the wrong places—and it will take months to resolve the issue.
Some businesses might be compelled to pass additional shipping costs, whether direct or indirect, onto consumers. Others may look for deeper savings on the supply side.
In either case, capacity management is here to stay, even if demand dips, because carriers will adjust the supply, if needed. In addition, global trade lane competition is going to increase. Consignees should get comfortable with paying a premium price if goods are to move—at least until the balance between supply and demand is restored.
Since its rise alongside the golden age of passenger air travel in the 1970s, air cargo has been the fastest way to transport goods. Now, it’s only faster if you can get the space.
Airfreight is experiencing an even greater capacity crunch than ocean, compounding the supply and demand imbalances on many of the key global trade lanes.
Covid-19 has changed how people travel, grounding flights, then entire fleets of planes, and leaving people wary of returning—especially without a vaccine available yet. As companies find easier ways to connect, relying on remote work, video conferencing, and virtual meetings, business travel is less essential. And, it may face a tough road back to full recovery as businesses look to lock in lower travel budgets for the long term.
In fact, the IATA estimates passenger travel won’t return to pre-Covid levels until 2024—at the earliest. Research this past spring by Boston Consulting Group (BCG) Henderson Institute found that 66 percent of the more than 300 global companies surveyed expected travel policies to change permanently.
Prediction: Capacity will be extremely tight even before accounting for the impact of vaccine distribution. Rates will be consistent with 2020, but have the potential to move even higher. Much will depend on the strength of global consumer demand coupled with vaccine distribution. Freighters will play a more critical role in the air cargo supply chain as belly space remains limited, sidelined by the pandemic. Traditional freighter carriers will continue to add capacity to their fleets by accelerating the delivery of new planes and converting used planes to freighter configuration as fast as possible.
Passenger airlines will also look to diversify their revenue streams—adding freighters to their fleet by converting newly redundant passenger planes. In addition, it is likely that airlines will continue to invest in on-the-ground capabilities for pharmaceutical distribution. However, overall ground handling capacity will continue to be a bottleneck for the industry in 2021.
The advent of a vaccine and setting up urgent distribution channels makes these changes even more likely throughout 2021. Vaccine manufacturers are more concerned with speed than cost, giving these shipments priority in the market over just about any other goods.
Neel Jones Shah, EVP and Global Head of Airfreight for Flexport cautions, “There will be almost no margin for error in capacity planning next year. Invest in forecasting teams and tools. Stay close to sales teams to get a line on business needs and audit transportation mixes for efficiency.”
5. Data and Technology
With disruptions off the charts in 2020, businesses have been hit hard at multiple levels. It has been a year of watching dramatic external shifts while looking within. And with all of that has been a dire need for analytics and answers to inform strategy akin to building the plane while flying it.
Prediction: Timely data and technology will become more powerful in navigating the change and uncertainty that is bound to carry into 2021. For companies to succeed, they will need to look for every advantage to help mitigate the economic impact of Covid-19. In that, real-time data analytics that enable critical decision-making on the fly will become ever more important.
“We design our technology to empower clients in many ways. But one of the things that became especially valued this past year was the ability for businesses to run their supply chains from anywhere—particularly when Covid hit,” explains Flexport Chief Technology Officer James Chen. “In fact, when companies were forced to switch to work-from-home operations, our digital platform use went up 21%.”
Building a Solid Bridge
Especially now, December can be a bridge to a new RFP season that tips the scale toward a successful year or another frustrating one. The best course of action: Prepare at all levels of the supply chain with critical tools of the trade:
- Technology One-stop dashboards, real-time shipping maps, analytics that reveal trends and patterns, and tighter collaboration between shippers and suppliers will make 2021 the year of disruption management.
- Tariff and Trade Advisory Services Customs expertise, matched with data, can reveal exceptional benefits, like substantial drops in customs inspections and reduced fees.
- Transportation Strategies and Services Knowing how to leverage speed versus space, and which trade lanes make the most sense, will help maximize value. Use carrier schedules plus historical data that goes beyond port-to-port times to create a reliable model for transit time predictions.
- Calculators Other resource tools, like duty calculators and carbon calculators can help keep companies on track to meet financial and sustainability goals.
Within the framework of tools, tips, and tracking, one unshakable truth remains: The Covid-19 pandemic is ultimately what will drive 2021. Even in best-case scenarios—widespread vaccinations, a rebound in trade and consumer patterns, and improved shipping capacity—there will be a deep adjustment period.
Businesses will need to consider how they will reckon with what remains permanent as a result of the Covid Economy. To learn more about what that portends—and inform planning for what lies ahead—register for the webinar State of Trade: Lessons of 2020, Insights for 2021 on December 15, featuring Fleport Chief Economist Phil Levy in conversation with industry veteran Will Urban.