Disruptions force manufacturers to rethink logistics outsourcing

Supply chain disruptions are forcing logistics service providers and carriers to make strategic choices. The most striking development is that ocean freight carriers are branching out into other areas of logistics. These and other changes offer plenty of food for thought, claimed Matthias Hanke (pictured) from consulting firm Roland Berger during a recent Webinar Wednesday: “Logistics outsourcing could well have reached a turning point.”

By Marcel te Lindert

Since 2016, geopolitical tensions have created one disruption after another, such as Brexit, the trade conflict between China and the United States, and the war between Russia and Ukraine. “I know several logistics service providers who specialize in transportation between Russia and Europe. They have been severely affected by the war,” said Matthias Hanke, who on behalf of consulting firm Roland Berger provides strategic advice to logistics organizations in Central Europe. “And let’s not forget that both business and consumer confidence in manufacturing has suffered a big dent due to the effects of the war. Logistics companies immediately feel this. It will be an even bigger disaster if the conflict between China and Taiwan escalates too.”

The impact of the disruptions varies from one company to the next. For example, are you a logistics outsourcer (shipper) or a logistics service provider? If you’re a logistics service provider, do you specialize in contract logistics or the last mile? Are you a freight forwarder or just a carrier? And are you focused on road, rail, sea or air? Hanke: “Each logistics company needs to assess which developments will or won’t impact on them. The next question is which strategy to choose. Should you start cutting costs or instead plan for growth? Should you adjust your revenue model? Should you look for merger or acquisition partners, or is it better to sell your entire company?”

Shifts in trade flows

As global trade flows shift due to geopolitical tensions, almost every company in the logistics industry is being forced to make strategic choices, whether due to the massive fluctuations in transportation demand and prices, the pressure on transportation capacity or the unpredictable fuel prices. “These developments threaten the profitability and ultimately the survival of some companies. At the very least, they distract businesses from the issues they should really be working on: making their operations more future-proof, more sustainable and more digital.”

Hanke pointed out the changes in supply chains, such as the fact that more and more producers are opting for locally oriented supply chains. They are building in extra buffers to hedge against risks and bringing their production or assembly activities closer to their sales markets. They are reducing supply chain complexity by reducing the number of product variations and thus their dependence on suppliers. “All this affects companies’ investment decisions.”

Predictions for transportation prices

Transportation rate trends are another factor. Rates for ocean freight and air freight in particular have soared in recent years. Will these return to the pre-pandemic levels of 2019? “Sea and air freight volumes are predicted to continue to rise in the coming years, although there is always a chance that companies will opt for other modes of transport for sustainability reasons. But the general expectation is that rates for ocean freight will rise to 40% above 2019 levels and for air freight to 20% above 2019 levels.”

Many logistics companies have already made important strategic decisions in recent years. Hanke referred to the ongoing wave of consolidation among global logistics service providers. “This presents medium-sized logistics service providers in particular with a choice: will they allow themselves to be taken over or will they pursue an acquisition strategy themselves? Or is a different growth strategy conceivable? More scale creates the opportunity to offer lower rates and capture even more market share. At the same time, there are also logistics service providers who want to be distinctive and are looking for new sources of revenue.”

Ocean freight companies branching out

The strategy of large ocean freight carriers such as Maersk, CMA/CGM and MSC is particularly striking. Having benefited from the high prices in recent years, they are using their extra profits to enter new parts of the supply chain by investing in container terminals, freight forwarding and other modes of transport – even air freight. “Companies that control an entire supply chain can differentiate their services. They can offer fast and slow services, for example, based on various combinations of sea and air freight. A shipper that partially switches to sea freight for Shanghai to Rotterdam can sometimes reduce the carbon footprint by 60-80%. Even though it extends the transit time from two days to two weeks, that shipper is still two weeks faster than a competitor using sea freight only.”

All these developments provide food for thought, including for shippers, and Hanke suggested that logistics outsourcing might have reached its peak. “We have had a long period in which ever-more logistics activities have been outsourced. There are several factors that could lead to a reversal of that trend. Think of the increasing risks related to the supply of raw materials and components. As a shipper, are you willing to continue to leave that process entirely in an external party’s hands, or do you want to exercise more control yourself? And what about the emergence of transport platforms that connect capacity supply and demand – who still needs a freight forwarder if they can deal with carriers directly? I have no proof that we’ve reached a turning point for outsourcing, but it’s worth thinking about.”

Sustainability is on the agenda

One development that will have a major impact on logistics companies’ investment decisions in the coming years is the growing focus on sustainability. More and more governments are imposing regulations regarding greenhouse gas emissions, particularly in the European Union, and manufacturers are also under increasing pressure from consumers to reduce their emissions. “Ever-more shippers are telling their carriers that they need to go green or they won’t get the job. In addition, the circular economy offers opportunities for logistics service providers, especially when it comes to return flows,” Hanke said. “Sustainability is firmly on the agenda. Logistics companies will have to act on this or risk going out of business.”