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Looking Ahead, Supply Chain Normalization in 2023?

Is it time for the logistics industry to finally exhale? Maybe. 

Shippers and transportation providers enter 2023 in a landscape far less tumultuous than what marked the past couple years as economic softening eases some of the supply chain headaches that defined the more recent past. 

Shippers and carriers are set to see the start of the Lunar New Year, which will keep cargo movement largely calm at the start of the year. 

Ocean Network Express (ONE) CEO Jeremy Nixon noted in a December media briefing with the Port of Los Angeles “things have been very soft and we’ve been adjusting down” since October. Lunar New Year typically means ONE’s service levels are reduced by about 50 percent, according to Nixon. 

The slowdown of imports has allowed previously overwhelmed ports, such as Los Angeles and Long Beach, to finally win at the game of cargo catch-up, a rail labor deal done in December put to bed fears of a national shutdown and companies that invested in tech continue to talk improvements in visibility. It all begs the question of whether shippers might see major service improvements in the new year. 

“We’re continuing to upgrade our customer service quality here in North America,” Nixon said. “We brought in these new import dashboards now in our e-commerce website so customers can get a complete indication of when their containers are coming in and when the arrival notice has been prepared…. So we’re providing a lot more data and dashboard a lot more tracking information for import customers into North America so they have more visibility going forward.”  

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Shipper criticism of ocean and rail carriers’ unreliable service reached a fever pitch during the height of the pandemic amid skyrocketing rates. 2022 saw the signing of the Ocean Shipping Reform Act (OSRA), a major overhaul to the regulations governing container shipping, and probes into rail service by the Surface Transportation Board

Time will tell whether government intervention spells relief in the long-term, but one constant in any forecast for logistics: change is all but certain. 

“Great providers and transportation providers that have a national footprint are going to be more of the norm and something the BCOs [beneficial cargo owners] want to make sure that they have in their transportation provider portfolio because we could sit here and talk about what we’re forecasting into 2023 and 2024 and the next year, but there’s always something that could happen,” said Paul Brashier, vice president of drayage and intermodal at third-party logistics company ITS Logistics. “So, my hope coming out of this year and going into next is that BCOs and shippers really start gravitating towards more service providers that have a nationwide footprint. It gives them that flexibility and malleability to help them navigate anything.” 

Cranes stand idle at the Port of Los Angeles on Nov. 16, 2022. The port has seen a slowdown of imports amid a pullback in consumer spending on goods and protracted labor negotiations. (Photo by Mario Tama/Getty Images)

‘Last remaining question mark’: labor

If there’s any nail biter for shippers to watch in 2023, it would be the pending labor contract for West Coast dockworkers, who have been without a new deal since July. 

The union representing workers, the International Longshore and Warehouse Union (ILWU), and Pacific Maritime Association (PMA), which represents employers, have said in joint statements a new contract would be reached with no disruption to cargo movement and the two groups are reportedly expected to hash out an agreement in the early part of 2023. 

The San Pedro Bay ports saw a loss of business to East and Gulf coast facilities as shippers re-routed cargo in 2022 to avoid any possible labor slowdown. Los Angeles and Long Beach are now scrambling to regain that lost business. 

“Our vessels are coming in. We’re berthing on arrival. Most of the time, we’re not having any delays. We’re getting the ships around, the cargo is flowing, the intermodal is much, much better on the rail side. So we’re fluid again. So that is good,” ONE’s Nixon said. “Of course, we have the overhang continuing on the discussions between the ILWU and PMA. Those negotiations are going on. They’re going to take a little bit longer than normal, but… I remain optimistic that both sides can find a logical and amicable outcome, which will create no disruption and therefore we’re not expecting any disruption. And… we would like to see, obviously, that last remaining question mark taken off the table and then we can start to see,  hopefully, more cargo coming back from this East Coast sort of ad hoc routing more back to the West Coast” 

Brashier, like many industry watchers, predicts a new contract sometime in January or February, with freight then expected to return to the West Coast. 

“We definitely have a positive outlook that it will get resolved early in Q1 of next year,” Brashier said. “I think the one thing to keep an eye on is, after this gets resolved, what do those volumes look like returning to the West Coast? From what we see in RFP [request for proposal] activity and what our clients are forecasting for 2023, it looks like volumes will return back to the West Coast, but there will still be a little bit more booked to the East Coast as well into the next year. So I think the East Coast will hold on to some freight.” 

