Author: Chris Demetroulis
In brief
- Transportation supply chains are consumer led. Vulnerability has been significantly reduced due to improved connectivity, digitization, historic experience and increased resilience.
- Realistically, the transportation sector needs to be sustainable and profitable. Regular communication and transparency are key to an effective partnership between all links in the supply chain, aiding understanding of rate and premium movements in response to shifting market dynamics.
- Infrastructure remains a weak link in the chain. Deep investment is required to improve connectivity between transport hubs and to enable the sector to transition into greener energy options.
- A cautious short-to-medium-term outlook remains amid growing concerns of insolvency, reduced investor appetite and a higher cost of borrowing. Transportation operations across all modes (rail, road, port and air) have tightened their belts and are holding onto capital reserves to ride out a challenging market.
- On-shoring and near-shoring are reframing the supply chain in a number of respects, increasing resilience to market shocks and reducing risk exposure levels to import market fluctuations.
Fast-moving market dynamics
Supply chains and their impact on industries, trade flow and commerce have been a consistent talking point in recent years. Bottlenecks, disruption, stoppages, resilience and delays are in the mix of risks and challenges being reported. Getting closer to supply chains highlights that consumer expectations — business and/or household — drive and influence the demand that the chain services.
The transportation sector, as one example, has demonstrated increased resilience during the 2020-2023 global pandemic period, a trend that reflects transportation operators' longstanding investment to proactively respond to ongoing bends and shifts in the market. Analysts have added to the commentary, predicting potential challenges on the horizon and guiding the industry through a more challenging commercial and macroeconomic environment.
"While the market remains unpredictable and uncertain to varying degrees, the industry has stepped up to the challenge and generally understands the risks, challenges, and opportunities in front of them.
Falling spot rates, a higher cost of borrowing, and reduced investor appetite highlight the need to adapt and innovate. In recent years, transportation operators have generally been more hesitant to invest in higher-risk ventures, instead focusing on channeling available capital to operate their businesses as costs continue to rise against a backdrop of inflation, a tighter labor market and higher vehicle maintenance and repair costs. Opportunities to cut costs are limited and likely to deliver short-term benefit. This situation has left a percentage of transportation operators seeking the path of least resistance to achieve business growth and stability without expending their own capital first. Subcontracting and engaging freight brokers are being used to deliver lower-cost capacity, and a squeeze on contract rates and closer scrutiny of insurance premiums have become more common.
Analysts and market commentators have influenced sentiment to a degree. "Analysts have a tricky job right now, trying to interpret a variable market with reduced certainty. Media reporting of the recession and rising global trade tensions has made investors more tentative, leaving business owners looking for new ways to grow in the current market. On the flip side, despite there being some apprehension about where the market may head next, we're still seeing businesses buy equipment and new vehicles and gradually taking a more realistic view on how to capitalize on uncertainty," Chris says.
Ultimately, partnership is the driving force behind the supply chain. "We've seen many examples of transportation businesses taking the hit financially and looking for ways to support their customer base and supply chain." Over time, the customer or account owner better understands and appreciates the critical value of transportation operators in their supply chain, and focus turns from pushing back on rate to better understanding the up-front challenges facing the industry in the current environment. There's growing awareness of the importance of sustainability and a commitment to building resilience in supply chains.
With infrastructure gaps, extreme weather and late deliveries between individual parts of the chain, delays are an anticipated point of vulnerability in any supply chain. Businesses often turn to insurance as a financial safety net, expecting loss to be recoverable via a claim.
Decoupling supply chains
The current market has provided an opportunity to review, reframe and refocus. Bringing more diversity into the mix of accounts and customers is one approach. Uncertainty and shifts in demand have led business operators, including the transportation sector, to rethink their approach. The global pandemic highlighted the vulnerability and risk when materials and goods are unable to move in line with market expectations.
Since 2022, there's been an accelerating trend of on-shoring and/or near-shoring operations to bring the supply chain closer to the consumer, with new markets emerging in Mexico and Latin America, while others such as Vietnam and India continue to expand. This move has been largely driven by wage inflation and geopolitical challenges in a number of established export markets, and manufacturers are diversifying their operations to meet new demand and respond to increasing complexity. Another factor is US government support for domestic productivity and supply sourcing — electric vehicle production is one example of a drive to boost production output as a visible shift in direction.
Supplier relationships have changed, and the decoupling of historic relationships has the objective of reducing the risk associated with having all eggs in one basket while continuing to demonstrate value and relevance to customers. Manufacturers and other major industries have focused on de-risking their vertical supply chain, spreading out the mix of suppliers. Others have invested in infrastructure improvements, such as building hubs at key manufacturing and warehousing locations and sourcing from local suppliers to shorten their supply chains.
Subcontracting drivers and a tighter US labor market have been suggested as critical points of vulnerability in supply chains. In reality, freight brokerage businesses generally have an independent pool of contracted drivers that enables the business to quickly respond to a driver being out of action. More sophisticated GPS systems and on-board technology have significantly reduced the dependency on an individual driver's knowledge and, in turn, helped to de-risk that aspect of the supply chain.
Where next for supply chains?
Supply chains are ultimately a linked partnership, focused on servicing a customer. Open, transparent communication helps the chain operate efficiently, identifying risk exposure early and making changes to schedules and operating models to adapt to evolving customer needs. While supply chains will always be vulnerable in some respects in a market environment that has experienced heightened uncertainty and complex change, the transportation sector is well equipped through historic experience to reconfigure the supply chain and keep the industry moving forward.
"The sector responded well to the COVID-19 disruption and rose to the challenge as industry and business operators' switched direction overnight. There were demand shocks and supply challenges; however, generally speaking, transportation operations responded well, and there was rich learning gained that has helped the industry move forward," Chris says.
"Balance sheet resilience has improved over the past decade. Insolvencies happen in a buoyant market, and although supply-chain challenges may be a contributor, they're less likely to be the cause. Aligning business strategy with supply-chain design is one way to reduce vulnerability, and developments in the freight forwarding brokerage space over the past 10 to 15 years have created a workable ventilation strategy to offset spikes in demand and alleviate a lot of supply-side bottlenecks."
Ultimately, supply chains will continue to change lanes in tune with the market and customer demand. They're as strong (or as vulnerable) as their weakest link. Diversifying supplier bases, shortening supply chains and improving logistics by investing in new infrastructure — including transportation hubs that capitalize on multimodal route options — are proving to be effective in de-risking the chain. Digitization and improved connectivity through the chain have enabled more effective planning and the spirit of partnership.
Gallagher Transportation practice: Insurance and risk management specialists
Gallagher, as a trusted insurance and risk management adviser to transportation sector operators across the US and internationally, is well positioned to develop strategic insurance programs and tools to support risk management practices tailored to meet a specific set of needs. Working closely with our insurance carrier partners, Gallagher is committed to the sustainability of transport and logistics businesses — road, railroad, air and port — as they continue to adapt to evolving market and customer needs over time.