Trucks on the highway in Delaware on Oct. 21, 2022. (Photo by Jakub Porzycki/NurPhoto via Getty Images)

Contract renegotiations?

Contract questions also abound for transportation rate agreements as the industry watched prices take a nosedive in the back half of 2022. 

“The rates are a function of many different things. I see them continuously getting to a normalized level,” said Michael Rofman, head of the transportation and logistics group at tax and advisory firm Mazars. “The reason I say that is because the inbound freight has now normalized to levels to be handled by our infrastructure and the transportation companies are now at normal terms.”

Transportation rates have come down anywhere from 40 percent to 60 percent in the past six to nine months, ITS’s Brashier noted. Ocean rates’ fall this year also helped usher in more capacity and operational improvements, he added. 

“I’ve never seen this level of RFPs in December in my 15 years in transportation,” Brashier said. “So there’s definitely change in how [shippers] manage the transportation or procure it.” 

The new market dynamics have meant a normalization for cargo flow not seen, in Brashier’s case, since around 2017 with the executive noting “it’s looking at being normal again for the first time in a long time.” 

“Overall, 2023 looks to be, pricing-wise, really, really positive for those purchasing it and significantly settled operations, no huge labor disruptions or turbulence on the horizon and it should be a relatively smooth year for folks in this industry,” Brashier said. “And that’s a good thing. The last two, three years were challenging and rough on a lot of folks. So hopefully this is good news for everybody in transportation.” 

Carriers are clearly looking at the situation through a different lens and are waiting to call it on the current situation with rates and contracts. 

ONE’s Nixon said it’s “early days” on where rates go and whether the industry sees a wave of contract renegotiations in 2023, given the drop-off in spot rates. 

“Of course, the new contracts don’t kick in until the first of May. We’ve got another two, three, four months to go before then so let’s see how things progress,” Nixon said. “But I think generally one comment we’ve learned in this industry is things go up, things go down. But when we get periods like this where the cargo volume drops away, normally it indicates that at some point down the line, cargo volumes will come back up again above the average median. So, let’s see how quickly the re-inventory program and the pickup in demand goes during February, March. But if we have a very long period of low cargo volume, it generally means that that will come later on in higher cargo volumes. So I think it’s too early to call on what’s going to happen on the transport rates for next year.” 

Prologis predicts Mexico industrial demand will “hit a new annual record” as more companies explore nearshoring in 2023. (Courtesy Photo)

New supply chain behaviors emerge

Supply chain scares of the past couple years have led to strategic resets.  

Retailers and other companies moved from a just-in-time to just-in-case stock strategy to ensure having inventory on hand during the pandemic. Now, as supply chain challenges ease, Vaughn Moore, executive chair and CEO of global freight forwarder AIT Worldwide Logistics, suggests shippers will employ a little bit of both models as they make their way through 2023 and beyond.  

“It can’t go all the way back to just in time right away, so I think we’re going to see a hybrid over a shorter period of time as we figure things out and then it remains to be seen,” Moore said. “And you’ve got to wait a little bit to see how the consumer responds to this new world.” 

Sourcing diversification, while not an entirely new trend brought on solely by the pandemic, will continue to alter the course for distribution and warehouse footprints. 

Prologis, a developer and owner of industrial real estate, said in its 2023 supply chain prediction report it expects demand for real estate in Mexico to hit a new annual record as the nearshoring trend continues.  

The commercial real estate firm, with a global portfolio totaling about 1.2 billion square feet, said nearshoring accounted for half the leases inked in the first six months of 2022 in Mexico for places such as Monterrey, Juarez and Tijuana. 

Prologis reported Mexico had about 25 million square feet of new industrial space under construction as of the third quarter, with the market seeing vacancy, or the amount of available space, fall to 1.4 percent.

ONE is planning its routes accordingly to accommodate surges in India, Vietnam and other parts of Southeast Asia.  

“I think the point though, just to also be aware of for many of our big customers in North America, is they are trying to de-couple a little bit from their reliance on China as a strong sourcing point. So we see typically 70, 80 percent of cargo coming out of China,” ONE’s Nixon said. “We see some strategy around trying to—China will still be important, but [companies are] looking at other locations…. So we’ve got to be able to adjust our loops and services so that we’re not just covering the China main ports, which will continue to be strong, but we have to cover these other markets where many of our North American retailers and importers are now going to increasingly source from over the next two, three, four years.”